CONTENTS
- 1. Final Appeal Practice | Overview of the Case
- 2. Final Appeal Practice | The Supreme Court's Determination
- - The Standard for Determining the Wage Character of a Management Performance-Based Bonus, a Direct and Close Relationship to the Provision of Labor
- - The Character of the Management Performance-Based Bonus, a Structure Closer to a Distribution of Business Profits
- - The Conclusion That the Lower Court Made No Error in Applying the Legal Principles
- 3. Final Appeal Practice | The Standard for Determining the Wage Character of a Management Performance-Based Bonus
- - Recent Trends in Supreme Court Precedents
- 4. Final Appeal Practice | A Practical Checklist for Companies
- - The Significance of the Final Appeal
1. Final Appeal Practice | Overview of the Case
The case reviewed here by the Final Appeal Group is a retirement benefits claim in which the central issue was whether a management performance-based bonus is included in the average wage.
A total of 972 current and former employees who had worked at the shipbuilder Hanwha Ocean (formerly Daewoo Shipbuilding & Marine Engineering) claimed the difference in retirement benefits, asserting that the management performance-based bonus the company had paid should be included in the average wage.
The bonuses at issue in this case were money paid under the following names.
The plaintiffs argued that, because the bonuses were consideration for labor, they should be included in the average wage that serves as the basis for calculating retirement benefits.
The average wage is calculated based on the total wages paid during the three months before retirement, and as the average wage increases, the retirement benefits increase accordingly.
The company argued that the bonuses were management performance-based bonuses in the nature of a distribution of business profits rather than direct consideration for the provision of labor, and that they were therefore not included in the average wage.
On this point, both the court of first instance and the appellate court determined that, considering that the bonuses at issue in this case were structured to be paid according to the company's financial performance, such as operating profit and ordinary profit, it was difficult to find that they had a direct relationship to the provision of labor.
The plaintiffs, however, did not accept that judgment and filed a final appeal seeking the Supreme Court's determination.
2. Final Appeal Practice | The Supreme Court's Determination
Having reviewed this judgment, the Final Appeal Group reported that the Supreme Court reorganized the standard for determining the wage character of a management performance-based bonus in this case.
The Standard for Determining the Wage Character of a Management Performance-Based Bonus, a Direct and Close Relationship to the Provision of Labor
The Supreme Court reaffirmed its established legal principle that, for money an employer pays to an employee to qualify as wages, it must be money paid in return for labor.
In other words, the following requirements must be met.
- An obligation to pay the money must exist
- That payment obligation must be directly or closely related to the provision of labor
In the case of the management performance-based bonus at issue, the payment criteria were structured as follows.
- Operating profit
- Ordinary profit
- Rate of achievement of financial indicators
The Court determined that, because such indicators are calculated based on the management performance of the company as a whole, it was difficult to find that they had a direct relationship to the provision of labor by any particular employee.
The Character of the Management Performance-Based Bonus, a Structure Closer to a Distribution of Business Profits
The Supreme Court found that the bonuses were closer in character to a distribution of business profits.
In other words, the bonuses at issue in this case were structured so that whether they were paid and their amount were determined according to the following factors.
- The company's overall results
- Management performance indicators
- Rate of target achievement
The Court held that money of this character is closer to compensation paid as part of a distribution of corporate profits than to consideration for the provision of labor.
Accordingly, it determined that the money could hardly be recognized as wages forming the basis for calculating the average wage.
The Conclusion That the Lower Court Made No Error in Applying the Legal Principles
The Supreme Court accepted as it stood the lower court's determinations as follows.
Accordingly, finding that the lower judgment contained no misapprehension of the legal principles or error in its determination, the Court dismissed the final appeal.
3. Final Appeal Practice | The Standard for Determining the Wage Character of a Management Performance-Based Bonus
The message this judgment conveys to companies and employees is clear. The mere fact that a management performance-based bonus is paid does not automatically make it recognized as wages.
In recently determining the wage character of a management performance-based bonus, the Supreme Court has comprehensively considered the following factors.
- Whether a provision serving as the basis for payment exists
- The mandatory nature of the payment obligation
- The connection to work performance
- The objectivity of the payment criteria
- The connection to the company's management performance
In other words, if a bonus is structured as follows, there may be a possibility that its wage character will be recognized.
