Guidelines on Ordinary Wages

Transcription

1 Guidelines on Ordinary Wages January 2014 고용노동부 노사지도지침-리플렛영문.indd 오후 3:11

2 This translation of Guidelines on Ordinary Wages is intended mainly as a convenience to the non-korean-reading public. If any questions arise related to the accuracy of the information contained in the translation, please refer to the official Korean version of the laws(www. moel.go.kr). Any discrepancies or differences created in the translation are not binding and have no legal effect for compliance or enforcement purposes. 고용노동부 노사지도지침-리플렛영문.indd 오후 3:11

3 Part 1 Background Ordinary wages refers to wages that are ordinarily paid to employees and are used as the basis for calculating statutory allowances, such as additional pay for overtime work. * ordinary wages means hourly, daily, weekly or monthly wages or contract wages which are determined to be paid periodically to a worker for his/her prescribed or entire work.(article 6 of the Enforcement Decree of the Labor Standards Act) The continued practice of working long hours during the period of economic growth led to more various types of allowances, thus making wage structures complicated. As a consequence, discrepancies arose between court rulings on ordinary wages and the relevant regulations established by the Ministry of Employment and Labor in 1988 (Guidelines for Ordinary Wage Calculation), causing controversy over their interpretations. Part 01_ Background 001 Against this background, the full bench of the Supreme Court delivered a ruling on December 18th, 2013, in which it set out its position on ordinary wages after a comprehensive consideration of the relevant interpretations made by courts so far. The Supreme Court made clear that regular bonuses and various allowances, such as welfare benefits, should be paid on a regular, uniform and fixed basis if they are to be included in ordinary wages. Meanwhile, it held that claiming retroactive payments in relation to fixed regular bonuses is not allowed on the ground of the good-faith principle.

4 One challenge that has emerged as a result of the Supreme Court ruling is to help workers and employers clearly understand the legal principles and standards of the ordinary wage system, revamp their complicated wage structures and reform their wage systems in a future-oriented manner. In response, the government plans to revise the provisions of the Labor Standards Act and its Enforcement Decree concerning the ordinary wage system and overhaul the relevant regulations after a tripartite discussion in the first half of this year. Guidelines on Ordinary Wages In order to prevent unnecessary confusion and conflict over the calculation of ordinary wages between labor and management, which will start wage and collective bargaining soon, the government provides these guidelines based on the Supreme Court ruling. 002

5 Part 2 Key points of the Supreme Court ruling The ruling delivered by the full bench of the Supreme Court on December 18th, 2013 summarizes legal principles on ordinary wages and sets out criteria for judging various cases concerning ordinary wages. + The Supreme Court ruling reaffirms that if payments made at intervals longer than the one-month pay period are of a regular, uniform and fixed nature, they are included in ordinary wages; concretely explains the requirement of fixedness, which has been a contentious issue so far; and does not allow workers to claim unpaid regular bonuses in accordance with the good-faith principle. Part 02_ Key points of the Supreme Court ruling Definition and characteristics of ordinary wage The Supreme Court defines ordinary wages as wages that are certainly paid to employees if they have provided the services prescribed in their labor contracts. Whether a certain payment qualifies as part of ordinary wages is judged based not on formal criteria, such as its name or length of payment interval, but on whether its objective attributes meet the legal requirements for ordinary wages.

6 Ordinary wages are base pay used to calculate overtime allowances etc. Therefore, they should represent the monetary value of work ordinarily done during the prescribed working hours set out in the labor contract. (compensation for prescribed work) Accordingly, additional payments made for extraordinary services (e.g. overtime work) not stipulated by the labor contract do not constitute part of ordinary wages. Ordinary wages should also be predetermined before the employee actually work overtime. Guidelines on Ordinary Wages 2. Judgment criteria for ordinary wages 004 Compensation for prescribed work Compensation for prescribed work is defined as "payments an employer has promised to make to an employee for the services he/she ordinarily provides during his/her prescribed working hours". The following payments cannot be considered compensation for prescribed work: ❶ Payments received by an employee for providing services beyond his/ her prescribed working hours; ❷ Additional payments received by an employee from his/her employer for providing extraordinary services other than the ones laid down in his/her labor contract; and

