On August 31, 2017, the Seoul Central District Court held for around 27,000 employees of KIA Motors ("KIA") in their claim seeking payment of unpaid allowances. These allowances were not paid, because the defendant, KIA, had not included the employees' regular bonuses in their ordinary wages.

Regarding KIA’s argument that the payment of allowances (including the employees’ regular bonuses) would contravene the “good faith principle,” the court ruled that while such inclusion may give rise to an unforeseeable financial burden during labor-management wage negotiations, given the following considerations, there are no grounds to conclude that KIA would face considerable business difficulties even if required to make the payments. Thus, the Seoul Central District Court ruled there is no contravention of the “good faith principle.”

Why Is There No Contravention of the “Good Faith Principle?”

1. Beginning in 2008, KIA was not in a bad financial condition, and the sum of the performance bonuses which KIA paid to its workers each year is significantly greater than the unpaid allowance payment which the employees are seeking in this case.

2. KIA failed to submit clear evidence regarding the decrease in business profits (such as losses resulting from THAAD retaliation).

3. With respect to future investment that KIA will have to make (e.g., for electric cars), it is difficult to determine an optimal investment amount.

4. The employees are exercising their employment rights under the Labor Standards Act, and KIA has already enjoyed the profits gained from these employees’ past services.

5. The payments of unpaid allowances, which the employees are seeking, are payments the employees were entitled to receive. However, KIA is merely focusing on the fact that going forward, these payments will have to be provided, and KIA’s perception of these payments as “jeopardizing the company’s existence” is not appropriate.

6. Through the labor-management negotiations, the parties should be able to find a solution (such as payment through installments) that would prevent KIA from having to face “considerable business difficulties” and/or “jeopardize the company’s existence.”

History and Significance:

Still, a clear standard of judgment regarding “significant business difficulties” does not yet appear to exist.

In the Supreme Court’s December 19, 2013 en banc decision in the Kabul Autotech cases, the Supreme Court, while defining the conditions for when a payment will constitute an ordinary wage, ruled that even if a fixed payment constitutes an ordinary wage, if a payment of such ordinary wage could cause the company “significant business difficulties,” it is a contravention of the “good faith principle.”

However, in the ordinary wage cases that followed the 2013 decision, we have seeing on-going debate as to the degree of “difficulties” a company must anticipate facing in order for the company to be deemed as facing “significant business difficulties,” and the trial and appellate courts have rendered different rulings.
For instance, in a recent appellate decision, the Gwangju High Court held that a claim by Kumho Tire employees for additional payment of allowances would put Kumho Tire's business in jeopardy, and rejected the employees' claim for payment of unpaid allowances, concluding that the employees' claim for payment contravened the “good faith principle.” In fact, in this decision, the appellate court overturned the trial court’s decision.

Our Thinking:

As the courts have been rendering different conclusions in ordinary wage cases, it remains to be seen how the “good faith principle” will apply in the pending ordinary wage cases. Further, based on the Seoul Central District Court’s recent ruling of the KIA Motors ordinary wage case, we anticipate that the uncertainty relating to the “good faith principle” will continue in both the legal and industrial circles.

Applying the “good faith principle” requires an extensive factual review, including the amount at stake, the company's size and total revenue, the company's financial status and its net and operating profits, business forecast and cash flow, and many other factors.

If faced with a possible unpaid allowance claim based on ordinary wage misclassification, employers should consider reviewing its status to identify the relevant elements that would support its position on good faith exception applicability.

In order to persuade a court that the “good faith principle” applies, the most critical point will be to demonstrate and highlight to the court that the employer is required to pay an unforeseen (additional) allowance, despite having provided all the wages, which were mutually agreed upon through the labor-management negotiations, and that such payment obligation (itself) is unfair.

Moreover, we believe the following arguments will have to be made to successfully persuade the court:

1. An (additional) allowance which both labor and management was not able to foresee is not a payment which the employees are entitled to receive.

2. A claim which seeks payment of an (additional) allowance, which exceeds the labor costs that a company is capable of bearing, goes beyond the intrinsic limitations of the company and therefore, is not permissible.

3. According to the Supreme Court, “sound maintenance of the workplace[,] which is the source of continued payment of wages[,]” is an important value, and a claim seeking a large payment (for additional allowances) may jeopardize the continued payment of such wages.