Four Questions Startups Have about how to Structure Employment Contracts
Work does not have to be performed within the scope of an employment contract. It may be the subject of an agency contract, contract for work or other service contract. Different working relationship models can trigger very different legal consequences.
Employee or freelancer?
Whether a work performing party is legally considered an employee or a service provider depends not only on the designation of the parties, but also on the actual working relationship that exists.
An employee is anyone who is integrated into the employer’s operational organization, follows the employer’s instructions and is in a subordinate relationship to the employer.
In return, the employee is entitled to regular salary payments and is covered by social insurance through the employer. The employer must protect the employee’s personality rights and health and is bound by the statutory protections against dismissal.
In contrast, freelancers or contractors work for several clients, arrange their working time independently and bear the business risk. They are responsible for paying their social security contributions and do not benefit from statutory protection against dismissal or continued payment of wages in the event of illness.
Is a written contract required?
With few exceptions, an ordinary employment or service contract does not have to be in writing. It may also be concluded orally or in electronic form. However it is done, it is important to document all agreements, because in the event of a dispute, it must be possible to prove what was agreed.
How can employees share in the company's profits?
There are various ways to give employees a share of the company's profits. Shares or options can be awarded within the scope of employee stock option programs. Or a variable compensation model with a performance-related bonus can be provided.
Legally, the employee’s salary must be distinguished from the voluntary bonus payment: the employee is entitled to the contractually agreed salary, which may include a variable, performance-related component, until the employment relationship ends. But it is at the employer’s discretion as to whether to pay a bonus (gratification) and to determine the amount. (for more information go to: Bonus Pay in Switzerland - Discretionary or Not?)
Performance-related compensation models must be structured so that business risk is not passed on to the employee. An appropriate basic income must also be guaranteed.
What are the legal requirements on overtime and weekend work?
Besides the provisions of the Swiss Code of Obligations on overtime, the Labor Law Act and related ordinances contain far-reaching provisions on employee working hours and rest periods, some of which are difficult to reconcile with the reality of work.
With some exceptions, the Labor Law Act applies to all employees of private companies, unless they are senior executives.
The law only deems an individual to be a senior executive if, by virtue of their position and responsibility, they have far-reaching decision-making powers or can significantly influence decisions with major impact. Although the amount of compensation may be an indicator when assessing whether a senior executive position exists, it is not in itself the key criterion.
If the working relationship is based on a service contract other than an employment relationship, the Labor Law Act does not apply.