7 ❸ Payments received by an employee, which have nothing to do with services provided during his/her prescribed working hours. However, it cannot be said that payments are not considered compensation for prescribed work just because they have not provided immediately, or within a short period, after the employee worked during his/her prescribed working hours. Regularity Regularity refers to whether payments are made at pre-fixed, regular intervals. Payments made at fixed intervals in a continuous manner can be part of ordinary wages even if the payment intervals exceed one month. According to the Supreme Court, the one-month payment interval is not considered a prerequisite for ordinary wages on the following grounds. Part 02_ Key points of the Supreme Court ruling 005

8 [ Grounds on which the one-month payment interval is not considered a prerequisite for ordinary wages ] ❶ The principle of regular payment set out in Article 43 (2) of the Labor Standards Act* is aimed at ensuring livelihood security for workers, so it cannot be interpreted as meaning that payments made at intervals exceeding one month are excluded from ordinary wages. * (Article 43 (2) of the Labor Standards Act) Wages shall be paid at least once per month on a fixed day; however, this shall not apply to extraordinary wages, allowances, or any other similar payment, or those wages provided for by the Presidential Decree. Guidelines on Ordinary Wages 006 ❷ Hourly, daily, weekly, monthly wage, etc., referred to in Article 6 (1) of the Enforcement Decree of the Labor Standards Act which provides the definition of ordinary wage are just an illustration of different types of wages calculated and paid based on different periods. * (Article 6 (1) of the Enforcement Decree of the Labor Standards Act) Ordinary wages means hourly, daily, weekly or monthly wages or contract wages which are determined to be paid periodically to a worker for his/her prescribed or entire work. ❸ Payments other than those made regularly at least once a month to ensure livelihood security for workers are excluded from wages that can be used for comparison with the minimum wage. However, this does not mean that the scope of ordinary wages should be limited to payments made at on-month intervals * Therefore, payments made on a regular basis are considered satisfying the 'regularity' requirement even if they are paid at intervals longer than one month, bimonthly, quarterly (3 months), biannually (6 months) or annually, for example.

9 Uniformity Uniformity is a concept that covers not only payments made to all employees but also payments made to all employees who meet certain conditions or standards. Payments should be made uniformly to qualify as part of ordinary wages. Certain conditions or standards must be conditions by which the value of prescribed work, such as work content, skills and experience, can be assessed. * Certain conditions must be fixed conditions that do not change from time to time. Part 02_ Key points of the Supreme Court ruling 007

10 [ Application of the uniformity requirement ] ❶ Even in cases where a collective agreement or employment rules provide for restrictions on certain payments to employees on leave of absence, reinstated employees and employees subject to disciplinary action, as this is simply to take account of the personal distinctiveness of the employees concerned, such payments are considered to be made uniformly to employees who maintain a normal employment relationship. ❷ Family allowance Guidelines on Ordinary Wages 008 If family allowance differs according to the number of dependant family members, it is not considered to be based on a certain condition or standard related to work performed, and thus does not satisfy the uniformity requirement (genuine family allowance). However, if a base amount is paid equally to all employees, and an additional amount is paid based on the number of dependent family members, the base amount qualifies as part of ordinary wages. Family allowance paid to all employees in the form of a fixed base amount is included in ordinary wages.

11 Fixedness Payments are considered to be of a fixed nature only when whether to make those payments is predetermined regardless of achievements, performance and other additional conditions before overtime work is performed. Fixed payments, whatever their names are, refers to minimum payments that will be duly and certainly made to employees who have worked a prescribed number of hours even if they retire the following day. Judgment criteria Fixedness should be judged based on whether it is certain that the payment will be made irrespective of achievements, performance and other additional conditions at the time of working overtime. (predeterminacy). Additional conditions means conditions whose fulfillment is uncertain at the time of working overtime. Part 02_ Key points of the Supreme Court ruling 009 Therefore, payments that are made only when additional conditions, other than performance of labor, are met or payments whose amount changes depending on whether such conditions are met or not are considered to lack fixedness. However, those parts of a payment which do not change depending on additional conditions are considered fixed. Performance-based pay whose payment or amount changes depending on actual work performance is a typical example that cannot be classified as ordinary wages because of its lack of fixedness.

