KEF Manual on the Wage Peak System

The Korea Employers Federation (KEF) has issued a ‘KEF Manual on the Wage Peak System’ which explains how to design and introduce the system and related legal issues. The following is a summary:

In order to successfully introduce the wage peak system, it is necessary to make sure the company concerned has established the principle of wage management. Introduction of a wage peak system, if the purpose is not clear enough, is likely to cause unnecessary confusion and resistance from employees. In this regard, companies need to verify if their wages are fairly distributed amongst employees in accordance with each one’s contribution to increasing company value and considering the wage levels of competitors. Once an analysis of wage fairness is done, then companies need to decide what position they will take regarding wages. In general, companies choose their wage strategy (lead strategy, match strategy and lag strategy), by comparing their wages with their competitors. A wage management principle may serve as a guideline in designing a wage peak system as well as giving a clear message to employees, thereby laying the foundation for building a consensus on the needs for the wage system change.

After the principle on wage management is made clear, it should be determined whether the wage peak system fits the current wage system. In many cases, it is not easy to classify the wages into annual salary, performance-based pay, job-based pay etc., since many factors must be taken into consideration in deciding a company’s wage system. If a company’s wage keeps going upwards regardless of productivity or performance, then the wage peak system should be introduced immediately.

When designing a wage peak system, the first thing to be determined is the target group. The wage peak system is applied to all employees who reach a certain age. Specific jobs which show significantly lower productivity or redundant workforce could be the target group of the wage peak system if it can be justified.

The second step is to decide on the method of wage level adjustment. There are five basic types of wage peak systems: 1) ascent-slowdown, 2) horizontal, 3) reduction, 4) descent-ascent, and 5) descent-horizontal. Companies could also develop their own wage peak model according to the characteristics of the business or job description, workers’ vocational skills and labor-management agreements.

Thirdly, companies need to set the wage inflection point. The wage inflection point refers to the point where an upward-sloping wage curve begins to turn downward under the wage peak system. Theoretically, the wage inflection point can be determined based on a mid- to long-term managerial strategy concerning workforce size and structure. However, in reality, management and labor usually discuss and decide this together. Since the law on retirement age has been revised, many companies with a wage peak system in place have set their wage inflection point at their previous retirement age.

Lastly, the wage reduction rate needs to be determined, which is the most sensitive issue within wage peak systems. Various factors such as the company’s business situation and wage levels should be considered when deciding the wage reduction rate. As the type of wage curve or wage inflection point, as explained above, directly affects the wage reduction rate, the company needs to make a comprehensive decision on this issue.

When deciding the wage reduction rate, the additional wage to be paid for an extended period of employment should not be less than the amount of reduced wage when the wage peak system is introduced.  The company also needs to take care that employees’ basic livelihood is ensured as much as possible in consideration of the company’s business situation. Thus, the employees’ cost pattern by age, minimum living expenses, starting age for national pension and various other factors should be carefully taken into account.

After the wage reduction rate is decided, the company needs to determine which wage components are to be reduced – whether to cut only the basic salary or the total amount of wage including all bonuses and allowances. In principle, basic salary tends to be more seniority-based; therefore, it should be subject to wage adjustment. When it comes to this basic salary adjustment, it is important to decide whether to apply annual pay raise and base-up in the adjustment. Given the characteristics of Korea’s seniority-based wage system and the purpose of the wage peak system, in order to efficiently introduce the wage peak system, a wage increase rate agreed during wage bargaining should not be applicable for annual pay raises as well as a base-up structure.

Once wage peak system is designed, an employer should modify existing employment rules and collective bargaining agreements in preparation for the next step. If there is no trade union, only the employment rules need to be modified, whereas in workplaces with a trade union, a new collective bargaining agreement or substitute bargaining agreement needs to be made. As wage peak system is applied to all employees including union members, non-members and employees in management, employment rules should also be modified along with the collective bargaining agreement.

After modifying the employment rules and collective bargaining agreement prior to introduction of the wage peak system, employees need to be classified and informed of their new working status, responsibilities and duties. After this, the employer and the employee need to enter into a new employment contract based on the modified working conditions. For the target employee group of the wage peak system, it is advisable to make an interim payment of severance pay for the previous period of employment according to the agreed-upon principle regarding severance pay.

In order to prevent any possible demotivation or poor attitude at work, it is necessary to continuously provide special training and monitoring after introduction of the wage peak system. Companies need to persuade the target group that they are not being financially disadvantaged, but instead are receiving extended employment (resulting in additional income) through introduction of the wage peak system.

