A manager of foreign companies can ask questions on Korean labor laws by clicking here.
This post is a brief explanation of mandatory severance benefits that are required by Korean labor law.
Employee Retirement Benefit Security Act stipulates mandatory severance packages for employees who leave a company after at least one year of service.
The misuse of the word ‘retirement’ in the law confuses foreign managers. I think “severance benefits” is more appropriate term. The definition of retirement in Wikipedia is: “Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits.”
Retirement Benefits under the act is not only for retirees who are at the closing stage of their professional life. Regardless of whether an employee is going into retirement or not, he is entitled to the benefits upon termination of the employment relations as long as he worked for a company more than 1 year. Every kind of termination is covered by the law. An employee may resign, may be laid off, or even be fired for making serious mistakes that brought damage to the company. For example, for the last situation, the employer should pay him retirement pay and try to claim damages through a lawsuit. In a nutshell, an employee is entitled to retirement benefits described in the law for all kind of termination.
Retirement pay to be paid to a worker is average wage of 30 days for 1 year. If a worker leaves the company after 1 year and several months, retirement pay for those additional months should be calculated on a pro rata basis.
If an employer established a company and makes no decision about mandatory retirement package, retirement pay system is automatically adopted. Some Koreans use the word “severance pay”, which means the same thing as retirement pay.
Under the Employee Retirement Benefit Security Act, labor and management can choose retirement pension system instead of retirement pay. An employer should obtain an agreement of a majority union or majority of workers (if there is no majority union) to decide on retirement benefit system. They may choose retirement pay or retirement pension.
Retirement pension has two types. One is defined contribution (DC) and another is defined benefit (DB).
Under the DC program, an employer contributes predetermined money, which is 1/12 of the annual total wage of workers to the individual accounts of workers at the financial institutions chosen as pension providers by labor and management. It is up to workers to manage the fund based on advice by the financial institutions. Upon termination of the employment relations, the financial institution pays pension as annuity or lump-sum to workers.
Under the DB program, the amount of pension benefit payable to the workers is predetermined. The contribution to be made by the employer vary depending on the outcome of the fund management which is the responsibility of financial institution. The amount of pension benefit under the DB program is the same as retirement pay, which is average wage of 30 days for one year of service.
This post aims to provide links to major Korean labor laws that are on the website of Korean Ministry of Employment and Labor. I hope this will make it easier for foreign managers to find laws they are looking for. All links are for downloadable pdf files.
Basic law governing legal standards for employment contract, wage, work hours, holidays, leave, dismissal and work rules.
Basic law governing labor relations, unions, labor disputes and strikes
Law governing the use of fixed-term contract workers and part-time workers
Law governing the mandatory retirement benefit system for employees. Employers should implement either retirement pension or retirement pay for their employees.
Law governing the use of dispatched workers (leased workers) and requirements for setting up staffing companies. The law requires staffing companies to “directly employ” workers and then dispatch them to clients.
Law governing gender equal treatment, sexual harassment, and childcare leave
Law governing matters pertaining to workplace safety and health regulations
Law governing benefits provided by the Korean Workers’ Compensation system.
A report on the Supreme Court ruling on ordinary wage in December 2013 by the Korea Employers Federation
On December 18th, 2013, the Supreme Court of Korea issued a ruling with regard to ordinary wage. The lengthy and complicated ruling was an attempt to resolve the controversy on the definition and scope of ordinary wage that have been creating much confusion and debate between labor and management. It is imperative for HR managers to understand the intent of the ruling because it will have a major impact on labor relations and compensation management in workplaces.
The Korea Employers Federation (KEF), an umbrella employers’ association in Korea, recently published an English report on ordinary wage that summarizes the Supreme Court ruling and also provides relevant background information related to the controversy over ordinary wage. I contacted Ms. Seonkyung CHOI, chief of the International Affairs Team of the Korea Employers Federation and obtained the text of the report. What you read below is the full text of the report. I thank Ms. Choi for kindly allowing me to post the report on this blog. I hope this report will help foreign managers to better understand the issue of ordinary wage in Korea.
