In a December 2024 decision, the South Korean Supreme Court significantly changed the treatment of fixed bonuses for purposes of calculating an employee’s ‘ordinary wage’, which is the base rate for various entitlements like overtime pay and pay in lieu of notice.
In that decision, the Court unanimously held that bonuses would count towards an employee’s ‘ordinary wage’ irrespective of whether those bonuses were (i) conditioned on the employee remaining employed on the payment date (a ‘Payment-Date Requirement’), or (ii) contingent on the employee attending work a certain proportion of regular working days during the bonus period (a ‘Service-Period Requirement’).
Although not addressed in the December 2024 decision, some legal observers had since questioned whether a Payment-Date Requirement or Service-Period Requirement could be enforceable at all, on the basis that they operate to deprive employees of wages they have already earned through their labour.
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The Supreme Court has now expressly held that a Payment-Date Requirement is generally enforceable. The holding also likely applies to Service-Period Requirements and other similar requirements attached to regular bonuses or similar payments.
In this case, a steel manufacturing company paid its employees an annual regular bonus equivalent to 800% of their monthly salary, pursuant to a collective bargaining agreement and internal salary regulations. Payment of the bonus was subject to a Payment-Date Requirement. In 2015, twelve current and former employees filed suit against the company, claiming that these regular bonuses were required to be included in their ordinary wage and would affect the calculation of their severance pay.
The court of first instance ruled against the employees, holding that the bonus was excluded from the employees’ ordinary wage due to its Payment-Date Requirement. However, the intermediate appellate court overturned this decision, holding that the Payment-Date Requirement was invalid and that the bonus was required to be included in the employees’ ordinary wage. Both of these decisions were issued before the Supreme Court’s December 2024 decision.
The case was appealed to the Supreme Court, which partially reversed. The Court agreed that the regular bonuses were required to be included in the employees’ ordinary wage. But the Court reversed the intermediate appellate court’s holding that the Payment-Date Requirement itself was invalid. The Court held that such conditions are generally valid unless they violate mandatory legal requirements or constitute a circumvention of the law.
The Court stated that ‘Employers and employees are free to agree on wage structures, systems, individual wage items, and total wage amounts, and may attach conditions to wage payments. Such conditions are valid unless they violate mandatory regulations or constitute unlawful acts. A condition requiring an employee to be employed as of a certain date to receive a payment is, in principle, a valid payment standard and does not amount to an unlawful forfeiture or deprivation of earned wages.’
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This decision makes clear that, even though the Court’s December 2024 decision prevents employers from using Payment-Date Requirements and Service-Period Requirements to exclude certain compensation payments from the calculation of legal entitlements like overtime pay, employers remain free to attach such conditions to the compensation payments themselves.
*Yulchon LLC
