The Korean Supreme Court recently issued remarkable rulings concerning a “period of calculating average wage.”

Average wage is a base wage for calculating annual paid leave allowance, severance pay, allowance for suspension of work, compensation for accidents, etc. under the Labor Standards Act. Under the Labor Standards Act, average wage means the amount calculated by dividing the total amount of wages paid to a relevant worker during three calendar months immediately before the day on which a cause for calculating his or her average wages occurred, by the total number of calendar days during those three months (Article 2(1)(vi) of  the  Labor  Standards  Act). However, the Enforcement Decree of the same act excludes some causes that are particularly disadvantageous to employees, such as a probation period, suspension of work due to a reason attributable to an employer, maternity leave and dispute, in deciding a “period of calculating average wage” (Article 2(1) of the Enforcement Decree of the Labor Standards Act).

With respect to the definition of average wage and causes for exclusion from its calculation period, there are the following two significant issues: (i) when the  calculation period  starts and  (ii) what method of deciding a  three- month period is reasonable.

In the cases concerning the definition of average wage, the Supreme Court primarily held that on conditions that “the basic principle of average age is an actual reflection of a worker’s ordinary wage for his or her living,” if the total amount of the wages paid to the relevant worker for three calendar months prior to the day when a cause for calculating average wage occurs is remarkably smaller or bigger than ordinary cases for a particular reason, such smaller or bigger amount shall not be a basis for calculating average wage (see Supreme Court Decision 98Da49357 rendered on November 12, 1999 and Supreme Court Decision 2007Da72519 rendered on October 15, 2009).

Relating to the above, we need to pay attention to a recent ruling from the Supreme Court in a case where “a worker was employed on the condition of a probationary period and a cause for calculating average wage occurred before such probationary period has finished.” The court held that “Article 2(1)(i) of the Enforcement Decree of the Labor Standards Act narrowly applies in cases where three calendar months prior to a day when a cause for calculating average wage occurs include not only a period for which wage is normally paid to a worker, but a probationary period, and therefore the average wage of the present case shall be “calculated based on the wage at the time when a cause for calculating average wage occurred (i.e. the wage paid during the probation period), regardless of the above provision of the enforcement decree” (Supreme Court Decision 2013Du1232 rendered on September 4, 2014).

With regards to the 2nd issue, in a case where “an employer delayed the assignment of  its  employee  due  to managerial necessities and that employer was accountable for such managerial necessities and had to pay to that employee allowance for suspension of work,” the Supreme Court ruled that “a monthly average wage shall be determined by calculating the three-month wage based on the amount paid for a year preceding the average wage calculation period” (Supreme Court Decision 2012Da12870 rendered on October 11, 2013).

This Supreme Court decision is the 1st decision that acknowledges that it is reasonable to calculate average wage based on the wage for a year preceding the day on which a cause for calculating average wage occurs. This decision will be a meaningful one to require attention in cases regarding calculation of average wage.