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Court rules bonuses as ordinary pay

Court rules bonuses as ordinary pay

Top court’s landmark ruling expected to directly affect lower courts, businesses express concerns over increased costs

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Published : 2013-12-18 15:53
Updated : 2013-12-18 18:25

Members of the Supreme Court, including Chief Justice Yang Seung-tae (center), are about to announce a landmark ruling that decided bonuses, if paid out regularly, constitute part of “ordinary wages.” (Yonhap News)

The Supreme Court on Wednesday sided with employees, ruling that bonuses, if paid out regularly, constitute part of “ordinary wages” used as the basis for calculating various types of compensation and severance pay.

The top court said in a landmark ruling that any labor-business agreement that excludes bonuses from ordinary wages will be regarded as invalid. The court, however, did not recognize welfare benefits such as vacation and birthday bonuses as part of ordinary pay.

“The amount of paid bonuses differs depending on the employment period, but such bonuses are included in ordinary wages if paid regularly and uniformly,” the court said. Bonuses paid at regular intervals exceeding one month will also be classified as ordinary wage, it added.

The landmark ruling made by the 13 Supreme Court judges is expected to directly affect all lower courts and put a significant financial burden on companies that were not including bonuses as ordinary pay.

The litigation, filed by about 300 employees of a local auto-parts maker, centered on whether to classify bonuses as part of ordinary pay. Ordinary pay is used as the basis for calculating overtime, nighttime and holiday pay and affects the amount offered in severance packages. Bonuses are not currently included in ordinary pay.

As the issue sparked a heated debate in labor, business and political circles, the top court decided to make a full-member decision. The top court holds such trials when the cases are important enough to set a precedent for other cases down the road.

Businesses expressed concerns immediately after the ruling over its potentially huge impact on Korea and its economy. “Companies will suffer greatly from intensifying conflicts between labor and management, and lawsuits (are expected to) follow (the top court’s ruling),” the Korea Federation of Small and Medium Business said in a statement.

Labor circles and businesses have been engaged in a war of nerves, striving to win over the public, the courts and political parties.

Companies in Korea would have to pay out an additional 38 trillion won ($36 billion) in total if bonuses were to be included in ordinary wages, undermining their export competitiveness, according to the Korea Chamber of Commerce and Industry, one of the five major business groups here.

Labor unions, meanwhile, welcomed the court’s decision.

“We welcome the ruling that included bonuses (as part of ordinary pay), but excluding welfare benefits is perceived as a retreat from the previous ruling,” said Choi Jong-hwan, deputy director of the Federation of Korean Trade Unions, one of two major umbrella trade union groups here.

The ruling is likely to urge businesses to improve their pay systems, in consultation with trade unions. Definitions of ordinary wages will be drafted in clear terms by the labor and management of each business unit.

The government said it respects the Supreme Court’s decision and will come up with measures to effectively improve the current pay system. The government is expected to revise related laws and enforcement ordinances by holding three-way talks with labor and businesses.

More than 160 civil cases are currently being processed, including one against GM Korea.

Daniel Akerson, chairman and chief executive officer of General Motors, the parent firm, raised the issue when he and other American businessmen met with President Park Geun-hye during her U.S. visit in May. As Akerson cited the wage issue as a key barrier to investment in Korea, Park said the Korean government would reassess the wage rule.

By Cho Chung-un

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