Conversely, as in this case, where a bonus has a payment structure centered on the company's overall financial performance, the character of a distribution of business profits, and a structure in which whether it is paid and its amount are heavily influenced by management judgment, the possibility that its wage character will be denied is high.
Recent Trends in Supreme Court Precedents
Recent Supreme Court precedents concerning management performance-based bonuses have reached differing conclusions.
Representative examples include the following precedents.
Samsung Electronics
With respect to the Target Incentive (TI), the Supreme Court reversed and remanded the lower judgment, holding to the effect that its wage character could be recognized.
In this case, the facts that the payment criteria were provided for in the rules of employment and that the work performance of the business division was reflected in the payment criteria were considered important.
SK hynix
By contrast, in the SK hynix case, the fact that the management performance-based bonus carried no payment obligation under the rules of employment was decisive, and its wage character was denied.
Hanwha Ocean
In this case as well, the Supreme Court denied the wage character of the management performance-based bonus on the grounds that it had a payment structure centered on financial indicators and the character of a distribution of business profits.
In the end, the recent trend in the precedents may be summarized as follows.
“More than the name ‘management performance-based bonus’ itself, the payment structure and the existence of a payment obligation are the key criteria for the determination.”
4. Final Appeal Practice | A Practical Checklist for Companies
A management performance-based bonus is a compensation system used by many companies, but depending on how it is designed, it may lead to a retirement benefits dispute.
Companies should therefore review the following matters together with attorneys handling corporate matters.
Reviewing the Bonus Payment Structure
- Confirming whether the bonus payment criteria are based on individual work performance or on company results
- Examining whether a provision setting a payment obligation exists
Reviewing the Rules of Employment and Compensation Regulations
- Putting the payment conditions and criteria in writing
- Examining the possibility of interpretation as to whether the bonus constitutes wages
Managing Retirement Benefit Calculation Risk
- Examining whether there are bonuses that may be included in the average wage
- Analyzing the retirement benefit burden that may arise over the long term
Preventing Labor-Management Disputes
- Defining the character of the bonus accurately in advance
- Conducting a legal review when changing the payment structure
The Significance of the Final Appeal
A final appeal is not a procedure that re-determines the facts but a procedure that determines whether the legal principles were appropriately applied.
Accordingly, at the final appeal stage, consistency with existing precedents, whether there was an error in applying the legal principles, and the appropriateness of the standard of determination become the key issues.
In labor cases in particular, legal issues such as the average wage, the determination of wage character, and the character of a bonus are addressed repeatedly, so a response that takes the final appeal strategy into account from the early stages of litigation is important.
The Final Appeal Group analyzes the judgments of the first and second instances, determines whether there was an error in applying the legal principles, and responds with a strategy suited to the client.
Legal Services of the Final Appeal Group
| Area of Assistance | Key Content |
|---|---|
| Assessment of the Possibility of a Final Appeal | Reviewing whether the lower court misapprehended the legal principles and whether grounds for a final appeal are established, and assessing the possibility of filing a final appeal |
| Strategy for Drafting the Statement of Grounds for Final Appeal | Structuring the grounds for the final appeal around errors in the determination of legal principles rather than the facts, and analyzing consistency with Supreme Court precedents |
| Analysis of Precedents and Legal Principles | Analyzing existing Supreme Court precedents, judgments in similar cases, and scholarly theories to build the legal reasoning applicable to the case |
| Organizing the Record and Evidence | Reviewing the records of the lower instances to reorganize the key facts and evidence that may affect the determination of legal principles |
| Designing the Final Appeal Response Strategy | Establishing a response strategy for each judgment scenario, such as the possibility of dismissal of the final appeal or of reversal and remand |
| Litigation Strategy After Reversal and Remand | Supporting the strategy for arguments and proof and the preparation of evidence needed in the remand proceedings if the Supreme Court reverses and remands |
| Risk Management Advisory | Analyzing the legal and financial risks that may arise after the judgment and presenting a response strategy to prevent recurrence |
By thoroughly reviewing the structure of a case and the legal principles with the assistance of the Final Appeal Group, parties may prepare a more stable response strategy even in long-running labor disputes.
If you would like to experience the one-stop response system of the Final Appeal Group and the corporate practice attorneys, you are welcome to make a 🔗corporate legal consultation reservation with our firm.
