1. Recent decision of the Incheon District Court which held that regular bonuses do not constitute ordinary wages

On May 9, 2013, in a case where the employees of a bus transportation service company filed a suit for unpaid wages against the company, the Incheon District Court held that regular bonuses paid only to the employees employed at the time of the payment of such bonuses and calculated based on the number of months of employment do not constitute ordinary wages (Incheon District Court decision on case no. 2012GaHap4912 rendered on May 9, 2013).

In the above case, the company (a) paid bonuses six times a year, each time in the amount equivalent to 100% or 150% of the standard monthly wages (the sum of monthly wages and continuous service allowance) that were paid over the preceding two-month period, which constituted 700% of the standard monthly wages in yearly total, to those employees who were employed by the company for over one year; (b) paid bonuses prorated on a daily basis to those employees who were not paid for 30 days or more during the two-month period preceding the month of bonus payment; (c) paid no bonus to those employees who were employed by the company for less than three months since the commencement date of employment, and paid 30% of the amount calculated under (a) and (b) to those employees who were employed by the company for three months or more but less than six months since the commencement date of employment, and 65% of the amount calculated under (a) and (b) to those employees who were employed by the company for six months or more but less than twelve months since the commencement date of employment.  The Incheon District Court held that it would be unreasonable to construe bonuses of such nature as a type of ordinary wages and that bonuses with such payment conditions constitute non-regular wages since whether such bonuses were paid and the amount of payment varied according to actual work performance, such as whether the employees were working normally during the bonus calculation period, whether the employees were working until the month when the bonuses were paid, and whether the employees satisfied the requirement of being continuously employed by the company for a period of one year or more.

  1. Previous Supreme Court decision and significance of this lower court decision on whether regular bonuses may be regarded as ordinary wages

Last year, in a milestone case where the employees of an intercity bus transportation service company in the city of Daegu sued the company for unpaid wages, the Supreme Court held that “employees who have been continuously employed for over six months are paid on a quarterly basis the amount calculated by applying a pre-set coefficient determined based on the number of years of continuous employment, and although such payment is made on a quarterly basis in contrast with the continuous employment allowance, which is paid on a monthly basis in the form of monthly salary, [the court] cannot conclude that such payment does not constitute ordinary wages based solely on such circumstance (Supreme Court decision on case no. 2010Da91046 rendered on March 29, 2012),” and thereby held that bonuses paid differently according to the number of years of employment may constitute ordinary wages.  The Supreme Court further held that if certain bonuses are paid to employees who resign from the company before the end of a certain bonus calculation period, in proportion to the number of days of employment during such period (as in the case of base salary) as well, such bonuses cannot be viewed as depending on the actual work performance of the relevant employees (please see Yoon & Yang Newsletter dated April 26, 2012).

Although the requirements for eligibility of the bonus at issue in the above Incheon District Court case were similar to those in the above Supreme Court case in that the former was paid differently according to the number of months of employment to employees who were continuously employed for over three months, the former is different from the latter since the specific requirements for payment were different, e.g., bonuses were paid only to the employees who were employed during the pre-scheduled month of bonus payment (in other words, the employee who quit before such month were not), and bonuses for employees who were not paid for 30 days or more during the two-month period before the month of bonus payment were calculated on a pro-rata basis based on the number of days of employment. Therefore, it seems that the Incheon District Court decision, which held that the relevant regular bonuses do not constitute ordinary wages, is not necessarily inconsistent with the above Supreme Court decision.

From the perspective of a company currently proceeding or expecting to proceed with a lawsuit relating to ordinary wages, the above Incheon District Court decision and Supreme Court decision may be of interest, since a comparison of the background facts with those decisions may helpful to the preparation of additional defenses.