The fear of being ordinary

The Korean Supreme Court’s recent announcement that two cases pending before the court regarding the thorny issue of ordinary wages would be heard en banc - that is, in the presence of all members of the court - has sparked considerable interest among the business, labor and the legal communities. Recognizing the widespread attention already given to the issue, the Supreme Court further promised to hold a public hearing on Sept. 5 to ensure fair and transparent proceedings.

While its decision to weigh in on these questions is commendable, the Supreme Court would be wise to consider carefully the impact of its potential ruling on the labor marketplace. The court should also take care not to undermine the reasonable historical agreements already reached by various companies and their respective employees. At a minimum, the court’s goal should be to add clarity and avoid doing unintended harm to Korea’s labor relations and future economic growth.

Ordinary wages have historically been anything but a simple concept in Korea, but as the complexity of the wage and benefit system has grown, the legal, financial and political importance of settling wage issues has become increasingly urgent. In principle, “ordinary wages” mean hourly wages, daily wages, weekly wages, monthly wages or contract wages which are paid regularly, uniformly and on a fixed basis to workers for their labors.

But just what these concepts mean in practice can be very difficult to define. Korean employers frequently pay, and employees routinely solicit and receive a dizzying and complex array of special bonuses, incentives and allowances. In the view of Korean employers, these extra payments help their employees enjoy higher levels of total compensation and incentivize hard work. In the view of Korean organized labor groups, however, these payments are implicitly understood to be integral parts of an employee’s base wages, and thus treating or classifying them differently from base wages results in an unfair reduction of related benefits and an undeserved windfall for employers.

Because compensation for overtime work, separation pay and compensation for unused annual paid leave each uses ordinary wages to determine an employee’s entitlements, a broad definition of ordinary wages would have terrible financial consequences. The statute of limitations for wage-related claims in Korea is three years, which would mean employers would have to contend with the prospect of large damages claims from both current and former employees. Larger employers could face costs well into the tens of billions of won (tens of millions of dollars).

It is of little wonder, then, that leading CEOs, trade associations and business groups have pressured Korea’s political leadership to resolve the question, claiming that the lingering uncertainty around this issue has slowed hiring and made the determination of employment-related costs and contingent liabilities practically impossible.

Unless and until the ordinary wage issue is conclusively resolved, it may be very difficult for the Korean government to create the conditions necessary to achieve its recently publicized goal of a 70 percent workforce participation rate.

Many employer groups are already bracing themselves for a decision that broadens the definition of ordinary wage beyond their historical practices, while labor groups are fearful that the upcoming ruling may jeopardize previous court victories, which established a more liberal standard. Each side has ample reason for concern. In a previous ruling issued in March 2012, the Supreme Court ruled that “fixed bonuses” should be included when calculating ordinary wages. According to the court’s rationale at the time, the fact that a fixed bonus was being paid to employees every quarter, rather than in each monthly pay period, did not automatically exclude it from ordinary wages.

Furthermore, the court found that if a collective bargaining agreement called for a prorated payment of a particular allowance to employees who leave their employer, such an allowance should be deemed to be a fixed wage that is paid periodically and uniformly and thus included in the calculation of ordinary wages. Lower courts have since been inconsistent in their rulings as to whether certain benefits, including such traditional mainstays of Korean compensation schemes as family, meal and holiday allowances, qualify as ordinary wages. This has prompted the Supreme Court to hear the pending case publicly next month in the hope of resolving many questions at once.

The pending case comes at a particularly critical time as Korea continues to sensitively and intelligently manage its rather dramatic transition from an export-driven manufacturing economy to an IT-oriented service economy, where private consumption, entrepreneurship and innovation can drive growth.

Most commentators and observers agree that whatever the Supreme Court decides, employers will need to carefully review and restructure their current and planned compensation systems in conjunction with their employees and in a spirit of good faith. Their goal should be to achieve a balance between full compliance with Korean law and the proper alignment of employment rewards and incentives.

*The author is a senior foreign legal consultant at Kim & Chang whose practice includes mergers and acquisitions, antitrust and labor and employment law.

by Patrick Monaghan