SOUTH KOREA: An Introduction to Banking & Finance

Supreme Court Decision Changes Criteria for Ordinary Wages

On 19 December 2024, in cases concerning a life insurance company and an automobile company, the Supreme Court issued new rulings through its en banc judgment and excluded “payment on a fixed basis” or “fixedness” as one of the criteria for determining ordinary wages (Case No 2020Da247190 and Case No 2023Da302838) (hereinafter, the “2024 Supreme Court Rulings”).

This overturns an established precedent dated 18 December 2013 (Case No 2012Da89399), where the Supreme Court ruled through its en banc judgment that certain bonus payments paid only to employees employed on a specific payment date, etc, do not qualify as ordinary wages, as such payments cannot be deemed to be paid “as consideration for the employees’ prescribed work” and “on a fixed basis”. The Supreme Court further confirmed this ruling in another court case on 26 September 2017. However, these prior cases have now been overturned by the 2024 Supreme Court Rulings.

Summary of the 2024 Supreme Court Rulings

“Fixedness” is no longer one of the criteria for determining ordinary wages. The Supreme Court excluded “fixedness” based on the following five reasons.

Concept of “fixedness” has no statutory basis

The legal concept of ordinary wages cannot be modified by the parties without a statutory basis. However, there is no statutory basis for requiring “fixedness” as one of the criteria for determining ordinary wages, even in the definition of ordinary wages under the Labour Standards Act. If the parties are allowed to require “fixedness” as one of the criteria for determining ordinary wages, this results in unfairly narrowing the scope of ordinary wages.

Circumvents the “mandatory” nature of ordinary wages

Requiring “fixedness” can allow the parties to easily circumvent the “mandatory” nature of ordinary wages by adding certain conditions, such as continued employment as of the payment date.

Excluding certain bonus payments by using the “fixedness” concept does not fully reflect the true value of the prescribed work

The concept of ordinary wages is meant to evaluate the true value of the prescribed work of each employee, and must therefore reflect the total value of such work.

Difficulty in calculating ordinary wages in advance

Ordinary wages should be calculable in advance of providing extended work (overtime, nighttime and holiday work), as they serve as a tool for determining statutory allowances for such extended work. As such, this should exclude any future factors not fixable in advance, and should faithfully follow the prerequisite concept of providing the prescribed work in full.

In light of this, the Supreme Court states that certain bonus payments conditioned on a certain number of working days within the normal working days of the employee’s prescribed work can qualify as ordinary wages, assuming they also satisfy the other requirements of regularity and uniformity. In contrast, wages that are conditioned on a certain number of working days in excess of the normal working days of the employee’s prescribed work should not be considered ordinary wages.

Does not align with policy goals of limiting overtime work

The concept of ordinary wages must align with the goal of the Labour Standards Act, which aims to limit extended work and to give employees compensation corresponding to such work. The requirement of "fixedness” undermines this policy goal by unfairly narrowing the scope of ordinary wages.

Redefining Ordinary Wages

In the 2024 Supreme Court Rulings, the Supreme Court removed “fixedness" as one of the criteria for determining ordinary wages. Therefore, “ordinary wages” now refers to payments that are paid regularly and uniformly as compensation for the employee’s prescribed work. In other words, certain bonus payments that are paid regularly and uniformly, regardless of the conditions attached thereto or the possibility of their fulfilment, will qualify as ordinary wages.

More specifically, the following should be noted.

• Certain bonus payments conditioned on continued employment should no longer be excluded from ordinary wages.
• Certain bonus payments conditioned on a certain number of working days should no longer be excluded from ordinary wages if such number of working days is within the normal number of working days of the employee’s prescribed work. However, if such number of working days is in excess of the normal number of working days of the employee’s prescribed work, this should remain excluded from ordinary wages.
• Even under the new criteria for determining ordinary wages, performance bonuses (which depend on specific work performance or evaluations) generally do not qualify as ordinary wages. However, if a minimum amount is paid as a performance bonus regardless of the employee’s actual performance, such an amount should be included as ordinary wages.

Limitation of the Scope of the 2024 Supreme Court Rulings

The Supreme Court stated that, since the 2024 Supreme Court Rulings have a significant impact on collective relations between the employer and the employee involving ordinary wages, the new criteria should not be applied retroactively, in order to ensure and protect legal stability and trust established prior to the 2024 Supreme Court Rulings. Therefore, the new criteria under the 2024 Supreme Court Rulings should only be applied to the calculation of ordinary wages to be made after the date of the rulings (19 December 2024).

However, the Supreme Court made it clear that the new criteria under the 2024 Supreme Court Rulings shall apply to the pertinent ordinary wages cases in progress and still pending in the relevant courts.

Significance and Implications of the 2024 Supreme Court Rulings

The 2024 Supreme Court Rulings drastically change the concept of ordinary wages from established precedents, and are expected to cause great confusion in the wage system, labour-management agreements, and practices that were formed based on such prior precedents from 2013. Accordingly, depending on the existing practices, the economic burden on each workplace may increase significantly and may require a major reorganisation of the wage system.

In consideration of these points, businesses should analyse the impact of the 2024 Supreme Court Rulings and, if necessary, make any relevant changes to their existing wage system.

We understand that the Supreme Court will also rule on outstanding cases regarding whether certain bonus payments should be included in average wages (used to calculate severance payments). Companies should also monitor this upcoming court decision.