Q&A ABOUT ORDINARY WAGE – Labor InFocus

Question 1

• What are the determinants for ordinary wage and how is it determined?

Answer 1

The Supreme Court defined ordinary wage as ‘money and valuables given to workers for his/her prescribed work regularly and uniformly in a pre-determinable manner. The Court’s definition is to reconfirm the previous rulings. Determination should be made according to objective attributes of the wage, rather than the title of the wage or payment periods.

<The Supreme Court ruling>

• When determining whether a wage is included in ordinary wage or not, one should consider that if the wage is money and valuables given to a worker in return for his/her prescribed work regularly and uniformly in a pre-determinable manner according to the objective attributes of such wage. Title of the wage or payment period cannot be determinants of ordinary wage. Bonuses paid at regular intervals longer than 1 month in return for labor in a specific period constitute ordinary wage.

Question 2

• What does ‘regularity’ mean as one of the determinants of ordinary wage?

Answer 2

The Supreme Court ruled regularity as ‘regular payment for every predefined period.’ Therefore, if payments are made at longer intervals than a month, such as 2 months, quarter (3 months), half-year (6 months) or 1 year, ‘regularity’ can be fulfilled as long as the payments are made periodically.

<The Supreme Court ruling>

• In case a wage considered as ordinary wage is paid regularly at longer intervals than 1 month, the payment is made in installment in return for a worker’s prescribed work in accordance with an agreement between the labor and management. It is obvious that the wage does neither lose its attribute as remuneration for a worker’s prescribed work nor regularity due to the length of payment period.

Question 3

• If a payment is calculated on a daily basis or paid differently based on a worker’s years of service, is the payment not an ordinary wage?

Answer 3

The Supreme Court ruled that ‘pre-determinable’ refers to “payment which can be predetermined regardless of achievement, performance or other additional conditions.” As for ‘differentiated payment according to the number of days worked or years of service,’ the Supreme Court made a decision based on the following 4 types.

1. In case of calculation based on the number of days worked : ‘pre-determinable’ condition fulfilled

2. Payment only to those who worked for a certain number of days (eg. payment is eligible only for those who provided labor for more than 20 days per month): ‘pre-determinable’ conditions not fulfilled
※ Same as lower court decision (Seoul High Court 2012 Na 38980)

3. Mixed type (full amount paid to those who worked for 15 days or more per month, payment on a daily basis calculation for those who worked less than 15 days): ‘pre-determinable’ conditions recognized only for the part of daily basis calculation

4. Payment only to those who worked for a certain number of days, or differentiated payment according to the years of service (no bonus for those who worked less than 6 months): ‘Pre-determinable’ conditions fulfilled.
※ Same as the previous rulings (Supreme Court 2010 Da 91046)

Recently, a majority of lower courts recognized that ‘calculating payment on a daily basis’ holds the attribute of ‘pre-determinable’ conditions.
※ Lower courts including Seoul High Court (2012 Na 23773 and etc.)

<The Supreme Court ruling>

• (Type 1) If a certain amount of wage is paid every workday and the total amount is calculated based on the number of days worked, then workers are confirmed to be paid if they provide labor on certain days. Then the wage constitutes ordinary wage.

• (Type 2) In case wages are paid only when a certain number of days are worked, an additional condition should be met such as ‘working for a particular number of days’ on top of providing prescribed work. Achieving the additional condition cannot be confirmed at a random day when overtime·night·holiday work is provided, and thus the additional condition is uncertain and does not hold the attribute of ‘pre-determinable’ conditions.

• (Type 3) In cases calculation methods or payment amounts vary by the number of days worked, if a certain amount of wage is confirmed for prescribed labor provided, the attribute of ‘pre-determinable’ condition is acknowledged. For instance, wage with a certain title is paid when a worker provides 15 days or more of labor, and wage with the same title is calculated on a daily basis for less than 15 days of labor. In this case, the ‘pre-determinable’ condition is acknowledged for the minimum payment with the daily calculation.

Question 4

• If payment is limited ‘only for incumbent workers,’ is the ‘pre-determinable’ condition denied?

Answer 4

If payment is made only to incumbent workers on a specific time or a particular payment day, the payment cannot be considered as ‘remuneration for labor,’ nor holds ‘pre-determinable’ condition. It is not clear that a worker would still be working until the day of payment.

There have been diverse views over ‘regulations applied only to incumbent workers,’ and this time the Supreme Court made a clear decision.

1. The case which recognized ‘pre-determinable’ conditions (Seoul High Court Nov. 23rd, 2012, 2012 Na 23773) : The wage is an ordinary wage though it is not calculated on a daily basis.

2. The case which denied ‘pre-determinable’ conditions (Seoul Northern District Court, Dec. 5th, 2012 : The bonus is not ordinary wage considering the fact that an early retiree was not paid.

