Mr. Kim, CEO, is worried about current business conditions. After consulting with other CEOs and experts, Mr. Kim has decided to revise the current regulations on working conditions which seem unrealistic and sometimes beneficial only to certain workers, and also to improve employee productivity and motivation, as well as his company’s competitiveness in the long term. What should Mr. Kim be aware of and what are the procedures he should follow?
Recently, news can be seen where employees at many companies have agreed to have their salaries cut in an effort to improve outdated labor practices and enhance competitiveness before the bigger crisis hits the Korean economy.
In most cases, companies are trying to amend regulations or practices which were made 20 ~30 years ago, and adjust excessive benefits and severance pay plans. Another issue is the adoption of a performance-based wage system in line with the legally-required retirement age extension to 60. Mr. Kim is also considering bringing such changes to his company. Let’s take a look at what Mr. Kim should consider in the process of revising company regulations.
Procedure for modification of working conditions including wages
Employee working conditions, such as wages, are determined by ⅰ) labor contract between an employer and employees, ⅱ) the company’s rules of employment, and ⅲ) the collective agreement signed by employer and trade union(s). Therefore, modifying working conditions means modifying the labor contract·employment rules·the collective bargaining agreement.
Let’s look at the way working conditions are set.
Normally, employment rules and collective agreements stipulate the same regulations for working conditions, and this is also the case at Mr. Kim’s company. In the event of contradictory information on the same subject, the collective agreement takes precedence, followed by the employment rules and finally, the labor contract. For example, if the rules of employment conflict with the collective agreement, the collective agreement holds, as it is deemed a higher level document.
There are exceptions, however, to this legal principle. The regulation providing more favorable working conditions for workers is deemed to apply. This is called ‘the principle of favorability.’
In the event the collective agreement needs to be adjusted, it is not easy to obtain consent from unions, and it may be much simpler to revise it through collective bargaining. When it comes to revising the rules of employment, there are two options. First, if it is a change favorable to workers, the employer only needs to hear the opinions of the employees. Second, if the change is disadvantageous to workers, the employer is required to obtain consent from a trade union composed of the majority of the workers, or, in the event no such trade union exists, then consent from a majority of the total workers. Even if such amendment of the rules of employment does not conflict with the Labor Standards Act, any unfavorable changes require that this procedure be followed.
In summary, complex procedures are required before downgrading current working conditions, such as amending the collective agreement or revising the rules of employment by obtaining consent from a majority of employees.
Procedure for making changes to the wage structure
According to recent data, about 80% of companies with 300 employees or more have adopted seniority-based wage systems. This means that employee wage levels automatically increase with their length of service.
Such automatic wage increases that occur regardless of each employee’s performance or competence may hinder company competitiveness and employee motivation, about which Mr. Kim is concerned. From the perspective of hard-working employees, the current seniority-based wage system is not fair, but rather disadvantageous and therefore, Mr. Kim, as CEO, would like to adopt a performance-based wage system.
Does an employer have to obtain consent from his/her employees before reforming the wage system? If the proportion of seniority-based wage is decreased and performance-related wage increased, this may be deemed as an unfavorable amendment for employees.
Such a wage system revision may be beneficial to some employees and disadvantageous to others. Therefore, an employer is required to go through the above-mentioned procedure to revise the collective agreement or rules of employment.
Issues of age-old regulations and practices
The progressive stage system for severance pay was established to motivate employees during the years of a fast-growing economy. There are many positives about this system, but the burdens on companies have been mounting. On top of this, most companies are offering additional support to their employees in the form of medical benefits or educational subsidies. In coping with the current tough economic times, companies need to adjust their benefits plans and outdated practices in a reasonable manner.
The representative case is to change a decades-old ‘progressive stage system’ for severance pay to a ‘linear scheme.’ Many companies have also reduced duplicate employee benefits and, with the savings, established new rewards for excellent performance. There are other options for Mr. Kim, such as providing loans for school expenses instead of financial aid and adjusting the level of medical benefits.
As such amendments can be disadvantageous to employees the procedure must be followed to revise the existing collective agreement or rules of employment.
It is inevitable that employees will strongly oppose a company’s attempt to reduce their existing benefits. Therefore, employers are advised to plan reasonable adjustments and ask for employee consent and cooperation. It is not easy for companies to unilaterally push ahead with changes to working conditions that may be unfavorable to employees.
Applying new working conditions to new employees
Since it can be so difficult to adjust working conditions for existing employees, Mr. Kim wonders if it is possible to apply a new set of working conditions to new employees instead.
In other words, it can be a controversial matter for a company to get the consent of incumbent workers about changes a company makes to its severance pay scheme or reductions to company welfare applicable only to new workers.
The change in this case is also disadvantageous. However, since the change(s) will not be applicable to existing workers and they will receive no disadvantage, there is no need to obtain their consent or that of the trade union.
Moreover, new workers are hired upon accepting the new rules of employment, which only require listening to the opinions of the existing workforce.
It is important to note that any changes should be made within a reasonable scope since a wide discrepancy in working conditions between new and existing workers can discourage the new workers or even result in high employee turnover.