Supreme Court rules for plaintiff in peak-wage system case

Economy

Published: 26 May. 2022, 17:14 Updated: 26 May. 2022, 18:17

Supreme Court rules for plaintiff in peak-wage system case

An office worker in Seoul on Thursday. The Supreme Court upheld a lower court ruling against the peak-wage system, which gradually reduces the salary of senior employees. The system, which has been implemented by all public institution since 2015 and 52 percent of private companies with 300 or more employees, is aimed at lowering labor costs while allowing retiring employees to work for few more years. [YONHAP]

The Korean Supreme Court upheld a lower court ruling against limits on wages of employees after a certain age.

The latest decision will affect Korean companies that practice the "peak wage system," which gradually reduces the salaries of senior employees facing retirement.

The system was first adopted to reduce labor costs while allowing retiring employees to work for a few more years.

The Supreme Court on Thursday upheld a lower court judgement that ordered the Korea Electronics Technology Institute to pay the 67 year-old plaintiff salary lost as a result of the peak-wage system.

In January 2009, the institute's management and the labor union reached an agreement in adopting a peak-wage system for senior employees 55 years old or older. In exchange, the employees will be able to work until they are 61.

The plaintiff started working at the institute in 1991 and retired 2014.

But after retirement, the former employee filed a lawsuit demanding salary lost under the peak-wage system. The salary cut was effective for the employee starting 2011. The plaintiff argued that despite his status, his paycheck was cut significantly.

The question in the case was whether the peak-wage system violates the Act on Prohibition of Age Discrimination in Employment and Aged Employment Promotion, which prohibits discrimination on wages or welfare without a rational reason or only due to age.

Both the first court and the appeals court concluded that limiting the wage of an employee just because of their age violated the employment law and was therefore invalid.

The Supreme Court noted in its ruling that confirmed the appeals court ruling that the purpose of the peak-wage system is to reduce costs. The judge concluded that cutting the wage of employees that are 55 years old or older for this purpose is not justified.

The court also stressed that based on the data provided by the institute, despite the performance of employees 55 or older being higher than those 51 to 54, the salaries of the older employees were cut.

The Supreme Court noted that the validity of the peak-wage system practiced in other companies might be legal depending on the purpose of adopting the system, the justification, the necessity and other factors, such as the actual level of the cut, the period of employment and the level of work.

The labor union welcomed the court's final decision while businesses raised concerns.

The Federation of Korean Trade Unions in a statement said the Supreme Court's ruling was an obvious call.

"Through today's ruling, we hope all unfair peak-wage systems that eat into a worker's wages are abolished," the union said in the statement. "We encourage the invalidation and the abolishment of the peak-wage system."

"We hope that in future related rulings the court makes cautious conclusions considering the purpose and the legal implications of the peak-wage system and the impact it would have on industries," the Korea Enterprise Federation said in a statement.

With the population aging rapidly and the financial security of the elderly becoming a major issue, the government more than a decade ago started to expand the implementation of the peak-wage system, which was introduced at several companies since the mid-2000s.

The peak wage system started to gain momentum as the legal retirement age by law was raised from 55 years old to 60 in 2013. The new legal retirement age became effective in 2016.

In 2015, the peak-wage system was adopted at all public institutions. The first public institution to adopt it was the Korea Credit Guarantee Fund in 2003.

In the private sector last year, 52 percent of companies with 300 or more employees were using peak-wage system.

BY HA NAM-HYUN, LEE HO-JEONG [lee.hojeng@joongang.co.kr]