Accounting
David Merz | Founding Partner
Zurich, June 16, 2022
We all get ill sooner or later. This is an unfortunate fact that we prefer to not think too much about, but is important to consider when running a business. Employees can and do get ill, which affects their ability to work. This article discusses what employers can and must do in such a situation. We explore the subject of daily sickness allowance insurance and all its aspects. We look at whether such insurance is mandatory, and what obligations the employer has in terms of covering an employee’s wages in the case that there is no insurance.
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Article 324a of the Swiss Code of Obligations (CO) states that an employer is obliged to continue paying wages for a limited period if an employee is unable to work due to illness. This minimum obligation is enforced irrespective of whether there is a daily sickness allowance insurance in place.
The minimum period of continued payment of wages is dependant on both the length of service to date, and the canton in which the employment contract is based. In general, the minimum period of continued wage payment is three weeks if the illness occurs during the first year of service. The wages are paid at 100% of the wage amount from the first day of illness. This obligation to continue paying wages only comes into force if the employment relationship has lasted for more than three months.
If the employment relationship has existed for more than one year, the minimum period of wage payment from the date of illness varies by canton. The courts have developed the Bern, Basel, and Zurich scales for determining the obligatory period to continue paying wages.
Here you can find the Bern, Basel, and Zurich scales.
The employer and, especially the employees, may rightly feel that the minimum statutory obligation to continue paying wages is insufficient to cover the risk of prolonged illness. In this case, the employer and employee may form a written agreement which replaces the employer’s statutory obligation to continue paying wages with daily sickness allowance insurance.
A daily sickness allowance insurance policy assumes the risk of paying employee wages during a period of extended illness. The length of time of coverage, the percentage of wage paid out, and the waiting period can all vary depending on the policy conditions; however, certain norms do generally apply. We will discuss these details further below.
Daily sickness allowance insurance is not required by law and employers are by no means obligated to agree to such a policy. However, it can certainly be advantageous to both employers and employees to take out such insurance. Collective labour agreements also commonly demand the payment of wages beyond the legal minimums set by Article 324a, which can be a significant risk to employers who do not take daily sickness allowance insurance.
It is important to note that an agreement to replace the employer’s minimum sick pay obligations with illness insurance is only allowable if the insurance benefit is at least equivalent to the mandatory illness pay without insurance. There are certain criteria which must be satisfied to ensure that this minimum equivalence principle is met.
Daily sickness allowance insurance usually stipulates a waiting period in the contract. This means that the daily benefits only start getting paid after this waiting period has expired. Waiting periods are usually between 30 and 60 days depending on the contract, but can even range from 0 to 360 days in more extreme cases. Most insurers will provide different options, with a reduced waiting period obviously resulting in higher premiums.
It is the norm that during the waiting period, the employer must bear the wage costs. This is usually from the first day of illness, but individual and collective employment agreements may be made whereby the employer only starts paying wages 1 to 3 days after the onset of illness. During the insurance waiting period, the employer usually covers 100% of the wage including social security contributions, unless an alternative agreement is made in writing, with the absolute minimum agreed amount set at 80% of wages.
Here it should be noted that, depending on the contract, the employee may get an exemption from paying the 2. pillar pension premium. This should be considered by the employer, as they could end up overpaying the employee if they continue to pay gross wages as before the illness.
Daily sickness allowance insurance policies usually only provide benefits as a percentage of insured earnings. The standard is for these insurance policies to pay out at 80% of the wages prior to illness, excluding social security contributions. Depending on the policy agreement, the percentage payout could be increased up to 100%, but should never be lower than 80%, which is considered the minimum allowance to be at least equivalent to the statutory minimum payout by the employer without insurance.
An increase in the percentage or an agreement to include certain social security contributions would both naturally result in a higher premium.
Daily allowances are not remuneration for work, which is why deductions for social insurance no longer have to be made. However, if your company continues to pay the full salary and only receives the daily allowances, social insurance contributions must still be deducted on the difference. When reporting the total annual salary to the various social insurances (AHV, UVG), make sure that daily allowances paid to the insured person are not declared as salary.
Standard benefit periods are either 365 or 730 days. The latter is preferred by many as it allows the employee to defer their occupational pension premium and therefore save on risk premiums.
In all areas, the insurance contract may be tailored to meet the specific needs of the employee and employer, and additional protection can be provided. This may be in the form of shorter waiting periods, higher benefits, and longer benefit payout periods. Naturally, with each addition in protection, the premium increases accordingly.
The requirement for equivalence which was previously discussed also requires that the employer pays at least half of the insurance premium. Therefore, the standard is at least a 50/50 split in premium contribution between the employer and employee. Of course, it may be agreed that the employer pays more than 50% of the premium.
Daily sickness allowance insurance is often seen as an attractive benefit for employees, as it provides more extensive protection against the loss of income in the event of extended illness. However, the employee is not the only party who benefits from this arrangement, and there are many reasons why an employer might consider insuring their employees. Here we explore some of the advantages of daily sickness allowance insurance for both employees and employers alike:
It should be obvious that a situation where an employer covers at least half of an employee’s insurance premiums is advantageous for the employee in question. Employees get piece of mind that 80% of their wages are covered for at least 1 – 2 years in the event of unexpected and extended illness or incapacity to work. They can also rest assured that the employer will have to cover their wages during the insurance waiting period, usually to the value of 100%. If the insurance contract is for 730 days, they may be eligible for the added benefit of exemption from pillar 2 contributions.
Daily sickness allowance insurance must always put the employee in at least an equivalent or better position compared to having no insurance coverage, so this requirement alone ensures that such a policy is of benefit to the employee.
What about the benefits to the employer? Taking a daily sickness allowance insurance for employees can in fact benefit the employer in many ways too:
It is also important that an employee takes steps to help prevent employee illness from occurring in the first place. This can be achieved through health workshops and wellness programs, offering rewards for fitness targets, encouraging (and even paying for) regular medical screenings, and contributing to employee medical insurance. All this can help prevent the need to have to pay wages in the event of illness and lead to a healthy and productive workplace environment.
Daily sickness allowance insurance is not mandatory but can be advantageous for both employers and employees alike. Employers are obligated by law to continue paying wages for a limited period if an employee is unable to work due to illness, but this minimum obligation may not be enough to cover the risk of prolonged illness. This is where daily sickness allowance insurance can protect both the employer and employee from undue risk.
It is important to remember that the employer is required to pay at least half of the insurance premium, and the insurance benefit must be at least equivalent to the mandatory illness pay without insurance. Employers should therefore consider their options carefully and ensure that they understand the terms and conditions of any insurance policy they choose to take out.
In doing so, it can be helpful to seek the expert guidance of a professional service like that of Nexova AG. We can help you understand your obligations as an employer, whether it is worth taking out daily sickness allowance insurance for your employees, and the specifics of the policy you should consider setting in place.
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