12 However, even in such cases, guaranteed minimum performancebased pay is considered a fixed payment that can be received by any employee regardless of his/her work performance, and thus is classified as ordinary wages. According to the Supreme Court ruling, payments made only to employees working for the company on the date of payment or at any other specific point in time are considered to lack fixedness. Guidelines on Ordinary Wages Labor-management agreement on ordinary wages A labor contract which establishes wages and other working conditions falling short of the standards provided for in the Labor Standards Act is null and void (Article 15 of the Labor Standards Act). The Supreme Court confirmed that even if labor and management have agreed to exclude regular bonuses, etc., classified as ordinary wages by law from ordinary wages, such an agreement is invalid because it violates the Labor Standards Act. Therefore, payments classified as ordinary wages by law should be included in the calculation of an employee's ordinary wage, and then based on the resulting ordinary wage, his/her overtime allowance can be calculated again. The employee may claim retroactive payments equal to the difference between the amount already paid and the newly calculated amount. (However, such a claim can be made only with respect to the three years immediately preceding that claim if the employer asserts the statute of limitations.)

13 4. Application of the good-faith principle 1) and prohibition of claims for additional payments A labor-management agreement to exclude payments legally belonging to ordinary wages from the calculation of ordinary wages is invalid since it is in breach of the Labor Standards Act. However, if the agreement meets the good-faith requirements, it is not allowed to claim additional payments. The applicable good-faith requirements are as follows: ❶ The wage components not included in the calculation of ordinary wages should be regular bonuses. * Regular bonuses refer to bonuses that are paid at regular intervals of more than one month in return for work performed over a given period of time. ❷ Having confidence that their regular bonuses are not classified as ordinary wages, the labor and management have agreed to exclude such bonuses from ordinary wages, and based on that agreement, they have established other wage-related conditions, such as a wage increase rate. * Labor-management agreements include not only explicit agreements, such as collective agreements, but also implicit agreements or labor practices. Part 02_ Key points of the Supreme Court ruling 011 ❸ If employees claim additional payments, the unexpected financial burden imposed as a result could cause serious business difficulties to the company or jeopardize its existence. * Judgment criteria presented in the Supreme Court ruling:ⅰ) Regular bonuses account for 600% of basic pay. ⅱ) Overtime work is routinely used. ⅲ) Making additional payments would increase actual wages by far more than the increase rate agreed upon during collective bargaining. ⅳ)Such a payment would lead to an increase in allowances for unused annual leave. 1) The good-faith principle is a grand principle of modern law which holds that the parties to a legal relationship should give consideration to the other party s interests and should not exercise their rights in a manner that goes against fairness or betrays trust. This is an abstract, general norm applicable to all legal areas.

14 Part 3 Guidelines for labor and management Based on the Supreme Court ruling, the Ministry of Employment and Labor (MOEL) is pushing for legislative and regulatory amendments to improve the ordinary wage system after a tripartite discussion. MOEL will complete the institutional reform as soon as possible. Guidelines on Ordinary Wages 012 There will be a sort of transitional period until the revision of the Labor Standards Act and relevant regulations is completed. During that period, it is necessary to make workers and employers prepare for the implementation of the new ordinary wage system, for example by adjusting their wage systems in line with the intent of the Supreme Court ruling and these guidelines. Local labor offices will have to provide active guidance and support to workers and employers so that they can clearly understand the details of the Supreme Court ruling and these guidelines and promptly reform their wage systems in a future-oriented manner through consultation. + As for disputes over the interpretation of the Supreme Court ruling, including the application of the good-faith principle, workers and employers will be advised to resolve such disputes amicably through dialogue in good faith in accordance with the intent of the ruling that emphasizes the good-faith principle. + In the process, workplaces will be assisted in simplifying their complicated wage structures and transforming their wage systems into a job- and performance-based one.

