Q&A on Extension of Retirement Age

Mandatory extension of retirement age to 60 has become reality. According to the Act on Prohibition of Age Discrimination in Employment & Aged Employment Promotion (hereinafter the Employment Promotion for the Aged Act) revised in April 2013, retirement age is to be raised to 60 or above in companies with at least 300 employees from 2016, and in companies with fewer than 300 employees from 2017.

In light of a rapidly aging society, it is important to reflect increasing lifespan by extending the length of working life, but forcing companies to set retirement age at 60 places considerable burden on those companies due to the current corporate culture and seniority-based wage systems. Restructuring the wage and retirement systems are indeed unfamiliar territory due to the lack of clear legal interpretations and standards. Below, we will look at some major issues and legal standards on the definition of retirement age, mandatory extension of retirement age to 60, and wage system restructuring in a Q&A format.

Retirement age is a type of notification that labor relations are terminated without additional processes required for dismissal. In other words, labor relations are automatically terminated when employees reach retirement age and there are no procedural restrictions. For instance, when employees with work-related illnesses reach retirement age, retirement takes place immediately, even if the employees are receiving medical treatment.

Before the revised Employment Promotion for the Aged Act comes into effect, companies can decide their own mandatory retirement age. A significantly lower retirement age may be invalidated or considered discriminative according to social norms, but generally retirement age is decided in accordance with the distinct characteristics of the individual company.

This will continue to apply to a limited degree even after the revised Employment Promotion for the Aged Act comes into effect. But the lower limit for retirement age will be standardized to age 60 for all workplaces. Accordingly, since 60 is the lower limit for retirement age, companies with lower mandatory retirement ages must raise them to 60 or above. Leeway only exists for retirement ages set above 60.

Under a by-grade retirement age system, an employee must retire if he/she fails to be promoted within a certain period of time. If the trade union and employer have already agreed on introducing a by-grade retirement age system, the system cannot be regarded illegal. However, as the revised labor law requires employers to extend their statutory retirement age to 60, it is impossible to introduce a by-grade retirement age according to position or type of job if the lower limit for retirement age is lower than 60.

So far, Korea’s legal courts have ruled that it is unfair to dismiss employees on the grounds of age limits for certain positions and the setting of different retirement ages according to position or type of job requires a justifiable reason. It is certainly difficult to introduce such a by-grade retirement age system, and there will not be significant change to interpretations by the legal courts on retirement age. However, in cases where there are special provisions regarding by-grade retirement age according to position, like those in the Act on the Staff of the National Intelligence Service, and the Police Officers Act etc., it is possible to set different retirement ages for different employee positions.

The term ‘age of 60’ refers to the legal age of 60 in full[1] as in western countries. Each company has its own specifications regarding retirement age such as ⅰ) the day when the employee concerned reaches n years old, ⅱ) the final day of the year when the employee reaches n years old, or ⅲ) the last day the employee is age n, etc. According to such rules or existing practices, companies are allowed to determine the point of time for age 60. If companies have set retirement age above 60, then retirement should be set as the day when an employee reaches n years old (a minimum of 60) in full.

Provisions such as “the 1^st day of the month when the employee concerned turns 60 years old” force employees to retire earlier than 60 and are against the law.

Fixed-term labor contracts remain effective for the period which the employer and employee concerned have agreed upon, and therefore in principle, the employment relationship between a fixed-term employee and his/her employer would be terminated upon contract expiry. Given the nature of fixed-term labor contracts, retirement age systems of individual companies do not apply to fixed-term employees; neither do legal provisions regarding retirement age of 60 under the revised labor law.

For example, for a part-time employee already past the retirement age during the effective period of his/her labor contract, the employment is deemed to remain effective until the employment relationship is otherwise terminated (i.e., in accordance with the labor contract).

Regulations regarding retirement age under employment rules or collective bargaining agreements certainly apply to a union head because he/she is an employee. Accordingly, if the union head reaches retirement age during his/her term, in principle, his/her status as both employee and union member may be terminated at once.

However, if there is a special provision in a mutually-agreed upon document (such as a collective agreement or rules of employment) saying “Retirement of the union head shall be deferred until conclusion of his/her term as union head,” the union head’s retirement shall be postponed until his/her term is finished.

Many collective agreements have provisions similar to “when an employee reaches retirement age, retirement can be postponed in accordance with labor-management agreement”. As this provision means that both employer and union opinions must be taken into account before extending retirement age, a trade union cannot demand that an employer extends retirement age. Provisions such as “even though an employee reaches his/her retirement age, the company can postpone his/her retirement age by 1 year if needed” are matters subject to HRM and employer discretion, and are not legally binding. Korean courts have ruled that if a company does not extend the retirement age of a specific employee, this shall not be considered a violation of the principle of good faith.

According to the revised labor law, employers are required to extend their retirement age to 60 or above. Even if some companies set their retirement age to below 60, legal retirement age is automatically extended to age 60. Forcing an employee to retire earlier in accordance with an existing lower retirement age shall be considered unfair dismissal unless there are specific justifiable reasons for doing so.

Regarding extension of retirement age to 60, there is the opinion that “current employment status” should be maintained until age 60 or over, without any changes to employment type or termination of the employment relationship. Based on this, the Ministry of Employment & Labor has stated that it is against the law to terminate an employment relationship at the previous retirement age under 60 and then repeatedly rehire such retirees as part-time employees until age 60.

On the other hand, some say that if the employment relationship is maintained until 60, some changes to working conditions (such as employment type, working hours, etc.) are allowed through labor-management agreement. Court decisions will be needed to resolve this difference of opinion.

