“Ordinary Wages” Under Korean Labor Law Clarified by the Supreme Court: “Regular, Uniform & Flat” Definition

The definition of “ordinary wage” has been clarified by the Korean Supreme Court in two decisions handed down on December 18, 2013. The cases will have a significant impact on Korean Labor & Employment Law and will, likely, lead to additional litigation.

The calculation for an Ordinary Wage is utilized to calculate statutory entitlements and, thus, has an impact on the aggregate amount of contributions necessary to be paid to an employee. The issue is one of the most significant issues, this year, for domestic and foreign employers.

For example, under Article 56 of the Korean Labor Standards Act, an employer must pay 50% of the “ordinary wage” plus the ordinary wage for overtime, night, and weekend work performed by the employee. For many companies, this calculation could increase costs to a point that will make profitable companies head, immediately, to the red.

The basic test has been that an Ordinary Wage is a payment that is: “regular, uniform and flat” Obviously, this “test” leaves much unanswered. The vagueness of this test has led to considerable litigation over the past few years.  Additionally, the Korean courts have inconsistently interpreted the definition, thus, leading to much confusion.  The confusion coupled with the significant burden on companies that may be imposed, led to a major lobbying drive by foreign and domestic companies.

I have written many memos on this issue with few opportunities to give a definitive answer, because of the lack of a consistent interpretation of the definition by the lower courts and, seemingly, even the Supreme Court. The situation has improved with the following two decisions, however, we expect disputes to continue with regard to the issue of “good faith.” This issue is addressed in a post that may be found at: (Ordinary Wages and the Principle of Good Faith in Korea: Definition and For How Long?).

On December 18, 2013, the Supreme Court of Korea, in a case that I will call the Regular Interval Bonus Case, delivered a couple of more clear examples, than in the past, of cases where compensation will be considered “Ordinary Wages” under Korean labor and employment law. The cases, in this regard, are a great development in making Korean Labor & Employment law more consistent. In the Regular Interval Bonus Case, the employer in the case was providing a “regular bonus” every two months to employees.  Seemingly, the major reason was to not increase “ordinary wages.”

The Court in the Regular Interval Bonus Case opined, in part, that:

  1. Any collective bargaining agreement (labor-management agreement or like agreement) that deems a certain type of payment as not an Ordinary Wage is void and, thus, unenforceable.  An exception is available for certain specific companies that have implemented this practice in particular limited situations based on the vague principle of “good faith and trust.” Discussed at: (Ordinary Wages and the Principle of Good Faith in Korea: Definition and For How Long?); and
  2. Payments paid at regular intervals are Ordinary Wage. The specific examples below are key to understanding the decision.  The “test” is the same and, thus, is still vague.  Thus, the Supreme Court did a great job of detailing situations that would “pass” and “fail” the test (found below).

The Supreme Court remanded the case to the High Court to determine if the “good faith” exception is applicable.  As noted this is discussed in another post on this blog.

The second case, which I will call the Allowances Case, utilized the Ordinary Wage definition and rationale in the Regular Interval Bonus Case to opine that these allowances when paid just for being employed at a certain period of time will not be considered “flat” under the Ordinary Wage “regular, uniform, and flat” definition.

The Allowances Case was remanded, also, to the High Court to determine if the payments were, only, payments made for being employed during a certain period of time.

The cases are important since they did a very good job of detailing situations that will and will not be considered Ordinary Wage payments.

A few examples of payments that should be considered as “ordinary wages” include:

  1. Installment Payment (e.g. payments made every other month);
  2. Prior Year Incentive Pay (e.g. incentive pay based on previous year work performed);
  3. Present Year Incentive Pay if Not Based on Performance (e.g. all employees receive even if lowest performance rank);
  4. Prorated Daily Wages; and
  5. Wages Based on Years of Employment.

A few examples of payments that should not be included in ordinary wages include:

  1. Present Year Incentive Pay Based on Performance;
  2. Non-Negotiated Wages (e.g. wages determined by future negotiations);
  3. Wages Paid based on Working at a Fixed Date; and
  4. Wages Paid based on Working for a Certain Number of Days.

I will explain the rationale for each of these situations in future posts.

Please do your company a favor and get a proactive adviser to discuss these matters with you.  I have been preaching about this risk for years and a proactive counsel could have structured payment schemes to lessen this type of risk.

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