A. Determination and Calculation of Ordinary Wage
The Supreme defined ordinary wage as ‘money and valuables given to workers for his/her prescribed work regularly and uniformly in a pre-determinable manner.
- Regularity: wages paid periodically may constitute ordinary wage even if payments are made at longer intervals than a month
- Uniformity: wages paid to all employees or some employees who satisfy certain conditions or standards, may constitute ordinary wage
- Pre-determinable: whether to pay and the payment amount, if pre-determinable at a time of providing labor regardless of other conditions such as achievement or performance, may constitute ordinary wage
- For example, wages paid only to incumbent employees at certain timing (eg. bonus for national holiday) and wages paid to employees who fulfilled for a certain number of work days (bonus given only to workers with full attendance on a specific month) are not included in ordinary wage because additional conditions should be met. Likewise, performance-based bonus is not included in ordinary wage because whether to pay and the amount are decided after providing labor.
B. Validity of Labor-Management Agreement and Good Faith Principle regarding ordinary wage
In accordance with the Article 15 of the Labor Standards Act, a labor-management agreement which excludes allowances or bonuses constituting part of ordinary wage is invalid. Since the agreement is invalid, employees in principle may claim for ad additional wage. However, employees are not allowed to request for retroactive wage payment in the following cases as it is against the good faith principle (the Article 2 of Civil Act )
- (1) regarding regularly paid bonuses, (2) if labor and management reached an agreement on the total amount of wage and other working conditions based on their joint recognition that regularly paid bonuses are not included into ordinary wage, and (3) if employees’ claim for retroactive wage payment would bring serious managerial difficulties to the company due to an excessive financial burden unexpectedly.
C. KEF Suggestions regarding Ordinary Wage
The recent ruling of the Supreme Court on the scope of ordinary wage (Dec. 18th) has left a huge blow to the society. Day after day, the press is reporting that enterprises have to bear a large amount of additional labor costs with the ruling that regularly paid bonuses should be included in ordinary wage. The government will announce the directions to reform wage system through the Wage System Improvement Committee while the politicians are preparing to establish legislation on ordinary wage. Meanwhile, labor issued a guideline on ordinary wage right after the ruling to affiliated unions in workplaces and held briefing sessions to prepare strategies.
However, uncertainties still remain since not all types of regular bonuses are included in ordinary wage. Even if they are, claims for an additional wage are limited by certain conditions. This is why companies need to actively seek and develop strategies in relation to their wage systems including ordinary wage.
Bonus paid at regular intervals exceeding one month is included in ordinary wage but claims for additional wage are restricted
The Supreme Court ruled that bonus paid at regular intervals exceeding one month are part of ordinary wage if paid out regularly and uniformly in a pre-determinable manner. This means that regular bonuses which have been paid, quarterly and biannually, may be included in ordinary wage. In case of performance-based bonuses with the minimum amount guaranteed, the minimum amount is recognized as ordinary wage. However, not all regular bonuses are included in ordinary wage.
The Supreme Court denied ordinary wage in the case of certain conditions attached such as a certain number of workdays to be fulfilled or payment only to incumbent employees at certain timing. In fact, the Supreme Court ruled out bonuses for New Year’s Day, Chuseok, summer vacation and seasonal kimchi-making under the reason that these types of bonuses are given only to incumbent workers.
The Supreme Court stated that an agreement between labor and management to exclude regularly paid bonuses from ordinary wage is invalid since it is against the Labor Standards Act. This means that even if labor and management agreed to exclude regular bonuses with collective agreement, such agreement is invalid. However, the Supreme Court restricts claims for an additional wage in the following two cases; 1. in case labor and management agreed to exclude regular bonuses from ordinary wage based on which wages and other working conditions were decided on the belief that regularly paid bonuses are not part of ordinary wages, 2. in case serious managerial difficulties may incur due to unexpectedly excessive financial burden coming from employees’ claim for an additional wage.
It is noteworthy that ‘serious managerial difficulties’ are different from the concept of ‘urgent managerial needs’ in Restriction on Dismissal for Managerial Reasons (Article 24 of the Labor Standards Act). The company in dispute has recorded stable profits with more than 200 million US$ every year.
From the fact that the good faith principle once denied at the 2nd trial was recognized by the Supreme Court and the reasons cited, serious managerial difficulties can be interpreted as ‘unexpected financial burden’. The Top Court mentioned the reasons as follows ; 1. overtime work is done nearly regularly, 2. regular bonus exceeds 600 % ordinary wage, 3. in case of additional payment, real wage increase would exceed more than double the wage hike agreed during wage bargaining, and 4. retrospective pay for the past 3 years would erode the net profits of the company.
