Ordinary Wage | Supreme Court Judgment on Whether Performance-Based Pay and Bonuses Subject to a Continued-Employment Condition Constitute Ordinary Wages

The Seoul High Court held that the base bonus, even if subject to a continued-employment condition, constitutes an ordinary wage as a wage paid regularly and uniformly.

It further held that, although retirees and those on leave are excluded, which imposes some limitation, this alone cannot negate its character as consideration for the contractually prescribed work.

As for the base performance-based pay (internal-evaluation pay), the court found that the defendant's remuneration regulations expressly set the payment rate at 200 percent of the base wage and that the same amount had been paid as a matter of practice for the preceding ten years, so the entire amount constituted a fixed wage and an ordinary wage.

By contrast, it held that the management performance-based pay, in-house performance-based pay, and long-service incentive are paid at differentiated amounts according to performance or length of service, so their character as consideration for the contractually prescribed work is not recognized, and it denied that they constitute ordinary wages.

The second-instance court ultimately granted part of the employees' claims, and both the employer, Korea Hydro & Nuclear Power, and the employees filed final appeals.

The Supreme Court ruled as follows on whether the base bonus constitutes an ordinary wage.

It held that, even where a continued-employment condition is attached to the base bonus, this is merely a condition limiting the recipients of payment and cannot be regarded as an invalid condition that deprives an employee, at the time of departure, of a wage already scheduled to be paid under the employment contract.

Accordingly, the effect of the ruling is that the base bonus constitutes an ordinary wage, and although the lower court's reasoning that “the continued-employment condition is invalid, so fixedness is maintained” was in part inappropriate, its conclusion recognizing the bonus as an ordinary wage was proper.

On the character of performance-based pay as an ordinary wage, which was the most central issue, the Supreme Court determined that performance-based pay paid at differentiated amounts according to work performance is not consideration for the contractually prescribed work and does not constitute an ordinary wage, given that whether and how much is paid varies depending on performance or evaluation.

It held, however, that if a minimum amount paid regardless of work performance (a minimum guaranteed amount) has been fixed, that portion may be included in ordinary wages as consideration for the contractually prescribed work.

It further held that the standard for that determination must be the period to which the performance-based pay relates (the previous year) rather than the year of payment, so performance-based pay paid as consideration for the previous year's work constitutes an ordinary wage for that previous year.

The Supreme Court ultimately found that the lower court had erred in treating the entire base performance-based pay as an ordinary wage.

On this basis, it reversed and remanded this part, holding that the scope of the minimum guaranteed amount within the base performance-based pay must be examined again.

The Supreme Court determined that the management performance-based pay and in-house performance-based pay are performance-linked pay paid at differentiated amounts according to institutional-evaluation results or internal evaluations and therefore cannot constitute ordinary wages.

It also held that the long-service incentive, as a conditional payment contingent on reaching a specified length of service, is not a wage paid regularly and uniformly and therefore does not constitute an ordinary wage.

▶ Diagnosing a company's ordinary-wage risk

Using a checklist of the performance-based pay and bonus structure, we organize the continued-employment conditions, payment cycles, and whether pay is linked to work performance, and we proactively identify items that may potentially be included in the basis for calculating ordinary wages.

▶ Advising on the design of performance-based pay schemes

Where a “minimum guaranteed amount within performance-based pay” exists, that amount may be treated as an ordinary wage, so clear performance-evaluation standards and a differentiated structure (variable elements) should be put in place.

▶ Supporting revisions to wage systems and regulations

The wording of collective agreements, remuneration regulations, and performance-based pay regulations should be revised to clarify the period to which the pay relates, the evaluation standards, and whether a minimum guaranteed amount is specified.

Public institutions and large corporations, in particular, should operate a process for promptly revising internal regulations when government guidelines change.

▶ Managing litigation response and accounting risk

Where a claim is brought by the employees' side, we construct the legal arguments in concrete terms, centered on whether the character of each pay item as “consideration for the contractually prescribed work” can be established.

From a corporate-accounting standpoint as well, the method of calculating provisions related to performance-based pay should be adjusted to align with the standards for determining ordinary wages.

This judgment is a precedent that established the legal principle that “a payment may constitute an ordinary wage even where a continued-employment condition is attached” and the standard that “performance-based pay is in principle not an ordinary wage, but, exceptionally, falls within it where there is a minimum guaranteed amount.”

Daeryun Law Firm LLP carries out advisory and litigation representation across the entire process, from diagnosing a company's ordinary-wage risk, revising wage regulations, and amending collective agreements to responding to large-scale collective wage litigation, through a collaborative system of legal specialists including attorneys experienced in corporate matters, labor consultants, and accountants.

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