Management Performance Bonus | The Supreme Court's Judgment on Whether a Private Company's Management Performance Bonus Constitutes Wages

In 2018, the Supreme Court recognized public institutions' management evaluation performance bonuses as wages.

Thereafter, arguments arose that management performance bonuses of a similar structure paid at private companies should also form the basis for calculating severance pay and average wages, and numerous lawsuits followed.

However, because the payment structure and funding sources of private companies' management performance bonuses differ from company to company, the lower courts produced a mix of cases recognizing and denying their wage character.

Some courts held that a bonus paid on the basis of financial results is difficult to regard as compensation for the provision of labor, whereas other judgments recognized its wage character on the ground that it was paid repeatedly according to fixed criteria.

With the criteria for determination thus remaining unclear, the situation continued in which an authoritative legal analysis from the Supreme Court was called for.

As to the performance incentive funded by each business division's EVA (economic value added), the Supreme Court held that it does not constitute wages under the Labor Standards Act.

As grounds, the Supreme Court cited the following points.

Accordingly, the Supreme Court viewed the performance incentive as closer to a sum that distributes management results after the fact when such results have arisen, rather than a sum paid regularly and definitively as compensation for the provision of labor.

By contrast, the Supreme Court recognized the wage character of the target incentive.

The Supreme Court noted that the target incentive had the following features.

Taking these circumstances together, the Supreme Court held that the target incentive constitutes an after-the-fact settlement for the work performance provided by the employee, that is, wages paid as compensation for the provision of labor.

The Supreme Court regarded whether management results function as a precondition for payment as an important factor in the determination.

If the structure is one in which whether management results arise governs the payment of the bonus itself, it is more likely to be assessed not as compensation for the provision of labor but as a sum that distributes management results after the fact when such results have arisen.

Conversely, if payment of the bonus is already provided for as a matter of the scheme and management results merely function as a basis for calculating or allocating the amount, the bonus may constitute wages paid as compensation for the provision of labor.

The Supreme Court also presented the range of variation and predictability of the bonus amount as a core factor in determining wage character.

It held that where the amount paid varies greatly from year to year and the range of variation relative to annual salary is excessively large, it is difficult for an employee to predict the amount in advance, so the bonus is difficult to regard as wages paid definitively and regularly.

Conversely, if the range of variation in the amount is limited within a certain bound and the bonus functions as variable pay combined with the base pay system, there is room to assess it not as a one-time payment but as part of the wage system.

The Supreme Court attached importance to whether the criteria for payment of the bonus are factors that can be managed and controlled through the employee's performance of work.

Where the bonus is governed by external factors that are difficult for an employee to control, such as market conditions, exchange rates, raw material prices, and management judgment, it is difficult to regard it as direct compensation for the provision of labor.

Conversely, if the bonus is linked to indicators that directly reflect the employee's effort and work results, such as the individual's or organization's work performance and whether targets are achieved, the bonus is more likely to be recognized as compensation for the provision of labor.

Following these judgments, companies may need to re-examine their management performance bonus schemes with a focus on the following issues.

Factors such as the above are likely to function as core criteria for determination in future disputes over the calculation of severance pay and average wages, as well as in lawsuits claiming additional wages relating to bonuses.

Following these Supreme Court judgments, the likelihood that a bonus scheme will be included as a basis for calculating severance pay and average wages has increased, so there may also be a need to consider the effect on the company's overall labor cost structure.

Our firm analyzes the purpose and actual operation of a management performance bonus scheme against the standards set by the precedents and reviews in advance the possibility that wage character will be recognized, together with the resulting potential risks, such as claims for additional wages and severance pay disputes.

In this way, we support companies in minimizing the possibility that their current bonus schemes will lead to legal disputes.

In addition, through collaboration with experts in related fields such as accounting, tax, and labor affairs, we provide not only legal advisory services but also comprehensive advice across business matters generally, including management and marketing.

If you need legal advice in connection with a management performance bonus, you are welcome at any time to request assistance through Daeryun's 🔗Legal Consultation Booking page.