The Supreme Court just rendered an unprecedented decision to the effect that a wage peak system, under which a company gradually reduces the salaries of employees aged 55 years or older prior to retirement, while maintaining the employees’ previous retirement age of 61, is deemed null and void and in violation of Article 4-4 (1) of the Act on Prohibition of Age Discrimination in Employment and Aged Employment Promotion (Supreme Court Decision 2017Da292343, May 26, 2022). Despite the fact that the system was introduced and implemented under an agreement with the company’s labor union, the Court opined that the system constituted discrimination against employees on the basis of their age without any justifiable grounds.
In particular, the Supreme Court ruled that, whether or not the wage peak system is invalid should be determined by taking into account various circumstances such as the following: legitimacy and necessity behind introduction of the wage peak system; degree of disadvantages to the affected employees, such as the scope and duration of the wage reduction; whether the measures subject to wage reduction, including whether the demanded workload or level of work intensity equivalent to their wage reduction was likewise reduced for the employees; and whether the money saved through the system was indeed used for its original purpose behind the system’s implementation.
More specifically, the Supreme Court ruled that the wage peak system in this case was promoting unreasonable age discrimination on the grounds that (i) even if the wage peak system was introduced to enhance efficient management of the business, such as alleviating the company's burden of continuously rising labor costs, the wage reduction could not be justified under the circumstances (i.e., legitimacy of the purpose was denied), and (ii) even though application of the system caused wages to drop significantly, no appropriate measures were taken to alleviate the impact thereof, and there was no difference in an employee's target work level or work duties before and after application of the wage peak system (i.e., insufficient measures to alleviate the wage reduction).
Although the criteria above presented by the Supreme Court is somewhat abstract, it will become increasingly specific and acknowledged with more case precedent in the future, and the invalidity of each company's wage peak system will be determined on a case-by-case basis. For example, on the day the aforementioned Supreme Court Decision was rendered (May 26, 2022), the Supreme Court dismissed an appeal without further deliberation in a different case where the lower court held that the wage peak system was valid, rendering the lower court's decision final and conclusive. It is our understanding that the Supreme Court has also assumed that the validity of the wage peak system may vary depending on the type of system each company has, as well as the arguments and evidence submitted in support thereof with other cases.
If the wage peak system is invalid according to the criteria presented by the Supreme Court above, (i) retirees and other employees whose wages have already been reduced due to application of the wage peak system may make a claim for back pay as to the difference in salary under the wage peak system and if it were not applied to the employee; (ii) employees to whom the wage peak system is set to apply to may refuse this change and oppose their wage reduction; and (iii) even if the wage peak system was introduced and implemented with the union’s consent or through a collective bargaining agreement, labor unions may claim that the system is illegal or invalid and may file a lawsuit demanding for abolition of the system or seeking confirmation of the invalidity thereof.
Therefore, companies that have adopted or intend to adopt the wage peak system must set up a specific structure of the wage peak system and thoroughly review and prepare for any and all contingencies, including, whether the wage peak system can be deemed invalid based on the criteria presented by the Supreme Court, and whether the risk of invalidation can be reduced by supplementing the wage peak system, such as mitigating the scope or period of the wage reduction or seeking appropriate measures to relieve the impact of the wage reduction.
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