Ordinary wage disputes have been filling Korean court dockets in recent years. The ongoing debate is whether regular and fixed types of bonuses or other benefits should be included in the calculation of the employee’s ordinary wage; the implication is that a higher ordinary wage makes for a greater base on which statutory allowance payments owed to the employee will be calculated – the key amongst these being statutory severance pay owed to any departing full-time employee employed for one or more years, regardless of reason for the departure.
In another major decision in the spate of ordinary wage cases, this time involving KIA Motors Co., Ltd., (“KIA”), the Seoul Central District Court held partially in favor of the employees on August 31, 2017, by holding that the employees’ regular bonuses and lunch allowances should be included when computing ordinary wage. In doing so, the Seoul Central District Court refused to recognize KIA’s argument that the inclusion would result in a “significant business/operational difficulty” for KIA, and thus, violate the Principle of Good Faith, since such amounts were not contemplated in previous labor-management wage negotiations.
If additional regular bonus or wage items are included when computing ordinary wage, an employer’s total statutory allowance payment liability increases. When the total resulting increase is such that an employer would face a “significant business/operational difficulty” or a “threat to the very existence of the company,” the employer may argue that the additional regular bonus or wage items should not be included as a Principle of Good Faith, since the increase was not reasonably anticipated during previous labor-management wage negotiations. Therefore, in the context of an ordinary wage dispute, the Principle of Good Faith serves as a defense for the employer against the inclusion of the disputed regular bonus or wage items.
When determining whether the Principle of Good Faith applies as a defense, a variety of factors are considered, including: the resulting increase in the total statutory allowances to be paid; the employees’ actual wage increase rates; the employer’s financial and operational status (e.g., net income, liquidity, operating losses, debt ratio); and the current status of the industry as a whole. Also, changes in the judiciary landscape and legislative changes or trends are also considered when assessing whether to recognize the Principle of Good Faith.
In this case, the Seoul Central District Court acknowledged that the inclusion of the regular bonuses and the lunch allowances when computing ordinary wage would potentially create a financial burden for KIA that was not anticipated during the labor-management wage negotiations. However, the court refused to recognize a violation of the Principle of Good Faith, stating that: (1) KIA had demonstrated sound financial status since 2008; (2) KIA was capable of paying the additional statutory allowance amounts that were being demanded; (3) KIA failed to provide clear evidence of a recent decrease in operating profit; (4) KIA is currently profiting from sales that are the result of the employees’ past labor for which the employees have not been fully compensated; and (5) the parties were capable of constructively and amicably resolving (through payment arrangements such as installment payments) future disputes through subsequent labor-management discussions.
However, we have seen district court level decisions on ordinary wage and the recognition of the Principle of Good Faith reversed at the High Court levels in other major ordinary wage cases, such as those involving Kumho Tire, Asiana Airline, and Hyundai Heavy Industries. More specifically, in these cases, the competent High Courts reversed their respective lower court’s holdings, stating that the inclusion of regular bonuses would create “significant business/operational difficulties” and/or “threats to the very existence of the companies” that would constitute violations of the Principle of Good Faith.
As anticipated, KIA has filed an appeal against the Seoul Central District Court decision, and may now face a difficult road ahead especially in light of the Moon Administration’s labor policy initiatives and recent [or anticipated] changes to the Supreme Court justices that may result in changes, expansions or new interpretations of the existing requirements for the Principle of Good Faith.
* Lee & Ko boasts a successful track record in wage disputes, particularly in the litigation and consultation of ordinary wage cases. As an accomplished firm having played pivotal roles in a line of leading cases, Lee & Ko has effectively provided response measures and solutions that are well-founded and tailored to the unique positions of each client by proactively dealing with key issues like the Principle of Good Faith. Should you need any assistance in this area of law, please do not hesitate to contact the authors below.
Sang Hoon Lee
Chang Soo Jin
Hyun Seok Song