Some of the lawsuits filed by retirees asking that performance bonuses received while employed be reflected in severance pay were finalized for the first time by the Supreme Court on the 29th. In a suit brought by a Samsung Electronics retiree, the court found that among two types of performance incentives (target and performance incentives), only the "target incentives" should be included in calculating severance pay, while in a suit filed by a Seoul Guarantee Insurance Company retiree, the court held that performance bonuses are not reflected in severance pay.
In these rulings, the Supreme Court drew a line based on whether a performance bonus qualifies as "wages." Compensation that workers receive for their own labor performance can be viewed as wages, but performance bonuses that distribute profits arising from management performance or market conditions are not wages. In effect, the rulings specify the definition of wages as "remuneration, pay, salary, allowances, and bonuses that a worker receives from the employer in return for labor."
◇Samsung pays target and performance incentives separately… Seoul Guarantee Insurance Company pays special performance bonuses
Severance pay is calculated by multiplying the employee's average wages paid over the three months prior to retirement by the years of service. Average wages include base pay as well as regular bonuses and annual leave allowances, and only three months' worth of the regular bonuses paid over 12 months are reflected.
While bonuses are fixed compensation paid on a regular basis, performance bonuses differ in whether they are paid and in amount, depending on performance, making them uncertain compensation.
Samsung Electronics has paid incentives divided into "Target Achievement Incentive (TAI, target incentives)" and "Over-Profit Incentive (OPI, performance incentives)."
Target incentives were paid twice a year, in the first and second half, by multiplying the base bonus amount by an organization-specific payout rate. The payout rate was determined by evaluating sales and profits by business division and unit, market share, brand index, inventory management level, and other factors.
Performance incentives were paid once a year and were distributed to employees based on 20% of the EVA (economic value added) generated by each business unit.
Seoul Guarantee Insurance Company paid "special performance bonuses." Special performance bonuses were calculated by multiplying the performance-bonus base amount—equal to the sum of monthly base pay and position allowance—by the achievement rate of management performance targets agreed to by labor and management.
◇Supreme Court recognizes only Samsung's "target incentives" as wages
On the 29th, the Supreme Court's Second Division (Presiding Justice Oh Kyung-mi) ruled in a severance pay claim filed by 15 Samsung Electronics retirees against the company that only target incentives, excluding performance incentives, should be reflected in calculating severance pay.
The Supreme Court said the evaluation items for target incentives are designed so that workers can, to some extent, manage and control whether goals are achieved by increasing the quantity and quality of their labor, and thus can be viewed as wages in return for labor.
By contrast, it found that EVA, which forms the basis for performance incentives, is more influenced by factors that workers find difficult to control, such as capital size, expense outlays, market conditions, and management decisions. The Supreme Court said, "Performance incentives are closer to a post hoc distribution of management performance than to a post-settlement of labor performance," adding, "It is difficult to see them as closely related to the provision of labor."
That same day, the Supreme Court's First Division (Presiding Justice Seo Kyung-hwan) ruled in a suit filed by five retirees of Seoul Guarantee Insurance Company that special performance bonuses also cannot be included in calculating severance pay. Regarding special performance bonuses, the court said they are "funds that distribute management performance, namely the realization of 'net income for the period,' rather than compensation for labor." It explained that net income for the period is the result of factors combined beyond the provision of labor, including capital size, expense structure, market environment, and management decisions.
The court also cited as a basis for its decision that the company has the authority to reject the union's demand for special performance bonuses when management deteriorates.
◇"Legal principle that wages must be closely tied to labor provision reaffirmed"
According to Supreme Court precedent, wages included in average wages are funds that the employer continuously and regularly pays the worker in return for labor, and that the employer is obligated to pay under the labor contract, among others. Whether the funds paid constitute wages is determined by the standard of whether there is a direct or close relationship with the provision of labor.
A Supreme Court official said, "These rulings reaffirm the existing legal principle for determining wage nature." The decisions are expected to serve as a standard for similar suits filed by retirees from other companies, including SK hynix and HD Hyundai Heavy Industries.
Labor groups, meanwhile, reacted strongly. The Federation of Korean Trade Unions said, "A limitation remains in that 'performance incentives' were not recognized as compensation for labor," adding, "We will legally codify the wage nature of all performance bonuses by revising the Labor Standards Act." The Korean Confederation of Trade Unions (KCTU) also said, "EVA or net income for the period are indicators that cannot be realized without workers' collective provision of labor," arguing, "Given that all funds paid within labor relations are wages, the Supreme Court's determination is difficult to accept."