For the case of KB AutoTech, the Supreme Court did not approve ‘bonuses for New Year’s Day · Chuseok · summer vacation · birthday· other gifts and individual annuity insurances · group insurances’ as ordinary wage since the payments were made only to “incumbent workers,” and “there was no objection from the workers about the payments.”

※ The Supreme Court returned the case to the lower court by stating that “although there is no written regulation, it seemed that an agreement or practice to pay the allowances to incumbent workers has been in existence.”

With the ruling of the Court, most of small allowances such as vacation bonuses and insurances for employees welfare will not be included in ordinary wage. Not every company has the regulation of ‘calculation on daily basis’ for the above mentioned money and valuables.

<The Supreme Court ruling>

• In case of wages that are decided to be paid only to incumbent workers, being employed at a particular time makes the worker eligible for the payment. If the wage is paid under such condition, then the wage does not hold its attribute as ‘remuneration for prescribed work,’ … nor ‘pre-determinable’ condition since payment is not guaranteed at the point when a worker provides overtime ․ night ․ holiday work in case the worker resigns before the payment day.

Question 5

• In case of performance-based bonus whose amounts vary by employees, is the ‘pre-determinable’ condition denied?

Answer 5

he Supreme Court ruled whether performance-based bonuses constitute ordinary wages or not in the following types ;

In principle, performance-based bonus doesn’t constitute ordinary wage since bonus payment and the amount are decided based on performance or achievement, and therefore they can’t be set in advance.

Other cases

ⅰ) Bonus whose minimum amount is guaranteed: the minimum amount is ordinary wage
(e.g.) employee A $300, employee B $200, employee C $100 : the amount of $100 is regarded as ordinary wage.
(e.g.) employee A $300, employee B $200, employee C $0 : no ordinary wage.

ⅱ) Performance-based bonuses paid in the following year(a) If bonuses (based on performance in the previous year) are paid in the following year, the total amount of bonus may be predetermined. Therefore, it is regarded as ordinary wage.(b) If the company decides to postpone bonus payment which should be paid during the year, this is not considered as ordinary wage.

In general, performance-based bonuses are not ordinary wage and there may be different interpretation over the performance-based salary paid on a 12 month installment. The performance-based salary may be regarded as a type of ordinary wage in accordance with (a) above. Different percentage of incentives of individual employees can be regarded as ordinary wage.

Comparison of recent court rulings on performance-based salary
※ Example of performance-based salary: 800% =【fixed 700% + incentive(0~100%)】

Seoul Central District Court(1^st trial)	Seoul High Court(2^nd trial)
Only fixed amount (700%) is regarded as ordinary wage	Entire amount (up to 800%) is regarded as ordinary wage

<The Supreme Court ruling>

•In general, bonuses determined based on the performance of employees is not considered as ordinary wage. However, if the employee is guaranteed a minimum amount of bonus even if he/she receives the lowest grade in evaluation, the minimum amount of the bonus is regarded as ordinary wage.
• If bonus determined based on an employee’s performance in the previous year is paid in the following year, wage payment and the amount can be pre-determined, and therefore bonus may be considered as ordinary wage. However, if the company decides to postpone payment of bonus due to some reason, bonus may not be considered as ordinary wage. But in this case too, if the employee is guaranteed a minimum amount of bonus even though he/she receives the lowest grade in evaluation, the minimum amount of the bonus is regarded as ordinary wage.

Question 6

• If labor and management agreed to exclude a particular allowance or regular bonus in ordinary wage calculation with collective agreement, is the collective agreement still valid?

Answer 6

Even if labor and management agree to exclude an allowance which is ordinary wage pursuant to the Labor Standards Act from ordinary wage calculation, it is invalid. However, the Supreme Court ruled that if there was an agreement to exclude regular bonuses in ordinary wage calculation before this ruling, employees cannot claim for an additional wage since it is against the principle of good faith. The labor management agreement is invalid, and they can’t claim for an additional wage pursuant to the principle of good faith.

<The Supreme Court ruling>

• An agreement between labor and management to exclude allowances considered as part ordinary wage from ordinary wage, the agreement is invalid. The invalid part should follow the Labor Standards Act. … However, in case labor and management agreed to exclude regular bonuses from ordinary wage based on which wages are decided, a claim for an additional wage causing severe managerial difficulties, is unacceptable as it is against the principle of good faith.

Question 7

• Is employment rule recognized as a type of labor-management agreements?

Answer 7

The Supreme Court ruled that the principle of good faith applies not only to collective agreement but also to employment rule, tacit agreement and labor practices. In case there is no collective bargaining at workplaces, employment rules may be recognized as one of labor-management agreement. In general, employment rules are recognized as labor-management agreement since companies listen to employees’ opinion or gather consent from a majority of employees in case of making or revising employment rules.

