Labor Law in Switzerland – Selected Aspects (Part 2)

The contractual penalty in employment contracts

In principle, contractual penalties can be stipulated in employment contracts if the contract is breached. These contractual penalties are often used for breaches of agreed non-competition or non-disclosure clauses. The legal basis for a post-contractual non-competition clause can be found in Art. 340 et seq. CO. However, if a contractual penalty in the employment contract has a security or compensation function, the question arises as to its admissibility.

In such cases, the contractual penalty must not lead to an increase in the employee’s liability. In general, the employee is only liable for damages caused intentionally or by gross negligence. On May 7, 2018, the Federal Supreme Court issued a ruling declaring a contractual penalty in an employment contract null and void. The employment contract between a stock corporation and a female doctor contained a clause stating that the employee would have to pay a contractual penalty of CHF 50,000 per violation in the event of breaches of the contract, in particular of the non-competition clause or the confidentiality obligation. In its reasoning, the Federal Supreme Court referred to Art. 321e CO, according to which the employee is liable for damages he causes to the employer intentionally or negligently. The employer must prove the breach of contract and the damage; the employee’s fault is presumed unless the employee can prove that he did not commit any fault. According to Art. 362 CO, this provision may not be deviated from to the disadvantage of the employee. An impermissible aggravation of the employee’s liability occurs if the liability is independent of fault, the penalty exceeds the actual damage or the burden of proof is shifted to the disadvantage of the employee.

The question of whether the agreement of a contractual penalty in the employment contract is permissible and reasonable must be assessed in each individual case. If a contractual penalty is to be agreed, the provisions for disciplinary measures pursuant to Art. 38 para. 1 ArG must be complied with. If this is intended to secure a post-contractual prohibition of competition, its validity is undisputed. Likewise, contractual penalties are permissible, provided they are of a disciplinary nature. However, for them to be validly agreed upon, the amount of the penalty must be determined and proportionate. In addition, the facts which are punishable must be clearly specified. Furthermore, the contractual penalties must not have a substitute character.