15 1. Direction of guidance (Judgment criteria for ordinary wages) Local labor offices will provide guidance for workers and employers, so that they can clarify their ordinary wage criteria according to these guidelines. * As explained earlier, the Supreme Court ruling sets out specific judgment criteria, including the definition of ordinary wage, compensation for prescribed work and the requirements of regularity, uniformity and fixedness. * The ruling is expected to have binding force in other cases as well given Korea's judicial hierarchy. Judgment based not on payments' names but substance Part 03_ Guidelines for labor and management The courts make their decisions based not on the names but the substance of payments. Accordingly, workplaces will be advised to judge whether a certain bonus or allowance constitutes part of ordinary wages not on the basis of its name but of objective attributes, such as payment conditions and operation status. 013 * If a payment is considered compensation for prescribed work in substance and satisfies the regularity, uniformity and fixedness requirements, it is included in ordinary wages even if it is called welfare allowance. Judgment on compensation for prescribed work Workplaces will be advised to make an overall judgment based on how the value of services ordinarily provided by employees during their prescribed working hours is assessed and how much money is paid in compensation for such services.

16 Judgement on regularity Regularity means that payments should be made at regular intervals in a continuous manner if they are to qualify as part of ordinary wages. Thus, payments made at intervals exceeding one month are just installment payments made at intervals of more than one month in compensation for prescribed work. Therefore, workplaces will be advised not to exclude payments from ordinary wages just because their interval exceeds one month. Guidelines on Ordinary Wages 014 Based on these criteria, regular bonuses paid at intervals longer than one month can be part of ordinary wages when they satisfy the regularity requirement (Their fixedness should be judged separately.) Judgment on uniformity Not only payments made to all employees but also payments made to all employees who meet certain conditions or standards satisfy the uniformity requirement. Certain conditions or standards mentioned here include length of service as well as various types of qualifications or licences. Judgement on fixedness Ordinary wages are basic pay used to calculate overtime allowances, etc., so they must be predetermined before overtime work, etc., is actually performed (pre-determinacy) To judge the fixedness of a certain payment, workplaces will be advised to see whether its payment conditions can be satisfied at the time of performing overtime work.

17 Workplaces will be reminded that payments made only to employees working for the company at a specific point in time are not of a fixed nature since whether those employees are working at that specific point in time is uncertain at the time of performing overtime work. Therefore, workplaces will be advised that among regular bonuses satisfying the regularity requirement, those whose payment is limited to "employees working for the company at a specific point in time" should be excluded from ordinary wages because of their lack of fixedness. * The Busan High Court ruled on January 8th, 2014 (2012Na7816) that a bonus of 380% of an employee s monthly full salary which is paid (in four equal installments (95%) over one year) only to employees who have worked for the company for more than one year and are being employed on the payment date does not qualify as part of ordinary wages because of its lack of fixedness. + Application examples Payments which change based on length of service (long-service allowance, etc.) Part 03_ Guidelines for labor and management 015 Payments for which whether to make a payment or the amount of payment changes based on length of service * (e.g.) payments which are made only after several years of service or whose calculation method or amount changes based on length of service Included in ordinary wages (Considered uniform) Length of service is considered a certain condition or standard associated with labor, which is one of the uniformity requirements. (Considered fixed) How long an employee has worked is certain at the time of performing overtime work.

18 Payments which change based on the number of days worked Payments that are made in a certain amount for each day worked * (e.g.) payments made at a daily rate for the number of days worked Included in ordinary wages (Considered fixed) It is certain that as long as an employee provides prescribed services on a given day, he/she will get paid a certain amount in return for such services. Payments that are made only when an employee has worked for a certain number of days Guidelines on Ordinary Wages 016 * (e.g.) payments made only when an employee has worked for more than 15 days a month Not included in ordinary wages (Not considered fixed) An employee should not only provide prescribed services but also satisfy additional conditions, such as a certain number of days worked. As a result, it is impossible to determine the amount of overtime allowance at the time of doing extended, night or holiday work, and therefore such payments cannot be considered fixed. Payments whose calculation method or amount changes depending on the number of days worked * (e.g.) payments which are made in full if the number of days worked is 15 or more, but are made at a daily rate only for those days worked if the number of days worked is fewer than 15. Such payments can be considered fixed to the extent that it is certain that at least more than a certain amount will be paid if prescribed services are provided. * The minimum daily amount calculated in the above example qualifies as part of ordinary wages.