Usually, issues regarding extended retirement age and wage structure reform are stated in the employment rules or the collective bargaining agreement. As both documents are different in terms of modification, procedures and methods are as follows:

In a situation where these issues are dealt with in the employment rules, an employer needs to check whether or not modifications introduced in the wage peak system will be unfavorable. If not, the employer may modify the employment rules after consultation with a trade union composed of the majority of the workers in the workplace concerned, or with the majority of the workers if there is no trade union. However, if it is regarded as an unfavorable change for employees, the employer should obtain consent from the workers in advance. There seems to be no legal controversy over introduction of wage peak system, as it complies with related provisions under Korean labor law; however, there should be careful consideration in two ways, 1) as a favorable modification because the total amount of income will increase as the employment period is to be extended; and 2) as an unfavorable modification because, in the short term, employees’ wages will be reduced.

For now, the related Act has not yet entered into force and there are an insufficient number of cases to learn from. At this juncture, we can presume the following situations: If a company extended its retirement age by 5 years from 55 to 60 and set the age of 55 as a wage inflection point, the company will need to consult with an employee representative or the majority of employees, as it is technically impossible to build a new wage structure for the extended employment period of 5 years. However, if the company decides to reduce employees’ wages from an earlier point than the previous retirement age (i.e. from the age of 53), it could be regarded as an unfavorable modification for the employees even if the additional income from the extended employment is more than the current wage loss. This is because such modification is in favor of employees whose retirement age is extended and will actually work until then, but it is unfavorable to those employees who will leave before the previous retirement age. According to precedents set by Korean courts, if any modification of the employment rules is favorable to some employees, yet may be unfavorable to others, it is deemed as an unfavorable change to the overall workforce and thus the employer must obtain consent from the employees. Besides this, given the fact that the amount of severance pay or industrial accident compensation could be lower as the wage peak system is implemented, this may be a determining factor in the court on whether a given change is favorable or unfavorable to employees.

If issues of retirement age and wage structure are dealt with in the collective agreement, unlike a change in employment rules, the agreement can be modified in accordance with labor-management agreement even if such modification is unfavorable to employees. According to law, trade unions are legally obligated to actively cooperate with management when introducing the wage peak system as a result of extending the retirement age. There is no penalty provision in the Act if the trade union does not accept a bargaining request from the employer regarding wage structure reform; however, the trade union could be put in a disadvantageous situation. As the trade union and management have to discuss various agenda items at the negotiation table, if collective bargaining stalls due to the trade union’s opposition to the introduction of the wage peak system, the employer cannot be blamed for stalled negotiations or unfair labor practices. This allows an employer to strategically use the issue of the wage peak system as a bargaining chip. Also, at the arbitration stage during an industrial action, an employer may be able to say that the bargaining and negotiation failed because the trade union did not carry out its obligation to cooperate.

When introducing wage peak system, target employees are mostly in high-level positions. If those employees were to keep occupying such high-level posts in the company until their retirement, it could possibly negatively influence the overall organization with low morale or slim chances for promotion. Because of this, if middle-aged or retirement-age employees wish to transfer to more minor jobs for personal reasons such as health problems, it is advisable to find ways to transfer them to easier jobs. Other than for introducing the wage peak system, such personnel movement requires justification if it leads to income loss.

‘Necessary measures such as restructuring the wage system’, as stated in the revised ‘Act on Prohibition of Age Discrimination in Employment and Aged Employment Promotion’ can be seen to include any comprehensive reform of the HR system. According to the Court’s decision, job transfers should be made under proper preconditions based on the good faith principle in order to be recognized as a justifiable measure. The proper preconditions include sufficient business needs, consideration of possible danger to the employee’s life, and consultation with the employee concerned. The above-mentioned ‘business needs’ includes necessary changes to restructure a high-cost workforce, and employee’s physical/mental health, etc.

If the company cannot find proper work for employees who are subject to the wage peak system, a transfer to affiliates or partner firms could be one solution. According to the court ruling, if there is a prior collective agreement on transfer to affiliates, the company is allowed to transfer its employees to affiliates without the individual employee’s consent. Thus, it is advisable to collectively obtain consent from the employees on the issue of transfer in advance, in order to prevent possible disputes.

There are various opinions over whether it is possible to adjust employment status or working hours (full-time → part-time). The majority opinion is that the retirement age should be extended without changing or terminating the employment contract. Therefore, if the company terminates the employment contract with a middle-aged/retirement-age employee when he or she reaches the previous retirement age (i.e. age of 55) and renews its labor contract with that employee as a part-timer until the age 60, it could be considered as a violation of the law. However, there are other positive opinions about the changes to employment status or types.

Also regarding the introduction of the wage peak system, the dismissal of a low-performing retirement-age employee could be problematic, whereas in a case of voluntary retirement, there is no legal restriction. It is also prohibited to dismiss employees under the age of 60 because of their age, while it is not completely impossible to dismiss them if their job performance is poor and their health is not adequate to continue their current work. In such situations, the employee concerned should be the one who is responsible for the dismissal and the reason for dismissal should be severe enough not to continue the employment relationship.