Minimize the base-salary shock

The Supreme Court concluded that bonuses and other regular payments should be included in base salaries - a move long demanded by the unions and salary-earners. Companies use base salary to calculate overtime, severance and retirement payments. Widening the interpretation of base salaries could cost employers from 6 trillion won ($5.6 billion) to 38.5 trillion won if the court decision is applied retroactively for the past three years, according to relative estimates from labor and employers’ associations. The Korea Employers’ Federation also estimates companies would have to pay employees an extra 8.8 trillion won a year. Companies would face an enormous financial squeeze from the new wage burden that would reduce investment and business operations in the future.

The Supreme Court ruled that retroactive application in extending the scope of base salary can be excluded if companies run into financial difficulties. But employers would inevitably face a flood of lawsuits from employees because the exception clause could only be determined by individual companies in the courts. What is certain is that the ruling would sharply increase labor costs for companies and worsen labor-management relations.

But these unfortunate consequences had been foreseen. Due to the vague legal definition of base salary, companies have been increasing bonuses and creating new allowances by keeping the base wage unchanged to save on labor costs. We repeatedly advised labor, management and the government to come up with a consensus and compromise on salary guidelines before the Supreme Court delivered a final ruling. Any court decision that sided with one particular party would inevitably hurt labor-management relations and leave less room for reasonable compromise.

Labor has won the first round. But it is unclear if the extension of the scope of base salaries will benefit workers in the long run. Companies could reduce hiring or turn to layoffs because of increased costs. Labor costs also could become a drawback for unions in negotiations with employers. Workers, therefore, should be prudent before rushing to court to fight for their retroactive unpaid payment.

The dispute over the legal scope of base salary finally has been clarified. Labor, management and the government still need to discuss further and reach agreement on their own guidelines. The tripartite parties should come to their own agreement for reasonable salary guidelines to minimize damage on both sides. Labor relations are best settled between the concerned parties instead of in court.