19 Payments which are made only to employees working for the company at a specific point in time Payments that are made only to employees working for the company on the payment date or at any other specific point in time regardless of whether they have provided prescribed services Not included in ordinary wages (Not considered compensation for prescribed work) Such payments are contingent on being employed regardless of any work done. (Not considered fixed) Whether the employee will be working for the company at that specific point in time is not certain at the time of performing overtime work. Payments whose amount changes based on the number of days worked even if the employee retires before a specific date * (e.g.) payments made at a daily rate upon retirement Part 03_ Guidelines for labor and management 017 Only payments made in proportion to the number of days worked are included in ordinary wages. (Considered fixed) If such payments are made in proportion to the number of days worked even if the employee retires prior to the specific date, only the pro rata share of the payments are considered fixed.

20 Payments which change based on work performance (performance pay, etc.) Payments for which whether to make a payment or the amount of payment is determined based on an evaluation of work performance In general, performance pay is not included in ordinary wages. However, minimum performance pay that even employees getting the lowest performance rating are eligible to receive is included in ordinary wages. Guidelines on Ordinary Wages 018 * (e.g.) If a company rates its employee's work performance A, B or C and pays one million won to those rated C, the lowest grade, every employee is guaranteed a minimum of one million won in performance pay, and therefore only one million won qualifies as part of ordinary wages (The rest is not included in ordinary wages). Payments for which whether to make a payment or the amount of payment for the relevant year is determined based on an employee's job performance in the previous year Included in ordinary wages (Considered fixed) Whether to pay performance pay, etc., or the amount of payment is predetermined prior to the relevant year when overtime work is done. Therefore, such payments are considered fixed. * (e.g.) annual performance pay (Not considered fixed) If there is a special circumstance where a payment that usually would have been made in the previous year is deemed to have just been postponed, it cannot be considered fixed, like performance pay in general.

21 Payments which are conditional on special skills, experience, etc. (qualification allowance, etc.) Payments which are conditional on special skills or particular experience * ( e.g.) allowances that are paid if an employee has a particular qualification or skills Included in ordinary wages (Considered fixed) Whether an employee has special skills or particular experience is certain at the time of performing overtime work, and therefore such payments are considered fixed. Part 03_ Guidelines for labor and management 019

22 Type of payment included/not included in ordinary wage Guidelines on Ordinary Wages 020 Name Technical allowance Long-service allowance Family allowance Performance based pay Bonus Payments contingent on being employed at a specific point in time Features Allowance paid to employees with certain skills or a qualification (qualification allowance, licence allowance, etc.) Allowance whose payment or amount changes based on length of service Family allowance which changes based on the number of dependant family members Family allowance paid to every employee regardless of the number of dependant family members Performance pay whose payment or amount is determined after an evaluation of work performance Guaranteed minimum performance pay Bonus certain to be paid regularly (regular bonus) Bonus paid temporarily or irregularly at the discretion of the employer according to business results (profit-sharing allowance, encouragement allowance, incentive) Payments made only to employees working for the company at a specific point in time(new Year/Chuseok bonuses or holiday bonuses often fall into this category.) Payments made in proportion to the number of days worked if an employee retires before a specific date Whether payment is included in ordinary wage or not Included Included Not included (The condition has nothing to do with work performed.) Included (It is family allowance only in name and considered to be of a uniform nature.) Not included (It depends on whether certain conditions are met and is not considered fixed.) Only the guaranteed minimum amount included (The guaranteed minimum amount is paid on a uniform and fixed basis.) Included Not included (It is neither predetermined nor considered fixed.) Not included (They are neither compensation for labor nor considered fixed.) Included (Only the pro rata share of the payments is considered fixed.) * Source: a press release about the Supreme Court ruling issued on Dec. 18, 2013

23 In cases where a workplace makes changes to its employment rules, thorough guidance will be provided to ensure compliance with the procedural requirements prescribed by law. (Consultation in good faith) If a workplace adjusts its conditions for ordinary wage payment, it will be advised to modify them in a rational way through good-faith consultation between labor and management. (Compliance with relevant procedures in the case of unfavorable alteration)if a workplace inevitably has to alter its payment conditions in a manner unfavorable to employees, it will be advised to faithfully comply with the procedures laid down in Article 94 (1) of the Labor Standards Act, which should be followed if any unfavorable alteration is made to employment rules. * Article 94 (1) of the Labor Standards Act: Prior consent should be obtained from a trade union composed of a majority of the employees or from a majority of the employees. Part 03_ Guidelines for labor and management 021 (Exceptional case) Where employment rules stipulate that ordinary wages should be determined according to the existing Guidelines for Ordinary Wage Calculation, if a payment which used to be included in ordinary wages is excluded from them according to the Supreme Court ruling despite the fact that no change has been made to the payment conditions, and as a result, the amount of ordinary wage is reduced, this is not considered an unfavorable alteration to the employment rules. (Application of the good-faith principle) The good-faith principle will be made more concrete by future court rulings that will be given on a caseby-case basis. The government, for its part, will provide guidance as follows, taking account of the Supreme Court ruling.

