We would like to bring your attention to important decisions recently rendered by the Supreme Court on employment & labor issues.
[Decision 1.] Wage Peak System Maintaining Retirement Age is Deemed Invalid
The Supreme Court 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, including 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 its 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 are somewhat abstract, it they will become increasingly specific and acknowledged pronounced with more case precedent precedents in the future, and the invalidity of each company’s wage peak system will be determined on a case-by-case basis. 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 toby 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 as 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.
[Decision 2.] Recent Supreme Court Decision regarding a Layoff (Urgent Business Necessity Requirement)
On June 9, 2022, the Supreme Court overturned a decision by the High Court (which had ruled that a layoff implemented by a company engaged in the steel pipe manufacturing business was unfair because it did not meet the “urgent business necessity” requirement under the law), and remanded the case back to the High Court (Supreme Court Decision 2017Du71604, June 9, 2022).
In its decision, the Supreme Court opined as follows:
“An urgent business necessity is not only limited to a situation where a company avoids tried to avoid insolvency, but also includes circumstances where a reduction in personnel is required in advance to cope with a possible crisis in the future. However, such personnel reduction should be acknowledged to be reasonable from an objective point of view.”
As to the company in question, the Supreme Court ruled that the “urgent business necessity” requirement was in fact met in light of the following reasons: (i) the industry itself under in which the company was doing business had suffered severe difficulties, such as a drop in international crude oil prices and a slump in the US energy industry; (ii) the accounting firm that studied the status of the company’s business conditions suggested that the company “faced a liquidity crisis”; (iii) the company recorded even lower revenue than expected as pointed out by the accounting firm; and (iv) the size of the company’s short-term loans significantly increased and the company’s assets were put on sale.
In addition, the Supreme Court ruled that (i) as part of its efforts to avoid layoffs, the company implemented the layoff process after a series of restructuring measures, including a voluntary retirement program, and thus, the layoffs may be justified even if the number of employees to be laid off is relatively small as a result of the company’s efforts to avoid layoffs, and (ii) the “urgent business necessity” requirement may not be deemed to have been met only when there are continuous accumulated deficits.
Interestingly, the first instance court (i.e., District Court) in the above case found that the layoff implemented by the company was justifiable. In particular, with respect to the legal requirement to demonstrate that the company made “efforts to avoid layoffs,” it is noteworthy that the first instance courtDistrict Court applied a more relaxed standard to determine the legitimacy of the layoff, citing the legal principle of the existing Supreme Court precedent that “the method and degree of efforts to avoid a layoff are not definitive and fixed, but depends on the degree of the employer’s managerial crisis, the managerial reason for the layoff, the content and size of the business, and the number of employees by position.”
For workplaces where layoff cases are pending or are expected to take place due to an urgent business crisis, it is advisable to carefully reviewwe advise careful review of the criteria for determining the “urgent business necessity” requirement proposed by the above Supreme Court decision and prepare in advance for legal disputes, etc. related to layoffs.