South Korean Supreme Court Redefines ‘Ordinary Wages’

These Supreme Court decisions primarily affect Korean employers, which commonly pay a significant portion of employees’ compensation through fixed regular bonuses but exclude those amounts when calculating the base rate for overtime pay and other statutory entitlements. Employers should review their compensation practices in Korea to ensure compliance or readiness to adhere to the new standard.

Employers should also look out for additional decisions expected from the Supreme Court soon, dealing with which kinds of incentive pay must be included when calculating the ‘average wage’ base rate for employees’ statutory severance benefits.

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The Court’s 2013 precedents held that any compensation which is regular, uniform, and fixed, paid in return for an employee’s regular contractual work, must be included in the ‘ordinary wage’. Ordinary wage serves as the legal base rate for calculating overtime pay, pay in lieu of termination notice, and compensation for unused leave. It can also indirectly affect statutory severance benefits in certain cases.

In those 2013 decisions, the Court clarified that for a payment to be ‘fixed’, it must be predetermined, guaranteed payment made for regular contractual work without additional preconditions. It further explained that, if a fixed regular bonus was (i) subject to the condition that the employee remain employed on the payment date (a ‘Payment-Date Requirement’), or (ii) contingent that the employee must attend work a certain proportion of regular working days during the bonus period (a ‘Service-Period Requirement’), then it was not considered ‘fixed’.

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The Supreme Court has now reversed that position in these latest decisions. Instead, the Court has now held that compensation no longer needs to be ‘fixed’ to be included in the ordinary wage. The Court’s decisions make clear that, to be included in employees’ ordinary wage, compensation must still be paid regularly and uniformly in return for an employee’s regular contractual work; however, it does not need to be guaranteed without any further pre-conditions. Instead, even if a payment is subject to a ‘Payment-Date Requirement’ or a ‘Service-Period Requirement’, those pre-conditions will not affect whether the payment is part of the ordinary wage.

The Court reasoned that allowing such Payment-Date Requirement or Service-Period Requirement to exclude payments from statutory calculations could enable employers to evade compliance by attaching arbitrary conditions. Indeed, in one of the cases before it, the employer had used such conditions to avoid treating ‘bonus’ compensation of up to 850% of the standard monthly salary as ordinary wage.

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The Court’s decision is effective prospectively or for already-pending cases. Employees who do not already have claims pending at a court will therefore not be able to commence any legal action based on payments prior to the date of the decision: 19 December 2024. But the new rule will be effective from and including the date of the decision, so affected employers will need to immediately comply.

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This decision will require immediate action by many employers in Korea. Any employers that:

• have fixed bonuses, incentives, allowances, or payments by other names that are paid regularly to employees in a predetermined amount for their regular contractual work; but

• do not include those payments in calculating employees’ ordinary wage, due to a Payment-Date Requirement or a Service-Period Requirement

will need to change their practices immediately. Non-payment of wages can be treated as a crime in Korea, and employers are now on notice that these kinds of regular fixed bonuses, incentives, allowances, or other payments must be included in the ordinary wage calculation beginning from 19 December 2024.

For employers that are not directly affected by these decisions, there are still cases pending before the Court that have the potential to upend other common compensation schemes. The Court is currently reviewing cases in which it is soon expected to decide whether certain kinds of performance bonuses must be included in employees’ ‘average wage’. Many employers that pay variable compensation based on business-performance metrics have excluded that compensation from employees’ average wage, essentially on the basis that it is profit-sharing rather than compensation for work and therefore should be excluded from employees’ average wage. If the Court again issues an employee-friendly decision in those cases, it may significantly increase the statutory severance benefits that employers must provide to employees with one year or more of service. And certain kinds of performance bonuses may also need to be included in employees’ ordinary wage in the future, if they otherwise meet the new definition of ordinary wage, but have been excluded because of a Payment-Date Requirement or a Service-Period Requirement.

*Yulchon LLC