Provisions in the revised labor law state that there exist obligations to “extend retirement age to 60 or above” and “take necessary measures such as reforming the wage system.” Some believe that, given that these two obligations complement each other, if one obligation is not fulfilled, the other obligation is not effective either. However, the more general view is that the obligation to extend retirement age to 60 is a stand-alone obligation and is in effect whether the wage system is reformed or not.

The employees scheduled to retire before 2016 when the revised labor law will come into effect have been termed the “sandwich generation.” In principle, extended retirement age does not apply to this group. However, unions often demand this group be included to relieve the concerns of such workers. Given the fact that extending this group’s retirement age is not an obligation, but only a benefit given by companies with good intentions, action on early implementation of the wage peak system needs to be taken along with extending the retirement age.

When it comes to early implementation of the wage peak system, the new system is to apply to all employees. However, if the only target group is the “sandwich generation”, what steps need to be taken? Such workers might perceive that early introduction of the wage peak system is not an unfavorable change to their working conditions when considering the extended employment period. Only consent from the “sandwich generation” is needed for any unfavorable changes caused by considerably reduced wages when implementing the wage peak system.

No legal definition exists of “reforming wage systems”, but it includes not only improving ways of determining wage levels in a merit-based wage system or wage peak system, but also upgrading every wage-related HR system such as job assignments, education/training, and evaluation and promotion.

Under the extended retirement age requirement, for example, if the term of service required for promotion of office workers to the next rank remains as it is today, problems may arise (such as congestion of personnel in the higher ranks). Therefore one solution would be to extend the length of service required for each rank [employee – assistant manager – manager – deputy manager – general manager] in line with the extended years until retirement.

The revised law stipulates that with the retirement age extension to 60 coming into force, employers and trade unions need to work together to take “necessary measures” such as wage system reform. In this regard, wage system reform is linked to retirement age extension and is a legal obligation for both employer and trade union.

If the above-mentioned duty is not performed, no penalty is stipulated in the law. Nonetheless, since the obligation is clear, employers can demand wage system reform with their unions (including introduction of a wage peak system).

If a trade union rejects or simply opposes and avoids the wage peak system, then the trade union is violating the duty of good faith negotiation.

One of the biggest questions when introducing a wage peak system is whether the introduction brings an unfavorable change to employees. If it is an unfavorable change, approval from a majority of union members (or a majority of employees if there is no union) is required. Whether it’s unfavorable or not can be decided on such factors as, i) who will be affected, ii) when the wage peak system starts, and iii) how much wages will be reduced as a result of the wage peak system.

With implementation of the mandatory extension of retirement age to 60, employees will expect a continuous increase in senior worker wages beyond the current retirement age (ex. age 57). In other words, employees will expect an automatic extension of retirement age to 60 from 2016 with their wage levels guaranteed. Therefore, introduction of a wage peak system may be seen as an unfavorable change, indeed this is the view of the majority. Therefore, in order to introduce a wage peak system successfully, it is desirable to obtain the approval of a majority of union members (or a majority of employees).

On the other hand, some recognize introduction of wage peak system as reasonable considering the original purpose of the revised law and its relation to retirement age extension. Since there are no legal precedents to refer to, this may be resolved through judicial decisions or other authoritative interpretation in the future.

The starting point for and ratio of wage reduction are determined according to company profitability, business circumstances, differences in wages with rival companies, and work skill etc. Therefore, it is not necessary to set the starting point as the retirement date before the legal revision (for example, 57). It is also possible to set the starting point to before the previous retirement age upon agreement with labor.

Nevertheless, the government pays out the employment subsidy only when wage reductions begin once the worker reaches the age of 55.

Severance pay is calculated based on average monthly wage in the 3 months prior to retirement. With a wage peak system, the average monthly wage decreases and workers may be concerned that their severance pay will also decrease. It is therefore common for a wage peak system to be introduced on the premise that an interim payment of severance pay will be made. After interim payment of severance pay, it is common for workers to subscribe to a Defined Contribution (DC) retirement pension plan. When the wage is constantly decreasing, DC pension plans are more beneficial to workers than DB (defined benefit) plans.

However, giving severance pay at once to all workers to whom the wage peak system will apply can cause serious financial instability. Companies are instead advised to calculate the amount of severance pay to be given before introduction of a wage peak system, and with the agreement of labor, set a delayed schedule for payment of severance pay. Worker consent will be needed to resolve issues connected to delayed payment of severance pay, such as accumulation and payment of interest.

Although a company has set its retirement age below 60, the revised law regulates that by 2016, such companies must extend the retirement age to 60. It is therefore advised that companies adjust their current wage peak systems before the revised law comes into force, since existing systems do not reflect the new retirement age. Wages may have to be adjusted to take into account the additional years before retirement.

If labor and management cannot reach agreement and the existing wage peak system is maintained, it can be assumed that wage adjustment has been done for the additional years according to the existing system.

No. The same general regulations which apply to labor and management in collective bargaining apply in such situations too. If a labor dispute occurs during wage reform, both labor and management can apply to the local labor relations commission for dispute resolution. The procedures after application for dispute resolution are also the same.

Many companies have separate provisions for early retirement benefits, as they have introduced Early Retirement Plans. The provisions for such benefits will also need to be adjusted.

The most important criterion for calculating early retirement benefits is the months remaining before retirement age is reached. Due to retirement age extension, the working period to be included in the calculations will also sharply increase. In order to determine an affordable level of benefit, these benefits will need to be revised.

Example: Early retirement benefits for workers with more than 5 years until retirement: [Base Wage/2]  [50  (Remaining months until retirement – 50) …]