24 Payments subject to the good-faith principle Workplaces will be reminded that the Supreme Court ruling stated that the good-faith principle is applicable only to regular bonuses. * Supreme Court ruling: Cases where it is not allowed to claim additional payments in accordance with the good-faith principle (requirements for the application of the good-faith principle) 1The good-faith principle can apply only to regular bonuses (Other payments are not subject to the principle.) Application requirements Guidelines on Ordinary Wages 022 The employer and employees concerned have agreed to exclude regular bonuses from ordinary wages in the belief that those bonuses do not qualify as part of ordinary wages, and based on that agreement, they have set other wage conditions, such as a wage increase rate. Such labor-management agreements include not only explicit agreements, such as collective agreements, but also implicit agreements or labor practices. Thus, the good-faith principle can apply even to agreements which are not wage or collective agreements. Serious business difficulties are a matter that should be judged by the courts based on individual companie s specific circumstances. Application period (until when claims for additional payments are restricted) The Supreme Court ruling says that the good-faith principle will not apply to any agreement made after this ruling is issued. This ruling refers to the Supreme Court ruling, so the principle of good faith is considered not to apply to any new agreement reached after

25 the date of the Court's decision (Dec. 18, 2013) (after the date of expiration in the case of agreements* reached before the decision date but due to expire after the decision date). * In the case of implicit agreements or labor practices, the application period is considered to end on the periodic wage adjustment date of the relevant workplace that arrives after the date on which the Supreme Court rendered the decision. In its ruling, the Supreme Court provided clear criteria for ordinary wages and approved the good-faith principle. In light of the intent of the ruling, the government will provide guidance to workers and employers, so that they can resolve their differences amicably through consultation in good faith before the expiration of their existing agreements, if possible, in the first half of this year. * In the case of wage or collective agreements, the good-faith principle will apply until the expiration of their term given the intent of the Supreme Court ruling which notes that wages have usually been adjusted based on the sum of wages. Guidance will be provided to ensure that workers and employers actively discuss reform of their wage systems instead of arguing over legal principles or pursuing time-consuming litigation. Part 03_ Guidelines for labor and management 023 (Reform of wage systems) Individual workplaces will be advised to clarify their criteria for ordinary wages and reform their practice of working long hours and wage systems in a forward-looking manner. Korean companies have a wage structure in which regular payments, such as a basic pay, represent a small proportion while special payments, such as various types of allowances and bonuses, and overtime payments due to long working hours account for an excessively large share. In addition, wages are weakly tied to jobs or performance, and step- and seniority-based pay systems are common in Korea.

26 As a result, wages have poorly reflected the value of work performed and productivity gains, and there has been a lack of predictability and rationality in wage-setting. All this has caused confusion whenever wage bargaining is conducted. In order to enhance productivity, reform the practice of working long hours and raise retirement ages without a decrease in employment, it is necessary to reform companies' wage systems into job- and performance-based ones. Guidelines on Ordinary Wages Therefore, workplaces will be advised to transform their wage structures into a simple and clear one which 1 is composed mainly of a basic pay to ensure basic income security for workers, 2 offers pay based on job performance, and 3 pays certain amounts of allowances according to job characteristics. 024

27 This translation of Guidelines on Ordinary Wages is intended mainly as a convenience to the non-korean-reading public. If any questions arise related to the accuracy of the information contained in the translation, please refer to the official Korean version of the laws(www. moel.go.kr). Any discrepancies or differences created in the translation are not binding and have no legal effect for compliance or enforcement purposes. 고용노동부 노사지도지침-리플렛영문.indd 오후 3:11

28 Guidelines on Ordinary Wages January 2014 고용노동부 노사지도지침-리플렛영문.indd 오후 3:11