On April 30, the amended ‘Act on Prohibition of Age Discrimination in Employment and Aged Employment Promotion (hereinafter the Employment Promotion for the Aged Act)’ was passed in the National Assembly. According to the revised Act, retirement age is to be raised to 60 or above in private companies with at least 300 employees and public agencies/local public enterprises/local public entities from 2016. By 2017, the mandatory retirement age of 60 or above will be required at central/local governments and workplaces with fewer than 300 employees.
Under the current corporate culture in which the seniority-based wage system is commonly adopted, there are concerns that requiring enterprises to extend their retirement age to 60 would adversely affect HR management due to increasing labor costs for senior employees and labor flow delay from recruitment to retirement. In particular, as enterprises decrease their hiring due to this retirement age extension, young job-seekers would be hit hardest. In order to decrease certain financial burden for employers and help young people land jobs, the current wage system needs to be made more efficient and reasonable through introduction of a wage peak system, etc.
Why wage peak system?
The wage peak system is a job-sharing measure. It aims to provide more job security for old employees through a gradual wage reduction after a certain age. Financial burdens for enterprises would be reduced and, in turn, job security guaranteed.
There are a few wage peak systems: △the Retirement Security model, △the Retirement Extension model, △the Employment Extension model, and △the Reduced Working Hours model. In the past, many enterprises introduced a Retirement Security wage peak system which guaranteed employment until retirement age instead of reducing wages. As a result, labor has negative sentiment toward the wage peak system.
Recently, however, an increasing number of companies are adopting a Retirement Extension systems which adjust wages instead of extending retirement age, and Employment Extension systems which adjust wages while ensuring re-employment. Now, the wage peak system has become an essential change to reduce labor costs and increase corporate competitiveness, as well as provide more job security.
Introduction of wage peak system and consent of employees
Under current labor law, there is no provision requiring employers to obtain consent from their trade unions or employee representatives with regard to introducing the wage peak system. However, if introduction of the peak wage system could be regarded as unfavorable change for employees, employers needs to get consent from a majority of their employees.
The revised Employment Promotion for the Aged Act, scheduled to take effect in 2016, stipulates that when extending retirement age, employers and trade unions with a majority of employees (or a representative employee) should do such things as improve the existing wage system according to its business situation. Therefore, a procedure for making unfavorable changes concerning employees is not legally required. However, for successful reform of the existing wage system it is desirable for employers to maintain cooperative relations with their trade unions.
However, employers are concerned that the revised Employment Promotion for the Aged Act does not include any specific provisions or details such as adjusting wage levels and introducing a wage peak system, only vaguely referring to “wage system improvement”. More worrisome is in the event that employees oppose a wage peak system, there is no dispute settlement process to resolve conflicts arising from labor-management disagreement.
Some said, a labor dispute with a trade union at the workplace can be settled according to mediation by the National Labor Relations Commission (LRC) and, if there is no trade union, employers shall obtain consent from a majority of employees before adjusting wages according to the Labor Standards Act. The government also announced its plans to provide stronger administrative guidance on this issue through labor inspections. The effectiveness of NRC mediation is in doubt because their proposals go into effect only when both labor and management accept them. Because of this, NRC mediation procedures hardly seem an appropriate tool for wage adjustment.
Government subsidies for introduction of wage peak system
The wage peak system is believed to be an essential measure to providing job security for older workers and relieving employers of additional costs related to extended employment. However, some difficulties and obstacles are expected in the course of introducing it. Through a Compensation Allowance for Wage Peak Systems, the government has been providing financial subsidies since 2006 to cover part of the reductions in workers’ wages at workplaces with wage peak systems so as to encourage employers and workers to adopt them. Under the program, financial subsidies are given to employees who worked in the concerned workplaces for at least 18 months and experience wage cuts by at least certain percentage.
Also, according to the revised Employment Promotion for the Aged Act, the government is able to give subsidies to companies which take such actions as improving their wage structures. The government also plans to provide consulting on wage structure reform.
Business guidelines for retirement age extension
Another problematic issue in terms of equitability is the treatment of workers scheduled to retire before 2016, the year the Act requires companies to extend the retirement age. For example, when retirement age is set at 56, those born in 1959 who work at workplaces with fewer than 300 employees in 2015 have to retire, but workers born just one year later in 1960, are able to work until the age of 60 thanks to the retirement age extension taking effect in 2016.
To address this problem, the government plans to facilitate companies’ ability to extend employment for such workers through cash incentives for instituting a re-employment type of wage peak system and hiring retirement-aged people.
Therefore, employers need to discover how to best use the government’s incentive policies and measures. It seems that most trade unions agree on extension of the retirement age but would possibly oppose the wage peak system. Companies are therefore advised to introduce a wage peak system in advance of the Employment Promotion for the Aged Act coming into effect. Also, given the fact that the term “improving the wage system” in the Act does not imply simply introducing a wage peak system, companies and workers need to reach consensus on upgrading the wage structure in a broader framework as a mutually beneficial solution.
First and foremost, it is crucial to analyze and estimate additional salary costs and welfare expenses resulting from extending the retirement age and introducing a wage peak system in advance, as well as labor productivity. With an accurate analysis, employers will be able to find more efficient ways to manage their workforces.
Employers also need to prepare for industrial relations after 2016 when the Act becomes effective, if they wish to effectively adjust wages to reasonable levels through such tools as introduction of the wage peak system.
Coping with extending the retirement age to 60
Despite the ambiguous provision on wage adjustment in the revised Employment Promotion for the Aged Act, it is clear that both the ruling and opposition parties in the National Assembly agree on the need to adjust worker wage levels through extension of retirement age. In this regard, the government plans to develop and disseminate guidelines on wage peak system and provide consulting.
Before the revised Employment Promotion for the Aged Act comes into effect, enterprises are advised to △ address the issue of workers excluded from extension of the retirement age, △ carefully calculate additional associated costs, △ make good use of government subsidies and support, and △ obtain consent from workers on the need to introduce wage peak system. By doing so, companies can reduce the related burdens and increase their competiveness while extending the retirement age of their workers to 60.