Definition of “Ordinary Wage” in Korea: Korean Employment & Labor Law Basics

The courts of the Republic of Korea, for years, has struggled to find a consistent interpretation of an “Ordinary Wage.”  The definition of Ordinary Wage, under Korean Law, was clarified by the Korean Supreme Court in two decisions handed down on December 18, 2013.  The calculation of Ordinary Wages is important, since it is utilized to calculate statutory entitlements, and thus has an impact on the aggregate amount of contributions necessary to be paid to employees.Korean Ordinary Wage

For example, according to 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.

Because of the potential for a large unknown future liability, this issue became the most significant issue, in the last few years, among domestic and foreign employers in labor and employment law in Korea.

The basic Korean test is 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 among practitioners.  This confusion, coupled with the significant burden on companies that may be imposed, led to a major lobbying drive by foreign and domestic companies to define an “Ordinary Wage” in a consistent and regular manner.

The test is unchanged with these decisions; however, the Supreme Court has made a useful checklist for lower courts.  However, lower courts have continued to inconsistently apply the test.  We shall update the reader when more cases come available.

On December 18, 2013, the Supreme Court of Korea, in a case that we will call the Regular Interval Bonus Case, has delivered a couple more clear examples, as compared to the past, of cases where compensation was considered an “Ordinary Wage” under the Korean Labor & Employment Law.  These 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 in order not to increase the “Ordinary Wage”.

Supreme Court Regular Interval Bonus Case

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

  1. any collective bargaining agreement (labor management agreement or similar agreement) that deems a certain type of payment as not an Ordinary Wage is void and, thus, unenforceable under law.  An exception is available for companies that have implemented this practice in particular limited situations based on the vague principle of “good faith and trust”; and
  2. payments paid at regular intervals are an Ordinary Wage.  The specific examples below are key in understanding the decision.

The Supreme Court remanded the Regular Interval Bonus Case to the High Court to determine if the “good faith” exception is applicable.

Supreme Court Allowances Case

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

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

These cases are important in Korean Labor & Employment Law jurisprudence, as they detailed situations that can and cannot be considered Ordinary Wage payments.

Examples of payments to be considered an Ordinary Wage according by the Korean Supreme Court

Examples of payments that should be considered an “Ordinary Wage” include:

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

Example of payments not to be considered an Ordinary Wage according to the Korean Supreme Court

  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.

The Supreme Court ruled that the decision should not be applied by lower courts retroactively if: (a) the employer and the employee agreed not to include the disputed sum in the calculation of the Ordinary Wage (implicit or explicit agreement); and (b) the sum would cause “serious financial difficulty” or an “unexpected burden” to the employer.  An agreement coupled with financial hardship, the Supreme Court held, would equate to the employee not acting in “good faith”.

The lower courts have inconsistently interpreted the “good faith” test.  Some court have placed a more significant emphasis on “financial hardship”, while others have placed a more substantial emphasis on “unexpected burden”.

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