16 August 2023

Employer’s position in a Group of Companies

  • Articles
  • Legal
  • Employment / Immigration

The inadequate regulation of group law in Switzerland raises numerous questions from a labour law perspective: Who can give instructions to the employee? To which company does the employee owe allegiance? Who can give notice of termination? You will find answers to these questions in the following article.

  • Michèle Stutz

    Legal Partner

In recent years, an increasing number of companies have organised themselves into group structures, while at the same time the mobility of individual employees has also increased significantly. This development stands in contrast to the lack of comprehensive, uniformly codified regulations in the area of group law in Switzerland. To date, there are only selective regulations in Switzerland that deal with groups of companies. The legal independence of the individual group companies and the simultaneous lack of legal personality of the group as a whole must be taken into account when drafting employment contracts. Among other things, this raises the questions of who is the employer in a group of companies and, in connection with this, the follow-up questions of to whom the employee owes a duty of loyalty under the employment contract, who can give binding instructions and who can legally give notice of termination.

What is a group of companies?

Due to the lack of codifications in the area of group law in Switzerland, there is basically no uniform legal definition of the term "group". However, doctrine has developed the following definition: A group exists when a number of independent companies (in practice often joint-stock companies) are brought together under uniform management for the purpose of forming an economic unit. This definition has also been adopted by the Federal Supreme Court. The definition under Art. 963 para. 1of the Swiss Code of Obligations (CO), which in connection with the obligation to prepare consolidated financial statements speaks of the control of a legal entity with an obligation to prepare financial statements over one or more other such entities, also goes in this direction.

The group structure is a living entity consisting of several independent legal entities that can be operationally active and thus also work with human capital. Individual employees may be transferred from one company to another in the event of restructuring within the group, which is not uncommon in practice. In this context, expatriations or secondments as well as personnel leasing are often an issue (cf. our previous magazine article: Intragroup Lending of Employees - New Practice (mme.ch).

Who is the employer?

The employer is basically the person who has the right to claim benefits from the employee and who has corresponding obligations towards the employee. An employer can be a natural person, a legal person or a group of persons. Accordingly, the position of the employer is of central importance. It regulates who has the active and passive legitimacy in the event of a dispute and without determining the position of the employer, no mutual rights and obligations can be established.

In the absence of legal personality, a group of companies cannot, as a rule, have the status of an employer and cannot be a party to an employment contract. Therefore, the employer status belongs to an individual group company or several individual group companies.

In practice, an employment relationship usually exists with only one group company. However, due to interlocking relationships within the group, the employee is sometimes employed within the group in a company other than the one with which the employment contract was concluded. In the case of such a divergence between the company carrying out the activity and the contracting company, there are various possibilities for the legal regulation: It may be a case of (subject to authorisation) intra-group transfer.

Restructuring within the group may lead to changes in the factual circumstances, which is why it is advisable to review the contractual basis on an ongoing basis.

To whom does the employee owe the duty of loyalty under the employment contract?

The employee's duty of loyalty arises is based on Art. 321a CO and is the correlate of the employer's duty of care. In principle, it is assumed that only the contractual employer is entitled under the duty of loyalty. However, doctrine takes the view that the interests of the group company are also covered by the duty of loyalty if they have a positive effect on the welfare of the employer. If the interests of the group and the interests of the employer, i.e. the group company with which the employment relationship exists, are diametrically opposed, those of the employer take precedence.

In principle, the employer has the right to assert claims arising from the duty of loyalty. However, the Federal Supreme Court has ruled that a delegation of rights under the employment contract is possible. This means that certain aspects of the fiduciary duty can also be delegated within the group.

Particular issues arise where a person is employed as an employee within the group and holds a position on the board of another group company. In such cases, the duty of loyalty under the employment contract and the duty of loyalty under company law apply side by side. In this case, liability towards one company is not excluded, which is why it makes sense to regulate the handling of conflicts of interest in such constellations in the employment contract.

Who has the right to give instructions?

After determining the position of the employer, the question arises as to who is entitled to give instructions to the employee. According to Art. 321d para. 1 CO, the employer is the holder of the right to give instructions. In principle, the right to issue instructions lies solely with the employing group company, even in the case of group structures. However, delegation is very common in everyday working life: In the majority of employment relationships, the employer acts as a legal entity but cannot itself exercise the right to give instructions. Instructions are often given on behalf of the legal person by natural persons, for example a direct superior of the employee concerned. However, the right to issue instructions may also be delegated within the group on a contractual basis.

Therefore, the question of whether an employee is entitled to issue instructions must primarily be considered in relation to the contractual arrangement. If it is not the parent company (but the subsidiary) that is entitled to give instructions on the basis of the employment contract, an employee cannot be dismissed without notice for disregarding such instructions. According to the case law of the Federal Supreme Court federal court case law, this constitutes unjustified dismissal.

Who is entitled to give valid notice of termination in a group of companies?

Swiss labour law attaches great importance to the freedom to give notice. However, there are limits to the right of termination in terms of time and content, i.e. the notice periods must be observed with the exception of termination without notice. In addition, the termination may not be based on abusive reasons.

However, it is crucial for the validity of the termination that is issued by the correct legal entity. In a group of companies, only the employer entitled under the employment contract can give notice of termination to an employee. The person acting on behalf of the parent company cannot therefore validly terminate an employment contract concluded by an employee with a subsidiary. In contrast, only the parent company can validly terminate an employment contract was concluded with it. From a temporal point of view, therefore, the relevant date is the date on which the correct company gave notice of termination.

Difficulties may also arise in connection with the dismissal if the employee is still working for the company in an executive position at the same time. In the former case, the termination is governed by the provisions of the employment contract, in the the latter by the provisions of company law. In the case of an executive body, it is called a dismissal and often a different hierarchical level is responsible than for the termination of employment relationships. The termination of the employment relationship of a member of the board of directors can also be delegated to a direct superior. The termination does not necessarily have to come from the board of directors.

Our recommendation

In the case of employment relationships within a group, particular attention must be paid to the form of the employment contract. This usually determines the position of the employer, which entails various rights for the employer such as the right to give instructions or to terminate the employment contract. For example, a dismissal issued by the wrong person is not legally valid and can cost a company dearly. Our employment law team will be happy to assist you in drafting contracts within the group.

This article was written with the help of our short-term intern, Ms Elisa Bruckbauer - thank you very much!
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