A Report on the Supreme Court ruling on ordinary wage (Korea Employers Federation, Feb. 5th, 2014)
I. Controversy on ordinary wage
A. Concept of ordinary wage
1. “Ordinary wage” is defined as wages given to workers on a regular basis and in a uniform manner at a pre-determinable rate for performance of their prescribed work. The Labor Standards Act stipulates ordinary wage to be used as the basis for calculating overtime pay and allowance for unused leave days.
2. Ordinary wage is the standard for calculating various allowances. It is not the actual amount of pay which employees receive. If the scope of ordinary wage increases, various allowances would grow accordingly, increasing cost burdens on companies. For example, if regularly paid bonuses are included in ordinary wage calculations, overtime pay and unused leave day compensation would increase, as would social insurance costs.
<Table 1> Impact of Increased Scope of Ordinary Wage
Regularly paid bonuses included in ordinary wage ⇨ ordinary wage increase ⇨ overtime pay and unused leave compensation increase ⇨ average wage, severance pay and other social insurance costs increase
B. Controversy on ordinary wage
3. Labor and management have followed the government’s administrative guidance that ‘regular bonuses are not included in ordinary wage.’
- 1982: Definition of ordinary wage inserted in the Enforcement Decree of the Labor Standards Act
- 1988: Inclusive & exclusive allowances listed in the administrative guidance
4. The courts had shared this view with the government, but since 1996 they have been expanding the scope of ordinary wage. In March 2012, the Supreme Court ruled that “regular bonuses are ordinary wage,” followed by a rapid increase in lawsuits. Beginning 5 years ago, in particular, trade unions have been filing lawsuits on ordinary wage, denying existing agreements with management. Currently, 187 companies are faced with lawsuits connected to ordinary wage (as of August 2013).
C. Background to the Supreme Court Ruling
5. There was a slim chance for business to win the lawsuit when the disputes began. Business has focused on the possible financial burden that expansion of the scope of ordinary wage would cause: increasing labor costs, discouraging companies from investing and creating jobs, polarizing the labor market, and creating more conflict between labor and management.
6. The Supreme Court made a full-member decision, reflecting on the long-held practices of labor-management agreement and the possible side effects highlighted by business (including decrease of job growth). The KEF has been preparing business strategies while supporting individual companies facing lawsuits.
D. The Supreme Court Ruling
7. With the increasing number of lawsuits and deepening confusion at workplaces due to contradictory rulings by lower courts, the Supreme Court made a full-member decision on December 18th, 2013.
⇨ ⓐ, ⓑ, ⓓ resolved, ⓒ remains as a burden on companies
⇨ Companies to reform their wage systems to deal with ⓒ
- Regular bonuses are included in ordinary wage in 50% of companies where wages would increase by 7~8% on average.
⇨ ‘Fringe benefits’ excluded from ordinary wage
II. Major criteria in the ruling
A. Decision on Ordinary Wage
8. The Supreme Court of Korea defines ordinary wage as money and valuables given to workers on a regular basis and in a uniform manner at a pre-determinable rate for performance of their prescribed work. Given the fact that most allowances are paid on a regular and uniform basis in Korea, the most critical condition for ordinary wage is ‘pre-determinable.’
Criterion 1: Regularity
- Allowances paid to employees at regular intervals
⇨ Payment interval can exceed 1 month (2 months, 3 months, 6 months etc.)
Criterion 2: Uniformity
- Allowances paid to ‘all employees’ or ‘some employees who fulfill certain conditions’
⇨ ‘Certain conditions’ shall be related to employee jobs such as duties, skills or career experience. For example, if an allowance is paid only to employees with children, it is not given in return for the work they have done ⇒ no uniformity
Criterion 3: Pre-determinable
- Key factor to deciding whether an allowance is included in ordinary wage
⇨ The Supreme Court ruled that payment and amount shall be determined in advance regardless of employee achievement, performance or other additional conditions.
9. Therefore, if an allowance is ‘pre-determinable,’ it could constitute ordinary wage. Currently, the following types are the commonly paid allowances in Korea.
