On January 29, the Supreme Court rendered a ground-breaking decision regarding whether corporate performance-based bonuses constitute “wages” (Supreme Court Decision, 2021Da248299).

While the Supreme Court recognized performance bonuses as wages for public institutions back in 2018, it has taken a stricter case-by-case approach for the private sector. Historically, for a private sector performance bonus to qualify as wages, it had to satisfy the following three conditions:
 

• The bonus is paid in consideration for labor;

• The employer has an obligation to pay the bonus; and

• The bonus is paid continuously and regularly.
   

Specifically, regarding the “consideration for labor” criteria, the Supreme Court’s stance has been that a bonus constitutes wages only if it is “directly or closely related to the employee’s provision of labor.”

In this case, while reaffirming these existing legal principles, the Supreme Court distinguished between the two types of bonuses paid by Company S, (i) the performance incentive (“Profit Sharing” or “PS”), and (ii) the target incentive (“Productivity Incentive” or “PI”).

The Supreme Court ruled that while PS does not constitute wages, PI qualifies as such. Consequently, the Supreme Court held that previously paid retirement benefits (e.g., statutory severance) must be recalculated to include PI amounts. This decision is expected to have a profound impact on the calculation of retirement benefits and wage system practices going forward.

Which Facts Truly Matter? – Distinguishing PS from PI

In this case, Company S paid PS once a year and PI twice a year (semi-annually) based on targets specified in its Rules of Employment, but excluded both of these payments from retirement benefit calculations. The lower court agreed with Company S, viewing both PS and PI as distributions of profits rather than wages. However, the Supreme Court remanded the case, drawing a sharp distinction between the two.
 

• External Factors: The PS was funded by 20% of the division’s EVA. The Court noted that EVA is driven by factors beyond an employee’s labor and control, such as the amount in capital, expense levels, market conditions and executive decisions.

• High Volatility: The payout rate fluctuated wildly (0%-50% of annual salary) each year. The Supreme Court reasoned that the quantity and quality of an employee’s work do not fluctuate to such extremes.

• Profit Precondition: Since PS was conditional on the company generating EVA, it was viewed as a “post-facto distribution of profit” rather than a “post-facto settlement of labor.”
   

• Predictability: The payment formula was fixed in advance (i.e., base amount × departmental payment rate).

• Direct Link to Labor: The evaluation criteria (e.g., completion rate for strategic tasks, departmental ratings, etc.) were designed to reflect actual work performance rather than external market factors.

• Stability: The fluctuation range was stable (i.e., 0%-10% of annual salary), resembling variable pay within an institutionalized wage system rather than a temporary benevolent gratuity.
   

Significance of Ruling

On the same day, the Supreme Court issued a separate ruling regarding another company, deciding in favor of the company and finding that its “Special Performance Bonus” did not constitute wages. The Supreme Court reasoned that the bonus in question was strictly contingent on “realizing net income,” a metric heavily influenced by external (i.e., non-labor-related) factors. Furthermore, as the payout criteria were negotiated annually through labor-management agreements, the Supreme Court viewed it as a distribution of profits rather than a fixed wage obligation.

With numerous similar lawsuits currently pending, this decision provides much-needed clarity. By establishing a sharp distinction between bonuses tied to company-wide profits and those based on productivity goals, the Supreme Court has created a concrete framework for identifying which incentives truly function as consideration for labor.

[Korean Version]