The Supreme Court noted that the practice of excluding regular bonuses from ordinary wage calculation have taken root in most companies following the guideline issued by the Ministry of Employment and Labor.

<The Supreme Court ruling>

• … There have been written or tacit agreement or practices between defendant and managerial staff members in applying this ordinary wage standard stated in collective agreement to the employees who are not union members …

• The practice of excluding regular bonuses from ordinary wage calculation has continued for a long time and the agreement between labor and management has taken root in many workplaces … the reason for this practice …..the ‘Guideline on Ordinary Wage Calculation’ of the Labor and Employment Ministry whose influences are huge on the both labor and management at workplace …

Question 8
• What are the conditions for applying the principle of good faith?

Answer 8

Although the Supreme Court acknowledged that regular bonuses should be included in ordinary wage, it ruled that if there were any agreement to exclude regular bonuses from ordinary wage calculation ahead of the Supreme Court’s ruling, employees shall not claim for an additional wage since it is against the principle of good faith.

※ The Supreme Court’s decision on the principle of good faith is meaningful for companies as the previous two trials ruled that companies should pay retroactive wages.

The Supreme Court outlined the following 3 conditions for the principle of good faith.

1. The principle of good faith only applies to regular bonus.
2. There should be agreements between labor and management. Practices or no objection is acknowledged as an agreement
3. In case of causing serious managerial difficulty or threatening the existence of the company

The Supreme Court ruled that serious managerial difficulties would be resulted due to 1. frequent overtime work 2. over 600% regular bonuses 3. real wage increase exceeding the agreed wage hike which was decided during wage bargaining 4. increased bonus for holiday leave. The Supreme Court also cited 5. wage bargaining practices 6. unexpectedly excessive expenditure 7. higher real wage increase compared to previous years 8. companies should pay additional wages mostly out of their net profit.

Most of the cases would be applied the principle of good faith (case of serious managerial difficulty).

※ Most law firms have same views.
※ Some maintain possibilities of disputes depending on individual companies.

<The Supreme Court ruling>

• Considering frequent overtime work including extended work · night time · holiday work … annual regular bonus exceeding 600% of basic pay … these factors seem financial burden for the defendant (company)

• If bonuses are included in ordinary wage, employees could expect much higher wages than the wage agreed during wage bargaining while the defendant (company) has to face serious managerial difficulties due to unexpected financial burden.

Question 9
• According to the principle of good faith, until when is the right of employees to retroactively claim for an additional wage restricted?

Answer 9

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. Since it is apparent with the Supreme Court ruling on December 18 that any agreement the way forward to exclude regular bonuses from ordinary wage is invalid, the principle of good faith is not applied to an agreement after this ruling.
※This is not stipulated in the Supreme Court’s ruling but explained in detail in its press release.

‘Labor-management agreement after the Supreme Court ruling’ is interpreted as an agreement to be made after the Supreme Court ruling on December 18, 2013. That is, even after the Supreme Court ruling, employees are not eligible to claim for an additional wage until new labor-management agreement is reached.

It might be appropriate that, until existing labor-management agreement is amended, the provision of collective bargaining agreement that ‘excludes regularly paid bonus from ordinary wage’ is maintained.

Question 10

• What is the validity of the Supreme Court full-member decision?

Answer 10

For KB Autotech case, according to Article 17 of the Court Organization Law, the decision of higher court has binding force on lower court’s ruling. Therefore, in case that the Supreme Court decided to quash the original judgment and remand the case, the decision of the Supreme Court would have a binding force on the original court and other lower court.

For other lawsuits concerning ordinary wage, the Supreme Court’s decision does not have binding force in principle, however, considering the nature of Judicial System in Korea, it would have an absolute biding power and influence on lower courts’ judgments.

In this regard, this decision by the top court is expected to greatly affect the rulings of the pending or potential lawsuits at all levels.

Question 11

• In case that labor and management agreed in the collective bargaining agreement to pay “200% of ordinary wage as a special incentive”, would non-statutory allowances such as special incentive increase together?

Answer 11

The Supreme Court ruling on December 18 didn’t make any decision on the so-called ‘agreed ordinary wage’. Considering other instances of lower courts, this matter is actually irrelevant with the current dispute over ‘ordinary wage pursuant to Labor Standards Act.’

Lower courts classified type B collective bargaining agreement as so-called ‘agreed ordinary wage’, ruling that there is no reason to increase other non-statutory allowances in accordance with increases in ‘agreed ordinary wage’.

※ Even though the standard wage for calculating regular bonuses is titled ‘ordinary wage’, it actually means ‘agreed ordinary wage’ between labor and management, which is a totally different concept from the term ‘ordinary wage’ in Labor Standards Act. That is, even though regular bonuses are included into the calculation of ordinary wage, it is not likely to increase the sum of ordinary wage limitlessly. (Seoul High Court Decision 2011Na23773, etc.)

admin