Korean Supreme Court Redefines Ordinary Wage: Implications for Overtime Pay and Other Statutory Allowances

On December 19, 2024, a unanimous Korean Supreme Court partially overturned its 2013 “ordinary wage” precedents, which may require many employers to revise their compensation practices. These decisions primarily affect employers that pay fixed regular bonuses but exclude those amounts when calculating the base rate for overtime pay and other statutory entitlements. This is a more common practice at Korean companies, but may be less common among foreign companies. 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 base rate for employees’ statutory severance benefits: “average wage.” Our Korean newsletter, which includes a link to a webinar on January 3, 2025, is available at this link. ??

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Background

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 notice, and compensation for unused leave. It can also indirectly affect statutory severance benefits in certain cases. This is for two reasons: (i)?first, although severance pay is based on a different base rate—average wage rather than ordinary wage—average wage is defined so that it cannot be lower than ordinary wage; and (ii)?second, overtime pay, calculated from ordinary wage, contributes to the computation of average wage.

Back in 2013, many employers excluded payments like “fixed regular bonuses” (for example, 600% of monthly salary paid in bi-monthly installments) from ordinary wage calculation. They justified this by distinguishing these bonuses from monthly salary and allowances. But the Supreme Court’s 2013 decisions forced many employers to start including such regular fixed bonuses.

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. And 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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Recent Changes

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.

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Implementation and Compliance

The Court’s decision is effective prospectively or for already-pending cases. So employees who do not already have claims pending at a court will not be able to commence any legal action based on payments prior to the date of the decision: December 19, 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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Action Items for Employers

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 December 19, 2024.

Compensation that is not paid regularly and uniformly for an employee’s regular contractual work, will still not be included in employees’ ordinary wage. What is paid in return for an employee’s regular contractual work may be subject to dispute. However, compensation like variable incentives or commissions, while a detailed criterion is not explicitly addressed by these decisions, are expected to fall outside the new definition of ordinary wage—except to the extent there is any fixed, minimum guaranteed amount.

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Other Considerations

These decisions also do not appear to have invalidated a Payment-Date Requirement or a Service-Period Requirement. The Court only held that such conditions do not prevent compensation from being included in employees’ ordinary wage. But it did not explicitly invalidate the conditions themselves.

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. ?

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