Net Salary Equalisation – Permissible Adjustment or Unlawful Salary Deduction?
Articles
Legal
Employment / Immigration
The article explains when net salary equalisation is permissible and how employers can lawfully avoid overcompensation during illness.
Natascha Figoutz
Legal Associate
Michèle Stutz
Legal Partner
If an employee is unable to work due to illness or accident through no fault of their own, the employer is statutorily obliged to continue paying the salary. Pursuant to Art. 324a para. 1 of the Swiss Code of Obligations (CO), the salary must be paid for a limited period in the amount that would have been owed had the employee actually performed their work, i.e. 100 per cent of the salary.
The employer may insure the financial consequences of non-fault illness by taking out daily sickness benefits insurance, provided that the parties have agreed in writing on an equivalent solution (Art. 324a para. 4 CO). According to the case law of the Swiss Federal Supreme Court, daily sickness benefits insurance is deemed equivalent in particular if, with premiums shared equally between employer and employee and a waiting period of two to three waiting days, it pays daily benefits amounting to 80 per cent of the salary for at least 720 or 730 days within 900 consecutive days. In practice, waiting periods of 30 or 60 days are often agreed, during which the employer must pay at least 80 per cent of the salary.
1. What Is Net Salary Equalisation?
In practice, it is frequently observed that employers continue to pay a higher salary than 80 per cent even during the benefit period of the daily sickness benefits insurance, for example 90 per cent or even 100 per cent. In such cases, the employer bears the difference between the insurance benefit and the agreed salary. While this approach is employee-friendly, it entails legal and financial risks: “topping up” the salary may result in the employee earning a higher net income during incapacity for work than during regular employment. Many employers therefore resort to net salary equalisation, offsetting the difference between the regular net salary and the higher net salary during illness by means of a deduction from the gross salary.
2. Starting Point: Higher Net Salary Despite Incapacity for Work
In the event of incapacity for work, daily sickness benefits, accident insurance benefits, loss of earnings compensation (EO) benefits and other third-party benefits may fully or partially replace the employer’s obligation to continue paying salary. These benefits are either not subject to social security contributions at all or only to a limited extent.
If, beyond the waiting period of the daily benefits insurance, the employer pays the full salary or, for example, 90 per cent of the salary, an undesirable effect may occur: the correctly calculated net payout in the event of illness may exceed the net salary received during ordinary employment.
3. Advantages of Net Salary Equalisation
Net salary equalisation aims to ensure that the employee is not placed in a better financial position than if they had performed their work. Absence due to illness should therefore neither lead to financial advantage nor create inappropriate incentives.
A higher net payout during incapacity for work is difficult to justify vis-à-vis other employees and also contradicts the purpose of statutory salary continuation in the event of illness, which is intended to mitigate loss of earnings rather than confer an additional benefit. Net salary equalisation thus contributes to an appropriate and balanced solution and promotes equal treatment within the company.
4. Simplified Example: Overcompensation Without Net Salary Equalisation
An employee earns a gross salary of CHF 10,000 per month. In the event of illness-related incapacity for work, the daily sickness benefits insurance pays 80 per cent of the salary after expiry of the waiting period, corresponding to CHF 8,000.
If the employer voluntarily tops up the salary to 100 per cent, it bears the difference of CHF 2,000. While the usual social security contributions are due on this salary supplement, the daily sickness benefits are not subject to such deductions, or only to a limited extent. Consequently, social security contributions are not levied on the entire gross salary of CHF 10,000, but only on the supplementary amount of CHF 2,000.
Without net salary equalisation, this results in the employee receiving a higher net salary during illness than during ordinary employment. It is precisely this overcompensation that a contractually compliant net salary equalisation is intended to prevent.
5. Legal Requirements
In Switzerland, salaries are generally agreed as gross salaries. The employer may not unilaterally reduce the agreed gross salary. Net salary equalisation, however, interferes with this system by reducing the actual payout, even if there may be an objective need for correction in the event of overcompensation.
Net salary equalisation is therefore permissible only if it has been expressly agreed and the employee receives the insurance benefits in full. A unilateral instruction by the employer is impermissible.
If the contractual basis – whether in the individual employment contract, a collective labour agreement or an employee handbook – contains a corresponding provision, there is no legal obstacle to net salary equalisation. In practice, collective labour agreements may also provide a sufficient basis justifying a deduction from net salary.
By contrast, it is impermissible for the employer to withhold insurance benefits in whole or in part. These benefits serve exclusively to compensate the insured employee for loss of earnings and accrue to the employer only to the extent that it continues to pay salary in the same amount. Any retention beyond this may, if all requirements are met, constitute misappropriation.
Accordingly, the appropriate solution is to stipulate contractually that the employer does not cover the entire difference between the daily benefits and the full gross salary, but merely supplements the insurance benefits up to the employee’s previous net income.
6. Summary and Recommendation
Net salary equalisation may constitute an appropriate instrument for employers to ensure consistent and equal treatment of working employees and those who are ill or injured. A clear contractual basis is, however, an indispensable prerequisite.
To avoid legal risks, careful drafting of employment contracts and prior legal review are recommended, particularly with regard to the interaction between employment law and social security law.
Our team of specialists in employment and social security law will be pleased to advise you competently, comprehensively and personally.
