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Court Decision Denying Inclusion of Incentive Payments as Wages


Kim & Chang’s Labor & Employment Practice successfully represented a foreign pharmaceutical company (the “Company”) in a labor dispute.  The court held that the Sales Incentive Plan (“SIP”) provided to sales employees and the Short Term Incentives (“STI”) provided to office employees (collectively referred to as “Incentives”) should not be deemed as wages under the Labor Standards Act (the “LSA”).

The Company’s collective bargaining agreement (the “CBA”) included a provision that stated that “incentives shall be excluded from the average wage, which serves as the basis for the calculation of retirement benefits” (hereby referred to as the “Provision”).  However, the Company’s labor union filed a lawsuit seeking the nullification of the provision on the grounds that it breached the mandatory provisions under the LSA and the Employee Retirement Benefit Security Act.

In this regard, the Seoul Central District Court held that incentives shall not be deemed as wages on the grounds that “as wages are paid to employees on a continuous and regular basis and companies are obliged to provide them in return for employees’ labor, it is difficult to consider incentives as part of the average wage.”  The Court further elaborated on its decision as follows:

  • First, incentives are divided into SIP and STI, which are slightly different in terms of eligibility and payment method.  However, as the two payments are determined and paid each year pursuant to the guidelines issued by the HQ, they are very similar in nature.

  • Second, as incentives are determined each year based on the HQ guidelines, the amount, payment criteria, etc. of incentive payments vary each year.  It is therefore difficult to conclude that incentives are a fixed payment that is determined in advance.

  • Third, there is no provision under the Rules of Employment or the CBA that obliges the Company to provide incentives.

  • Fourth, it is difficult to conclude that the payment of incentives is inherently related to the employee’s provision of labor as the conditions for payment, proportion of payments, etc. are affected by various factors (e.g., business circumstances, management decisions, etc.) that cannot be controlled by individual employees.

We emphasized the unique nature of incentives by highlighting the HQ’s discretion over incentives and making distinctions from those provided by domestic companies.  We further argued that incentives do not fulfill conditions under the “wage” criteria provided by the Supreme Court, and in doing so, successfully represented the Company in this lawsuit.

Recently, there have been multiple lower court decisions with conflicting decisions on the nature of performance bonuses.  This case is particularly meaningful in that it has confirmed that performance bonuses, which are paid annually based on the business performance of the company without a pre-determined payment criteria, are not directly or closely related to employee’s provision of labor and thus cannot be deemed as compensation in return for labor.  It will likely serve as an important precedent for cases involving incentives provided by foreign companies in Korea.