Mr. Kim, president of a dietary supplement company, introduced an incentive system based on individual and group sales performance to motivate and reward salespersons in his company. After the introduction of the new system, Mr. Choi, manager of the sales team, filed a lawsuit stating that the incentives were not included in severance pay calculations. Does the incentive paid to Mr. Choi need to be included in severance pay calculations?
The question of whether incentives are a “wage”
Many companies are using incentives to boost revenues and worker morale. Money and valuables paid to workers are called bonuses, incentives, and rewards, etc., but these are not legal terms. Confusion may arise as to whether an incentive should be included in severance pay calculations, or in the scope of “wages”, since each company has its own policy and method of paying incentives.
There are two types of money and valuables that are paid as incentives to workers. One is a “collective incentive” which is paid according to performance of a group like a company or a department. The other one is an “individual incentive” which is paid according to individual workers’ performance.
The first criterion is whether the payment obligation exists
According to law, “wage” is defined as “wages, salaries and any other money and valuable goods an employer pays to a worker for his/her work, regardless of how such payments are termed.” Under this context, the Court considers money and valuable goods as wages if they are ⅰ) paid continuously and periodically, or ⅱ) the collective agreement or Rules of Employment stipulates the employers obligation to pay.
The existence of the rules that stipulate payment obligation is considered as a very important criterion in a dispute.
If certain conditions, payment method and criteria are in the Rules of Employment or etc., the incentive is likely to be considered as “wages”. However, an incentive will not be considered as wage in the following situations: ⅰ) the incentive is paid randomly and no rule exists stating obligation; or ⅱ) the company has a rule that stipulates paying incentives, but the rule is vague, such as “the company can pay incentives for the following cases:~”, and the specific amount and rate of payment are determined by the company on each occasion.
<Figure 1> Criteria for Determining if Incentive is considered Wage
Group incentives
Does the incentive that Mr. Choi was paid based on his performance or his group’s count as “wages”?
First of all, a group incentive which is determined by the group’ performance is not included in wage, and cannot be considered as a reward for work since payment of the incentive is influenced by a specific condition: achieving the goal of a company or a department. Even if the group incentive has been paid repeatedly with non-fixed conditions (based on company or team performance), the incentive would not be counted as wage. Therefore, the group incentive that Mr. Choi has been paid according to his group performance is not wage, and would not be included in severance pay calculations.
Such stipulations as “an incentive is paid when sales grow 50%” or “a bonus is paid when there are no strikes,” where performance or the absence of strikes determines the amount of incentives or whether the company should pay incentives or not, can be considered sharing business performance. In other words, incentives that are paid according to whether goals are achieved or not, are not considered as “wages”.
Individual incentives
On the other hand, incentives that are paid to Mr. Choi based on his individual sales performance are considered differently case by case. One judicial precedent considers incentives as wages, while another judicial precedent ruled that incentives are not wages since they are based on individual performance and thus are not actual reward for work.
Nevertheless, the Supreme Court these days tends to determine whether incentives are wages or not based on whether they are ‘payment for one’s work.’ Therefore, bonuses paid in accordance with performance are regarded as payment for work.
In other words, if a worker’s tasks include the main work of the company or if the tasks are the worker’s own duties, incentives based on the worker’s performance are counted as wages. Examples include selling cars for an automobile company, medical/special treatment and consultations with doctors, and a salesperson selling gift cards for a shoe company.
The Supreme Court has sometimes considered the fair or reasonable nature of an incentive when the incentive forms a large proportion of one’s income. The Court takes fairness and reasonableness into account since the worker’s severance pay can shrink if incentives are not counted as wage. In this context, the following should be comprehensively considered to determine whether Mr. Choi’s incentives can be counted as wages or not.
ⅰ) Are a worker’s duties regarded as part of company’s business?
ⅱ) Have the incentives been paid periodically/continuously? Or occasionally depending on an individual worker’s special/accidental circumstances?
Even though related regulations such as the Rules of Employment and types of payment should be considered for Mr. Choi’s case, the incentives paid to Mr. Choi are likely to be considered as wages and payment for his work since selling dietary supplements is what a salesperson does for a dietary supplement company. Therefore, the incentive amount will be included in the severance pay calculations when the individual incentive is considered as wage.
Unlike group incentives, individual incentives are often considered as wages. Thus, CEOs are required to comprehensively review individual incentive systems before introduction, in terms of related regulations, characteristics of work that such incentives are paid for, and forms and periods of payment, etc.
Careful review required prior to introduction of incentive systems
Many companies have already introduced incentive systems, particularly for salespersons, and the names and forms of payment vary. Of course introducing an incentive system is advisable, considering that the strictly seniority-based wage system needs to be improved by introducing wage systems based on job classification or performance.
Nevertheless, companies sometimes make mistakes when they introduce incentive systems, thinking that the incentives will not be included in ordinary wages in severance pay calculations, and face disputes and unpredictable burdens later on. In particular, if nothing in the Rules of Employment or collective agreement stipulates payment of incentives (meaning CEOs should determine the periods, conditions, and amount of individual incentives on their own), employers need to decide carefully. If paying incentives becomes a practice according to decisions of the CEOs, not only does the likelihood that an obligation to pay will occur, but also the possibility exists that those incentives will be included in “wages”.