Current Debate and Court Rulings on Ordinary Wage

After the Supreme Court and other lower courts ruled last year that regularly paid bonuses are included in the calculation of ordinary wage, controversy surrounding the issue has been heating up workplaces across Korea.

Since the 1980s, businesses have relied on the government guidelines which do not include regularly paid bonus into ordinary wage calculation. However, after the recent court rulings, labor has been filing complaints about the ordinary wage issue and demanding that the scope of ordinary wage be expanded. In particular, some companies are facing consecutive lawsuits regarding wage calculation and therefore labor-management relationships have worsened considerably. Currently, trade unions have filed suits against Hyundai Motors, KIA Motors, Renault Samsung Motors, Daewoo Shipbuilding & Marine Engineering, Hyundai Samho Heavy Industries, Asiana Airlines, and other companies whose employees often work overtime due to the nature of their duties.

If regularly paid bonuses are counted as part of ordinary wage, companies will face much higher labor costs with no choice but to scale down their employment. Since ordinary wage is used as a base to calculate various legal allowances including overtime work and unused paid leaves etc, expanding the scope of ordinary wage will inevitably lead to cost increases. To make matters worse, citing recent court rulings in favor of workers, labor is expected to demand that companies increase their allowances retroactively for the past three years.

Although many companies have failed to fend off such lawsuits in lower courts, some companies, including Samhwa Express (bus company) and Gwangil Transportation (taxi company), have received favorable decisions from the courts.

1. Samhwa Express (Bus Company)

The Incheon District Court ruled on May 9 last year that performance-based bonuses cannot be considered as part of ordinary wage because they are paid irregularly, with amounts varying according to worker performance.

The court interpreted “bonuses paid in accordance with the number of days served” as performance-based and therefore not to be included in calculation of ordinary wage which is paid to workers “regularly” or “uniformly.” The most important criterion for determining ordinary wage is whether or not it is paid according to worker performance.

Employees working for less than 3 months: 0% / 3 months ~ 6 months: 30% of basic salary / 6 months ~ 1 year: 65% of basic salary

The amount of bonus is determined by ▲the worker’s attitude at the workplace; ▲whether the worker remains employed on the date of payment of the bonus; ▲ whether the worker fulfills the requirement of minimum continuous service (at least 1 year).

2. Gwangil Transportation (Taxi Company)

Gwangil Transportation included regularly paid bonuses in calculating minimum wage, but not in ordinary wage calculation. In response, its taxi drivers filed a lawsuit against the company, demanding that regularly paid bonuses be excluded from calculation of minimum wage. The Seoul High Court decided that “regularly paid bonuses” should constitute part of minimum wage on the grounds that such regularly paid bonuses are not paid according to taxi driver performance, and that those bonuses should be excluded from calculation of ordinary wage.

No bonus paid to employees working less than 1 year or those who caused an accident with damage of KRW 2 million or more(approx. USD 1,800)     For employees working 23 days or more, bonuses are paid in accordance with the number of days served (300~400% of basic salary) ※ Bonuses paid in monthly installments over 12 months

Given the purpose of the Minimum Wage Act’s special regulations for taxi drivers reflecting their unique wage system, taxi drivers’ bonus is decided based on their performance”, which is excluded from the calculation of minimum wage. Considering this characteristic of taxi driver bonuses, the court decided that such bonuses are not paid in “a fixed amount” to all taxi drivers and therefore cannot be included in calculations of ordinary wage. In accordance with the taxi company’s regulations for bonuses, the amount varies according to the number of days served.

Indeed, the issue of ordinary wage affects every company in Korea and will greatly impact the Korean economy as a whole. If the scope of ordinary wage widens, the resulting higher costs of labor will undermine the global competitiveness of Korean businesses and represent significant barriers to corporate investment and job creation. For every 1% increase in labor costs, total employment is estimated to decrease by 0.24%~0.27%.

Companies in Korea would have to pay approximately 38 trillion KRW (USD 34.4 billion), resulting in 372,000~418,000 job losses.     Additional labor costs of KRW 8.8 trillion (USD 7.1 billion) will incur every year, and cost 85,000 to 96,000 jobs. Over the next 5 years, it is estimated that a total of 710,000~800,000 jobs will disappear.     For some SMEs, additional wages that they would have to pay are greater than their operating profits over the past 5 years.     Additional labor costs for some large companies will amount to hundreds of billions, or even trillions of KRW, given that additional wages per employee amounts to tens of millions of KRW.

One major concern due to the increasing labor costs is that many companies in Korea would end up relocating to China and other countries, seeking cheaper labor.

Another concern is that wage polarization between large companies and SMEs, and regular employees and temporary employees, is likely to deepen if the scope of ordinary wage is expanded, as it would mainly benefit high-paid, regular employees who already enjoy favorable wages and working conditions.