Type 1. Calculated according to days worked⇒ pre-determinable
(Example) Payment to retirees based on actual number of days worked (e.g. 17 of 60 days)
※ Type 1 is the most common type
Type 2. Paid only to those who have worked a certain number of days
⇒ not pre-determinable
(Example) Payment only to employees who have served at least 15 days per month
Type 3. Paid only to incumbent employees ⇒ not pre-determinable
(Example) Payment only to incumbent employees at the time of payment of regular bonus
※ Despite a bonus regulation that fits Type 3, if the bonus is paid based on a daily calculation under Type 1, it may be considered ‘pre-determinable.’
Type 4. Non-uniform performance bonuses ⇒ pre-determinable (△)
(Example) Minimum amount of bonus is regarded as pre-determinable
• Employee A $300/ B $200/ C $150 = $150 (the minimum) is considered ordinary wage
• Employee A $300/ B $200/ C $0 = no ordinary wage ($0 is the minimum)
※ Type 4 is applicable to cases where an employer has an obligation to pay a performance-based bonus. If bonuses are given in return for ‘fulfilling certain conditions’ such as achieving business goals they are not regarded as wage.
B. The Principle of Good Faith: Restriction on Retroactive Wage Claims
10. If labor and management agree to exclude regularly paid bonuses from ordinary wage, such agreement is to be regarded as null and void. In this case, companies should re-calculate the amount of ordinary wage and other allowances, and pay additional wages to employees based on that calculation.
11. However, the Supreme Court ruled that employees cannot claim retroactive wages ‘for the past 3 years’ if the principle of good faith applies. The ‘principle of good faith’ according to the Civil Act of Korea means that legal rights shall not be exercised against trust and good faith.
12. When it comes to the principle of good faith, the Supreme Court ruled that requiring payment of retroactive wages may bring ‘serious financial difficulties’ (of which the Court gave several situations, listed below) for the affected companies and, if so, trade union claims would breach trust with the company. The principle of good faith is expected to apply to most pending lawsuits regarding ordinary wage.
<Table 2> Situations Causing Serious Financial Difficulties for Companies
- The amount of regularly paid bonuses is considerable (e.g. 600% of base pay)
- If additional payment were to be made, the rate of real wage increase would exceed the agreed rate in the wage agreement
- If each allowance is negotiated after the total amount of wage is decided during wage bargaining
- If payment of the additional wages would break the average wage increase in the past years
- If the additional financial burden would take up most of the company’s net profits
C. Application of the Supreme Court Ruling
13. The principle of good faith may apply to labor-management agreements made prior to this ruling, but from the time when a new labor-management agreement is negotiated, companies need to carefully take the Supreme Court’s decision into account when setting the scope of ordinary wage. It is recommended that labor and management calculate ordinary wage according to objective factors and conditions.
14. There are different views on the interpretation of ‘when a new scope of ordinary wage should be set’ if a valid collective bargaining agreement still exists.
- The Supreme Court ruled the principle of good faith cannot be applied to ‘new agreements after this ruling.’
- Two interpretations of ‘new agreements after this ruling’ include:
A: The current CBA is valid until a new CBA is negotiated;
B: Immediately after the Supreme Court ruling on December 18, 2013, the scope of ordinary wage should be adjusted and allowance for overtime work needs to be re-calculated based on the new scope of ordinary wage.
* CBA: Collective Bargaining Agreement
15. The Ministry of Employment & Labor, according to interpretation A above, announced a guideline on ordinary wage saying that existing CBA are valid, with the Supreme Court ruling to be reflected in new collective bargaining agreements.
16. If there is no collective bargaining agreement with only Rules of Employment in place, the timing of new wage arrangements in the past could be considered as times when new labor-management agreements were made. For example, if promotions and wage arrangements are decided April 1st every year, this could be considered a tacit labor-management agreement.
<Reference> Government Guideline on Ordinary Wage
- The government issued ‘Guideline on Ordinary Wage’ reflecting the Ruling of the Supreme Court made last December in order to prevent confusions and unnecessary conflicts in workplaces.
Labor and management are encouraged to have dialogue pursuant to the principle of good faith.
⇨ Guide to simplify wage items and to reform wage systems into job/performance-based ones
In case of changing Employment Rules in relation to payment conditions of ordinary wage, due procedures to be followed.
