Recently, a series of lower court decisions have affirmed that a performance bonus based on the company’s performance results (revenues, profits, etc.) constitutes the employee’s wage for purposes of calculating his/her statutory severance payment.
In this regard, the Supreme Court of Korea opined back in 2013 that a performance bonus should not be deemed “wages” on the basis that a company’s performance cannot be directly attributed to an individual’s performance or provision of work under an employment relationship (Supreme Court Decision 2012Da48077, April 11, 2013). In 2018, however, the Supreme Court overturned such decision in a case where employees at a government-owned corporation received their performance bonus based on performance assessments conducted by the Minister of Economy and Finance. Based on this 2018 Supreme Court decision, many employees in the private sector filed similar claims arguing that their performance bonus should be included in their average wage for statutory severance payment calculation purposes.
Following the foregoing Supreme Court decisions, the lower courts have taken varying positions on this issue. In cases where the criteria for payment of a performance bonus was not clearly established, the lower courts held that a performance bonus does not constitute average wage (please see the list below) because (i) there must be pre-established criteria for the payment of wage, and (ii) the performance bonus is not solely determined by an employee’s work and thus cannot be considered to be a payment in return for the employee’s work.
- Case #1 (semiconductor industry): Suwon District Court Decision 2020Na55510, February 4, 2021
- Case #2 (electronics industry): Seoul Southern District Court Decision 2020Na26085, June 17, 2021
- Case #3 (electronics industry): Seoul Southern District Court Decision 2020Na72056, August 20, 2021
However, the Seoul High Court, Seoul Central District Court, and other labor courts held that a performance bonus does constitute average wage (please see the list below) based on the following reasons: (i) even with the discretion to determine the criteria for a performance bonus, employers are still obliged to provide a performance bonus if it has been paid on a regular basis for a substantial period of time or there is an established policy/regulation for payment of the performance bonus, and (ii) the employee’s work has a direct and substantial impact on the company’s overall performance and in that regard, the performance bonus is a reward for such efforts by the employees.
- Case #4 (insurance industry): Seoul Central District Court Decision 2019Gahap538253, April 15, 2021
- Case #5 (electronics industry): Seoul Central District Court Decision 2019Gahap542535, June 17, 2021
- Case #6 (glass industry): Seoul High Court Decision 2020Na2012736, June 30, 2021
Similar to the issue of what is to be included in an employee’s ordinary wage that was ultimately resolved by the Supreme Court’s en banc decision in 2013, we expect the Supreme Court to also resolve the conflicting lower court decisions on performance bonuses including the Case #2 where the lower courts rendered conflicting decisions even under the same facts. We expect the Supreme Court’s decision on performance bonuses to have a greater impact since the ordinary wage issue primarily concerned companies in the manufacturing industry whereas performance bonuses concern employees across various industries.
It would be prudent for employers to closely monitor any developments on this issue as inclusion of a performance bonus in an employee’s average wage will likely have a significant impact, especially to those employers who have not included performance bonuses in the calculation of average wage. Specifically, we believe that employers under the following circumstances should carefully review their current practice in light of the recent lower court decisions: (i) where a performance bonus has been paid over a long period of time or there are established policies on the criteria and/or payment method for the performance bonus, (ii) where the performance bonus is paid on a regular basis without exception, and (iii) where the performance bonus reflects a substantial portion of the compensation provided to employees and the amount of the performance bonus paid to each employee is the same or similar.
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