In this regard, most cases seem to fulfill ‘serious managerial difficulties’ including money-making companies as well as those suffering deficits. Companies need to prove their situation in detail, for example 1. if they make retrospective payment for the past 3 years, it would result in unprecedentedly high wage increase, 2. the amount of 3 years’ payment would be huge, accounting for double-digit percentage of the annual salary, and 3. this year’s operating profits stand below the average of the recent few years.
Labor claims for additional payments based on the ruling, while maintaining the current wage system
Trade unions such as the FKTU (Federation of Korean Trade Unions) and the KCTU (Korean Confederation of Trade Unions) are taking prompt actions by providing guidelines and educations. First, they are planning to make demands for the additional wage of the past 3 years even though the labor and management made agreements not to include regular bonuses in ordinary wage before the decision of the Supreme Court. The Court mentioned that regular bonuses could be excluded from ordinary wage when “confidence is formed between the labor and management about excluding regular bonuses from ordinary wage.” Therefore, labor is prospected to highlight the fact that ‘no confidence is made’ by securing various information and data. Moreover, labor will be insisting that companies will not have excessive burden even with the additional wage claim from the workers. As for wages that will be paid after the ruling of the Supreme Court, labor made its guideline for workers to claim for an additional wage with regular bonuses included.
During the wage and collective bargaining in 2014, labor is expected to focus on fulfilling the necessary conditions for the current salary to be included in ordinary wage while the current wage system is maintained. Labor will ask to include the minimum amount of performance-based bonus in ordinary wage, and to claim regular bonuses even for retirees or to make regular bonuses as base pay. Also, if the labor and management make agreements for welfare expenses, labor is likely to claim to determine a certain rate or amount of payment.
To minimize additional labor cost, employers should reform current wage systems
First, employers should make it clear to employees and trade unions that, in accordance with the good-faith principle stipulated in the Supreme Court ruling, they do not have the obligation to retroactively pay the statutory allowances. The Supreme Court ruled that the good-faith principle is recognized under tacit agreements or labor practices, as well as explicit agreements between labor and management including collective bargaining agreement. Also, for cases of serious managerial difficulties to restrict employees’ right to claim retrospective wage payment, the Supreme Court stated as follows;
Case 1. In case total amount of regularly paid bonuses exceeds 600% of base salary.
Case 2. In case the increase rate of real-wage exceeds the wage increase rate which was agreed by collective bargaining, due to the expanded scope of ordinary wage.
Thus, most employers seem to have no obligation to retroactively pay the statutory allowances of the past.
Second, the Supreme Court ruled that employees are not eligible to retroactively request unpaid statutory allowance until new labor-management agreement is reached. Therefore, even though the Supreme Court decided that regularly paid bonuses are included into the calculation of ordinary wage, employers do not have to pay additional ordinary wage which reflects the Supreme Court’s ruling until their existing collective bargaining or wage agreements is amended.
With the Supreme Court’s ruling this time, employers are advised to reform their existing wage system in order to minimize additional cost burden. Above all, employers need to lower the portion of regularly paid bonuses which are possibly to be included in ordinary wage, by converting them into incumbent-only payment or performance-based incentive. When it comes to performance incentive, it is advised to design the group-based incentive system, which pays incentives by groups of different levels of achievement, in order to avoid unnecessary disputes over ordinary wage calculation. As incentives which are paid on fixed basis reflecting the previous year’s performance are possibly considered as ordinary wages, if a company has been paying incentives every year based on individual’s performance, the company should reflect the relevant year’s performance, not the previous year’s one, and the minimum amount which is guaranteed to be paid to all employees, needs to be lowered as much as possible.
If it is difficult to reform the existing wage system, employers should add a new rule to offer regularly paid bonuses only to the incumbent employees, not retirees, and also abolish rules or practices on its daily-basis calculation. If the trade union refuses to accept such reform plan, the employer should freeze or cut basic salary in collective/wage bargaining, taking into account additional wage increase resulted from including regular bonuses into ordinary wage.
The ordinary wage issue, along with the legislative attempts of the government and politicians to reduce working hours, is putting pressure on enterprises to reform their wage system and improve the currently long working hour practices. With the extended scope of ordinary wage, allowances for holiday work or extended work are likely to increase the most because those are calculated based on ordinary wage. Thus, employers should come up with their long-term and short-term measures respectively. In the long term, enterprises are advised to simplify their wage system and introduce performance-based pay system, while developing measures to minimize overtime work on holidays through improving labor productivity.