Ruling discussion: Compensation for abusive termination is tax-free
According to Art. 336a of the Swiss Code of Obl igations, the party who terminates the employment relationship abusively must pay the other party compensation of up to six months' wages. How such compensation is to be treated for tax purposes has not yet been fully clarified and has been judged differently depending on the canton. There was also disagreement in the literature.
In its ruling 2C_546/2021, the Federal Supreme Court clarified for the first time and decided that compensation pursuant to Art. 336a CO predominantly has the character of a satisfaction payment and is therefore tax-exempt.
Facts
After 16 years in the same company, an employee was dismissed. The employee then sued her employer for abusive termination. During a conciliation hearing, the employer agreed to make a net payment of CHF 25,000.
The tax administration of the Canton of Vaud decided that the compensation was taxable as income. The Cantonal Court of the Canton of Vaud, on the other hand, ruled that the payment of CHF 25,000 qualified as compensation for an abusive termination under Art. 336a CO and therefore did not constitute taxable income.
Federal court reasoning
According to case law, a termination may be abusive in particular due to the way it is pronounced, because it characteristically violates the principle of good faith. Furthermore, a termination by the employer can be abusive if the employer violates the personal rights of the employee.
Since the parties already agreed at the conciliation hearing, no court had to decide whether the termination was actually abusive. But the question of whether the payment fell under Art. 336a OR was still open. An interpretation of the settlement was to provide answers.
The Federal Supreme Court stated that the employer agreed to pay compensation in the course of conciliation proceedings for abusive termination. Given the totality of the circumstances, the settlement could be interpreted as including an acknowledgement of abusiveness. Further, the Federal Supreme Court emphasized that the settlement lacked terms emphasizing that the employer did not acknowledge a legal obligation:
"Bien qu'assisté par un avocat, l'ancien employeur de l'intimée n'avait pas assorti son engagement d'une réserve telle que "sans reconnaissance de responsabilité", "à bien plaire" ou encore "par gain de paix". Sur la base de ces éléments, les juges précédents ont admis que l'accord passé devait être interprété comme comprenant la reconnaissance du caractère abusif du licenciement litigieux."
Since the employer had not provided the settlement with any reservation such as "without acknowledgement of legal obligation", the recognition of the unfairness of the termination must be assumed.
Regarding the tax consideration of the payment, the Federal Supreme Court stated that satisfaction payments aim to compensate for the immaterial damage suffered as a result of the violation of personal rights. However, the state should not enrich itself fiscally from the misfortune of citizens, which is why they are tax-exempt.
With regard to Art. 336a CO, the Federal Supreme Court states that the compensation serves the purpose of compensating the employee for the injustice she suffered as a result of the abusive dismissal:
"L'indemnité de l'art. 336a CO vise en effet à compenser l'atteinte subie par l'employé découlant du caractère abusif de son licenciement et qui, de sa nature, implique une atteinte à la personnalité."
Indeed, an abusive termination per se involves a violation of personality, which is why compensation under Art. 336a CO is a tax-free satisfaction payment.
Our assessment
It is to be welcomed that the Federal Supreme Court explicitly states that compensation pursuant to Art. 336a CO as a satisfaction payment does not constitute taxable income. This creates legal certainty with regard to future labor law disputes involving compensation for abusive termination.
However, it is also worth mentioning that the Federal Supreme Court emphasizes the importance of drafting provisions in settlements. In settlement negotiations, whether before an arbitration authority or only between the parties, it is of elementary importance to formulate the provisions in an agreement in such a way that they clearly reflect the will of the parties.
There are various terms and phrases that explain whether the parties make concessions. However, other terms can also explain that no legal obligation is recognized despite concessions (such as the usual addition "without recognition of a legal obligation"). If this is missing, it can quickly be inferred that one acknowledges having issued an abusive termination.
Do you have questions about the wording of settlement agreements or general questions in connection with employment law disputes? Feel free to contact Arife Asipi.