If Samsung Electronics paid employees performance bonuses to some fixed extent, they constitute "wages" as compensation for labor and must be reflected when calculating severance pay, the Supreme Court ruled.
The Supreme Court's Second Division (Presiding Justice Oh Kyung-mi) on the 29th overturned an appellate ruling that had ruled against 15 former employees of Samsung Electronics in their lawsuit seeking severance pay and sent the case back to the Suwon High Court.
◇ Target incentives paid twice a year, performance incentives paid once a year
Samsung Electronics, under standards set by its work rules, paid employees "target incentives" twice a year in the first and second half, and a "performance incentive" once a year. When the 15 plaintiffs left the company, Samsung Electronics calculated and paid their severance pay based on average wages that excluded the incentives.
Average wages are the amount obtained by dividing the total wages paid during the three months before retirement by the total number of days. A company must pay employees severance equal to at least 30 days' worth of average wages for every year of service. If average wages increase, severance pay also goes up.
Samsung Electronics' target incentive is money paid to employees based on evaluations of each business division and business unit's performance. The performance incentive is money distributed to employees, under certain criteria, from 20% of the EVA (economic value added, the amount obtained by subtracting the cost of capital from after-tax operating profit) generated by each business unit.
◇ Samsung Electronics did not reflect either target or performance incentives in severance pay
Previously, former employees of Samsung Electronics filed a lawsuit in June 2019, saying the company calculated and paid severance based on average wages that excluded "management performance bonuses," such as target incentives and performance incentives, and asked for the unpaid amounts.
This lawsuit was filed after a Supreme Court precedent changed in 2018. The Supreme Court held that management evaluation performance bonuses paid to employees of public institutions based on evaluations by the Ministry of Economy and Finance constitute compensation for labor and should be included in average wages. Since then, former employees of private companies have filed a series of lawsuits, arguing that "performance bonuses must be included in severance pay." There are more than 10 cases pending before the Supreme Court.
Samsung Electronics argued that management performance bonuses are determined by factors beyond employees' control, such as the global economy and management's judgment, and therefore are not compensation for labor. It also said that even if they were paid in the past, that does not mean they can continue to be paid going forward.
◇ "Target incentives are wages, performance incentives are not wages"
The Supreme Court found that target incentives are wages as compensation for labor and must be reflected in the calculation of severance pay. It said performance incentives cannot be regarded as wages that form the basis for calculating average wages. However, considering the purport of reversal, it fully quashed the lower court's ruling, saying it is necessary to calculate the difference in severance pay.
On target incentives, the Supreme Court said, "They are set by a pre-determined formula based on each employee's base pay," and judged them to be "fixed sums whose payout scale is determined to some extent in advance." It continued, "Because Samsung Electronics assigns concrete targets such as strategic tasks or sales performance and pays according to results, they are closely related to the provision of labor," adding, "They are closer to an ex post settlement of labor performance than to an ex post distribution of management performance."
By contrast, on performance incentives, it judged, "Whether EVA occurs and its scale are the combined result of other factors besides the provision of labor, such as the scale of equity and debt capital, the scale of expenditure, market conditions, and management judgment," adding, "They are closer to an ex post distribution of management performance than to an ex post settlement of labor performance."