On May 29, 2014, the Supreme Court delivered its decision in the General Motors ordinary-wage case (Sup. Ct. 2012 Da 116871, decision of May 29, 2014) (the “GM Decision”), reversing the appellate court’s judgment and remanding the case back to the trial court. The Court held, among other things, that the plaintiffs’ claims for back wages based on the recently expanded definition of “ordinary wage,” may be barred by the “good-faith” defense that the Court applied last year in the Kapeul Autotech case.
The Supreme Court’s ruling in this case had been expected to be an important barometer for understanding the scope of this “good-faith” defense. The GM Decision is notable in that, unlike in Kapeul Autotech, the Supreme Court did not explicitly consider the financial impact of the plaintiffs’ claims in relation to GM’s financial condition or profit level for the concerned period. Instead, the Court discussed only the degree to which judgment for the plaintiffs would increase GM’s previously agreed and anticipated labor costs.
Under Korean law, numerous statutory entitlements such as pay for overtime work and work during nights and days off, compensation for unused annual leave, and minimum severance pay, are directly or indirectly based on an employee’s “ordinary wage.” “Ordinary wage” is a statutory term intended to exclude extraordinary compensation such as discretionary bonuses and performance awards. But “ordinary wage” is not defined by statute.
The Ministry of Employment and Labor (the “MOEL”) long took the position that an employee’s ordinary wage does not include “bonuses,” even those that are paid regularly and independent of performance, so long as those bonuses are paid in intervals greater than one month. Until recently, courts had not explicitly contradicted with the MOEL’s interpretation. And employers had relied on government guidance and a lack of contradictory court precedents, and excluded regular bonuses paid in intervals of two or more months from the calculation of ordinary wage.
But in 2012, in the Keum-A Limousine case, the Supreme Court for the first time explicitly recognized that regular bonuses may be required to be included in ordinary wage. And the Supreme Court further clarified that holding in the Kapeul Autotech decision in December 2013, where it held that any compensation for ordinary work, paid in regular intervals, uniformly to all or a class of employees, in a fixed or predeterminable amount, must be included in ordinary wage.
However, the Kapeul Autotech decision also offered potential relief for employers facing suits for back wages based on the newly expanded definition of “ordinary wage.” The Supreme Court announced that employers could offer a “good-faith” defense to such claims, if (i) there had been a labor-management agreement or established practice to exclude regular bonuses from ordinary wage, and (ii) requiring payment of back wages would result in serious managerial difficulty to the employer.
In the wake of that decision, observers have anxiously awaited further explication of how to apply the "good-faith" standard, and the GM case had been expected to provide further guidance.
The General Motors Case
The employee-plaintiffs in the GM case argued that (i) their regular bonuses and (ii) other allowances and benefits (such as holiday bonuses) should have been included in their ordinary wages; and they asserted claims for back wages based on the “proper” scope of their ordinary wages.
The Supreme Court affirmed that the plaintiffs’ regular bonuses were required to be included in their ordinary wages, because they were predetermined payments made regularly and uniformly. However, the Court also held that the “good faith” defense may bar the plaintiffs’ claims, based on the following facts:
- labor and management agreed on wage terms, including rates of increase, based on the total amount of wages payable, calculated using a definition of “ordinary wage” that excluded the regular bonuses at issue;
- considering that regular bonuses were approximately 700% of the employees’ base wages, if the regular bonuses were to be included in the employees’ ordinary wages, the overall wage increase rate would far exceed what had been agreed between labor and management; and
- GM employs about 11,000 blue-collar employees who regularly perform overtime work, and work during nights and days off, so the company’s additional liability would be substantially larger than the estimated total wage increases that were used as the basis for labor negotiations.
In light of these facts, the Supreme Court decided that the additional financial burden that GM would face, should the plaintiffs be awarded back wages based on including regular bonuses in their ordinary wages, may cause serious managerial difficulty. And the Court remanded the case for a proper examination of the potential applicability of the good faith defense.
With respect to the plaintiffs’ claims for other allowances and benefits, the Supreme Court found that the lower court did not thoroughly examine whether they meet the definition of ordinary wage, particularly regarding the element of “fixedness” (or predeterminability).
Based on the foregoing, the Supreme Court reversed the appellate court’s decision as to both claims and remanded the case for further proceedings in light of its opinion.
In the Kapeul Autotech case, the Court found the existence of serious managerial difficulty after reviewing the degree to which ordinary wages and actual total wages would increase if judgment were awarded to the plaintiffs, and the impact of the foregoing on the company’s net profit. In the GM Decision, however, the net profit of the company was not explicitly considered in finding the potential for serious managerial difficulty. Rather, the Court considered the dramatic increase rates of ordinary and actual wages, which were not anticipated by management when negotiating wage increases, and found that the unexpected and significant additional financial burden may cause serious managerial difficulty.
Since the Court discussed only the overall financial impact of an adverse judgment, without explicitly considering the financial impact of paying back wages in relation to the company’s ability to pay, it may be a promising sign for other companies facing ordinary-wage claims. If the Court intentionally omitted any consideration of GM’s financial performance, then even employers with relatively strong financial performance may potentially be able to argue that the unanticipated additional financial burden of their employees’ ordinary-wage claims will cause serious managerial difficulty, so long as the required wage increases would be sufficiently high.
It should be noted, however, that while it appears that the Supreme Court in the GM case may have broadened the scope of the serious managerial difficulty required to assert a good faith defense to ordinary-wage claims, it did not do so explicitly and deferred the final determination to the trial court. Consequently, there still is no entirely clear standard that can be easily applied to other cases.
We will closely follow further judicial developments, in the GM case and others. It remains to be seen to what extent courts will take the Supreme Court’s reasoning in the GM Decision as encouragement to liberally apply the good-faith defense to large-scale ordinary-wage claims.