⇨ Labor and management need to go through consultations in case of changing regulations on ordinary wage
⇨ Any unfavorable change in the regulations requires approval of a majority employees
※ Ensure the regulation does not change without consultation with employees.
The principle of good faith applies up until the expiry date of the existing CBA (before new agreement is made).
⇨ Guide labor and management to reach an agreement through compromise and dialogue within the 1st half of this year
Provide guidance on reforming wage system based on job /performance
⇨ Simplify the composition of wages with base pay, performance-based bonus and certain allowances.
(End of the report)
Labor lawyers at Kim & Chang, one of the major law firms in Korea, published a Q&A Guide on employment laws and benefits of Korea in late 2013.
This guide titled “Employment and employee benefits in South Korea: overview” seems to be one of the best and most extensive guides on the subject that are currently available online.
What surprises me is that a post of this blog ranks #1 for Google search for “overtime system in Korea” when the post was not the best explanation on the topic. It may be because that there are too few relevant articles out there. That is why I write this new post on overtime system under the Korean labor law. I try to provide here a brief and essential information on the topic.
Wikipedia defines overtime as “the amount of time someone works beyond normal working hours.” So, for the definition of overtime in Korea, we should first find the definition of normal working hours.
Korean labor law defines normal working hours as 40 hours per week and 8 hours per day. (Article 50 of the Labor Standards Act). Therefore, Korean overtime is the time spent on work beyond 8 hours a day or 40 hours a week.
2. Limits for overtime
As long as an employer and an employee has an agreement, overtime is possible for up to 12 hours per week. Except for pregnant workers or female workers within 1 year after childbirth, there is no limit for daily overtime for adult workers.
3. Agreement on overtime
In principle, an agreement should be made between an employer and an individual employee for every instance of overtime work. However, according to Supreme Court rulings, it is possible to predetermine overtime in labor contracts or include such overtime agreement in the rules of employment or collective bargaining agreements as long as the individual workers’ right to agree on overtime is not denied or restricted.
4. Overtime pay
For each hour of overtime, 100% of hourly ordinary wage should be paid to a worker and additionally 50% of hourly ordinary wage should also be paid. In other words, for every 1 hours of overtime, 150% of hourly ordinary wage should be paid.
5. More than 12 hours of weekly overtime allowed for some businesses
With some businesses specified by labor law (article 59 of the Labor Standards Act), overtime exceeding 12 hours per week is allowed as long as there is a written agreement between an employer and a representative of employees.
These businesses are:
- transportation business
- goods sales and storage business
- finance and insurance business;
- movie production and entertainment business
- communication business
- educational study and research business
- advertising business;
- medical and sanitation business
- hotel and restaurant business
- incineration and cleaning business
- barber and beauty parlor business
- social welfare businesses
6. Workers who are exempt from overtime pay
Article 63 of the labor standards act lists four categories of workers who are exempt from work hours regulations of the act. Two categories of workers are important for most business.
A. surveillance or intermittent work, for which the employer has obtained the approval of the Minister of Employment and Labor. One example would be security guards.
B. managerial and supervisory work or work of handling confidential information irrespective of type of business.
The category B looks similar to the distinction between exempt and non-exempt workers under the Fair Labor Standards Act of the United States. But it is not formulated as much as in the US law. All we have, as something like a criteria to determine what kind of workers can be included in the category, is a guideline, not law, by the Ministry of Employment and Labor, which I translate below.
“Workers who are engaged in managerial and supervisory work” means those who are in the position that is integrated with management with regard to labor management such as determining working conditions. A mere title is not decisive factor to determine whether a person belongs to this category of workers. Rather a comprehensive examination should be made over factors such as whether a person is subject to strict restriction related to work hour arrangement, whether he participates in determination of labor management policy, whether he has the right to run labor management and whether he receives special allowance for his position.
“Workers who are engaged in work of handling confidential information” means someone whose work, such as a duty of secretary and others, is inseparable from the work of those who are engaged in managerial and supervisory work and who are not subject to strict restriction in terms of work hours. Again, the titles are not decisive criteria here.