Pitfalls of Conditional Sign-On Bonuses: Lessons from the Swiss Supreme Court

A recent ruling of the Swiss Federal Supreme Court may significantly limit employers’ flexibility in using sign-on or retention bonuses. Even payments intended as compensation for forfeited benefits can be reclassified as “salary” – and thus become subject to strict rules prohibiting conditionality. This article discusses the legal reasoning behind the decision and explores its practical—and potentially problematic—consequences for Swiss employers.

Background:

In its decision BGer 4A_506/2023 of February 19, 2025, the Swiss Federal Supreme Court reaffirmed a core principle in Swiss labor law: salary payments may not be made conditional upon continued employment at a specific point in time. This in contracts with discretionary bonus payments, where such conditions are admissible.

This decision is particularly relevant in the context of sign-on bonuses, which are often structured with future payment milestones tied to ongoing employment. The Court extended its established jurisprudence to include such arrangements, even where the payment was compensatory in nature, rather than remuneration for future services.

The key issue in this decision is therefore the application of these salary protection principles to sign-on bonus payments.

Case Overview:

The case concerned an employee of an oil trading company who had been promised a CHF 700,000 sign-on bonus, payable in three equal tranches:

• upon joining (02.09.2019),

• after 12 months,

• after 24 months.

Importantly, the sign-on bonus was not intended as remuneration for future services, but rather as compensation for equity and other benefits the employee forfeited by not accepting a position with another company (his previous employer). The purpose of the payment was to make up for this loss and incentivize the employee to join the new employer instead.

The employment relationship was terminated by the employer as per 31 August 2020—just one day before the due date for the second tranche.

While the lower courts considered the sign-on bonus a gratification (i.e., discretionary benefit), the Federal Supreme Court overturned this, concluding that the payment was contractually fixed and predetermined, and therefore constituted salary under Article 322 CO. It emphasized that the bonus was promised at fixed intervals, independent of the employer’s discretion, and thus could not be made conditional on continued employment.

This reclassification was decisive: as a salary component, the Court found that any condition tied to being employed at the payout date was invalid and unenforceable, and that the employee was entitled to a pro rata share of the second tranche up to the termination date.

Key Takeaways from the Supreme Court Ruling:

1. Clear Distinction Between Salary and Bonus

The Court emphasized that the CHF 700,000 was not discretionary, but agreed upon in advance, with specific payment dates, and thus qualified as salary, not a bonus. This aligns with Art. 322 CO, which defines salary as remuneration in exchange for work performed.

2. Conditional Clauses Are Invalid for Salary Components

Quoting the decision (freely translated):

“Salary payments may not be made dependent on the employee still being employed or not having terminated the contract.”

This follows established case law (e.g., 4C.426/2005), which holds that any condition tied to ongoing employment is void when it relates to salary. The reasoning is that salary is a core obligation in an employment contract and must be paid for services rendered, regardless of employment status at a later date.

3. Pro Rata Entitlement Applies

In line with this, the Court confirmed that salary entitlements accrue proportionally. Since the employee worked until 31 August 2020, he was entitled to a pro rata share of the second tranche, but not to the third, which related to a period after the termination.

Reconsidering the Court's Reasoning: Is This Really Salary?

While the Federal Supreme Court treated the sign-on bonus as salary, this qualification is not beyond doubt. The facts of the case indicate that the CHF 700,000 payment was compensation for forfeited equity from the employee's previous position – i.e., a form of transitional or damage payment rather than remuneration for actual or future work.

This raises a key question:

Why should such a payment—clearly compensatory and not tied to actual services rendered—be treated as salary and therefore subject to the prohibition on conditionality?

We believe this decision is open to criticism:

• It blurs the line between salary as compensation for services rendered and indemnities or sign-on incentives linked to previous employment circumstances.

• It disregards the legitimate interest of employers to structure retention-linked payments (such as staggered sign-on bonuses) in a way that reflects both loyalty and continuity.

Indeed, this ruling risks making any predetermined payment contractually "locked in" as salary—even where the purpose was entirely different.

Consequences for Retention and Incentive Structures

This interpretation could have wide-reaching implications:

• Retention bonuses, often tied to continued employment or loyalty milestones, may now face enforceability issues if they are too precisely defined or labeled as guaranteed amounts.

• Performance bonuses with predetermined targets and payment dates might similarly be reclassified as salary unless their discretionary nature is clearly spelled out.

Unless clarified in future case law or legislation, this ruling introduces uncertainty for employers aiming to incentivize commitment or compensate for lost benefits.

How to Structure Sign-On and Retention Bonuses Going Forward

Employers who wish to preserve flexibility and mitigate legal risk must carefully draft such clauses in a way that reflects the true nature of the payment. If a bonus is meant to compensate for lost benefits or to encourage long-term retention, this should be made contractually and linguistically clear.

Key considerations include:

• Framing the payment explicitly as a non-salary compensation or indemnity.

• Avoiding language that fixes exact dates and amounts, unless the intent is to treat it as salary.

• Ensuring discretion—based on future performance or presence—is clearly articulated, if intended.

Practical Implications for Employers:

This decision highlights the importance of properly categorizing and documenting the nature of bonus payments. While the Court's reasoning is consistent with prior case law, it also raises concerns about the shrinking scope for employers to use conditional incentives as retention tools. In particular, the ruling could be seen as overly rigid, failing to distinguish between a voluntary indemnification for past damages, forward-looking performance incentives and deferred compensation linked to past losses or decisions.

Employers wishing to incentivize retention through bonus structures must distinguish between:

• discretionary bonuses, which may be linked to future presence or performance, and

• contractually fixed compensation, which must be paid regardless of subsequent resignation or termination.

Conclusion:

The Federal Supreme Court’s position affirms a strict interpretation of Swiss salary protection rules. However, this decision arguably overextends these protections into areas—like sign-on bonuses—that serve different purposes, such as compensating for past losses or incentivizing future retention.

While employers must accept the legal risk associated with such structures, this judgment underscores the need for carefully tailored contractual language. Employers would be well advised to review how sign-on and retention payments are framed—not only in substance but also in form—to avoid unintended reclassification as salary.

About the author:

Kamila Pudlo is Legal Counsel at Littler Switzerland.

You can reach her under +41 44 219 60 64 or at kamila.pudlo@littler.ch.

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