Insolvency Compensation
Insolvency compensation (Insolvenzentschädigung) is a mandatory payment employers must make to employees when the company becomes insolvent. Under Swiss law, employers must cover up to four weeks' gross wages per employee. The state does not cover this cost; it falls entirely on the employer's insolvency estate. This obligation exists whether or not a formal bankruptcy proceeding occurs.
Insolvency compensation is the legal obligation to pay employees up to four weeks' gross wages when your company becomes insolvent and cannot meet payroll. The amount is capped at four weeks of the employee's regular salary as of the insolvency date.
Unlike severance pay (which may be negotiable), insolvency compensation is non-negotiable and applies automatically when your company cannot pay wages. It is a creditor claim against the insolvency estate, not a voluntary benefit.
When Insolvency Compensation Applies
Insolvency compensation becomes due the moment your company cannot meet payroll obligations. This includes situations where cash flow collapses, a large customer defaults, or bank financing is withdrawn—even before a formal bankruptcy petition is filed.
The obligation arises under the Swiss Code of Obligations (Obligationenrecht, OR Article 338c) and applies in all Swiss cantons. The employee does not need to pursue legal action; the claim is automatic and must be honoured from company assets if any remain.
- Triggered when the company demonstrably cannot pay wages on the due date
- Covers all employees on the payroll at insolvency, including part-time and Pensum-based staff
- Applies regardless of whether bankruptcy is formal or de facto
- Capped at four weeks' gross wages per employee (no limit on total payout)
- Not reduced by employee misconduct or performance issues
- Creditors stand behind employees in the insolvency queue
Your Obligations as Employer
You must set aside or ring-fence funds for insolvency compensation as soon as you know insolvency is imminent. If you operate in a canton with mandatory severance funds (e.g., some Romandy cantons), those rules may overlap with insolvency compensation.
If your company enters formal bankruptcy, the insolvency trustee will calculate and process these claims. If insolvency is informal, you should communicate the amount owed to each employee in writing and document the insolvency event clearly.
- Calculate four weeks' gross wages for each employee as of the insolvency date
- Include all salary components (base, guaranteed bonuses, not discretionary ones)
- Do not offset insolvency compensation against employee debts or loans
- If bankrupt, provide the trustee with complete payroll records
- In informal insolvency, notify employees in writing of amounts owed
- Retain all supporting payroll documents for at least ten years
Common Mistake
The single most common error is assuming the state or a fund will cover insolvency compensation. In Switzerland, there is no government guarantee or unemployment-linked safety net for unpaid wages. The cost falls entirely on the insolvency estate.
A second frequent mistake is miscalculating the four-week amount by excluding bonuses, commissions, or other regular pay components. If an employee's standard monthly package includes a 13th-month bonus or performance commission, those must be pro-rated and included in the four-week base.
- No state or fund reimburses insolvency compensation in Switzerland
- Do not exclude any regular, recurring pay component from the calculation
- Do not assume employees will accept a partial or deferred payment
- Do not treat insolvency compensation as negotiable in restructuring talks
- Employees can lodge claims directly if not paid; consult a lawyer before disputing amounts
Frequently asked questions
- Does the state reimburse insolvency compensation?
- No. Switzerland has no state guarantee fund for unpaid wages. The full cost of insolvency compensation falls on the company's insolvency estate and is paid from remaining assets before other creditors receive distributions.
- Is insolvency compensation the same as severance pay?
- No. Insolvency compensation is a statutory minimum payment (up to four weeks) triggered by inability to pay. Severance pay (Abfindung) is negotiable and may be offered on top, but is not required by law unless your contract or a GAV specifies it.
- What if the company has no assets left?
- Employees hold an unsecured claim in the insolvency estate. If assets are exhausted, they receive nothing. However, they may file for partial unemployment benefits with their canton's RAV/ORP/URC for the period wages were unpaid.
General information for Swiss employers, not legal advice. Have a lawyer confirm anything with legal consequences.