The Supreme Court ruled that welfare points are not wages, and thus do not constitute ordinary wages*.
Prior to this ruling, there had been no Supreme Court decision that directly dealt with whether welfare points constituted ordinary wages and/or should be considered in calculating average wages**, and the lower courts were inconsistent in their views as to “whether the provision (allocation) of welfare points could be seen as the payment of wages or money and other valuables.”
* “Ordinary wages” are all wages paid to employees regularly, uniformly and on a fixed basis for their prescribed labor. It is the basis for making calculations of certain payments to employees, such as those for overtime, nighttime and holiday premiums, the allowance for unused annual paid leave, and payments made in lieu of statutory notice of involuntary separation.
** “Average wages” are calculated based on all wages, salaries and any other money and valuable goods an employer pays to an employee for his or her work in the last three calendar months prior to the date on which the event necessitating the calculation occurred (such as a separation from employment, as the statutory severance amount is based on average wages).
The Supreme Court’s en banc decision found that the welfare points provided by Seoul Medical Center to its employees did not constitute wages. “Welfare points” refer to points provided by employers to their employees for limited purposes related to employee welfare, such as travel, health care, cultural pursuits and self-improvement and which can only be used at designated shopping malls or stores. Similar to other companies, the Center’s points are granted on January 1 of each year to eligible employees (employees who are on leaves of absence, who retired in the middle of a year, and/or who newly joined the company, are granted points on a pro rata basis), the usage of the points is limited to certain areas designated by the company, and any unused points expire at the end of the year.
The majority opinion, joined by eight justices, found that the welfare points did not constitute wages, and thus did not constitute ordinary wages, as the points were not provided as consideration for labor. The decision was based on the following grounds:
- the Framework Act on Labor Welfare, which provides the legal basis for selective welfare systems2 such as welfare points, expressly excludes wages from the concept of employee welfare;
- the current selective welfare system was introduced to change the previous system, which focused on welfare allowances based on wages, to an actual corporate welfare system;
- the usage of the welfare points is limited, any points unused within one year do not carry forward and instead expire, and the points are not transferable;
- the welfare points were granted at the beginning of each year to all employees regardless of whether they actually provided labor or not; and
- most business places do not list welfare points as “compensation” or “wages” in their collective bargaining agreements or rules of employment.
In addition, the majority opinion also noted that:
- the term “welfare points” is a convenient term of art to refer to the underlying benefits and does not refer to any actual compensation;
- the act of allocating welfare points by the employer does not create any actual profits to its employees and does not require the employer to pay any expenditure; and
- the Labor Standards Act (Article 43) requires an employer to pay wages directly, fully and in currency to its employees at least once a month; therefore classifying welfare points as wages would have the perverse result of potentially establishing grounds for the criminal prosecution of employers who do not have similar policies for points in place as they do for other forms of compensation.
While this decision provides some clarity on the matter, considering the fact that the forms of welfare points differ from company to company, the possibility remains that lower courts may find that welfare points are included in the scope of wages in some particular cases, such as when employees can immediately exchange their welfare points for gift cards, securities or money. Therefore, companies should carefully examine their policies regarding welfare points and take into consideration any differences from the program described in the en banc decision.
2 “Selective welfare systems” refer to systems in which employees voluntarily choose certain welfare benefits based on their own preferences and needs.