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Feb 9, 2014

Ordinary Wages and the Principle of Good Faith in Korea: How long should the principle be applied to Korean CBA?

We wrote a post on this blog a few weeks back entitled: Ordinary Wages Under Korean Law Clarified by Supreme Court: Regular, Uniform & Flat Defined.

Our post noted, in part, that:
" . . .the Supreme Court, in a case that I will call the Regular Interval Bonus Case, has delivered  a couple of more clear examples, than in the past, of cases that will be considered Ordinary Wages.   In the case, the employer was providing a "regular bonus" every two months.

The Court in the Regular Interval Bonus Case opined, in part, that:
  1. Any collective bargaining agreement (labor-management agreement or like agreement) that deems a certain type of payment as not an Ordinary Wage is void and, thus, unenforceable.  An exception is available for certain specific companies that have implemented this practice in particular limited situations based on the vague principle of "good faith and trust."  I will elaborate on this more in a followup post after the holidays; and
  2. Payments made at regular intervals (e.g. every other month) are Ordinary Wages.
The Supreme Court remanded the case to the High Court to determine if the exception is applicable.

In the second case, that I will call the Allowances Case, utilized the Ordinary Wage definition and rationale in the Regular Interval Bonus Case to opine that these allowances when paid just for being employed at a certain period of time will not be considered "flat" under the Ordinary Wage "regular, uniform, and flat" definition.

The Allowances Case was remanded, also, to the High Court to determine if the payments were, only, payments made for being employed during a certain period of time."
I promised to explain in the post the meaning and application of the principle of "good faith" to situations where an implicit or explicit agreement between management and employees exist that excludes from "ordinary wages" certain payments made to an employee (e.g. night-time, holiday or overtime payments - excluded from being calculated as a regular bonus).

The Supreme Court has noted that these "agreements" are not void when:
  1. When the agreement is considered as a "customary practice" in the company;
  2. The increase in cost to the company will cause "serious managerial difficulty" or, otherwise not within the capability of the company to pay; and
  3. The increased cost was not considered in the calculation of the "base salary," when negotiating wages thus, the base salary would have decreased if the company and the employees considered these additional expenses to the company.  
This test, obviously, will need a great deal of interpretation by the lower courts in the future.  We expect this case to lead, in many cases, to additional litigation to determine, among other things:
  1. If an agreement exists (does not need to be a "written" agreement);
  2. If an agreement exists is it a "customary practice";
  3. Will the additional cost cause "serious managerial difficulty"; and
  4.  Whether the employer and employees knew when negotiating wages that compensation to the employee should decrease if this cost was assumed by the company.
Also, we are not, yet, how long will the application of this principle of good faith will assist companies in avoiding this unexpected expenses.  The Supreme Court noted in a press release that any agreements of this sort after the Supreme Court decision are void (December 18, 2013)  However, we are unsure how long, specifically, the principle is applicable for agreements prior to December 18, 2013 when no new agreement is able to be reached.

We will, likely, soon be litigating cases that will determine the specific application of this principle and the length of time this principle should be applied.

Interesting case?  What should be the outcome?
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SeanHayes@ipglegal.com

IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.

www.ipglegal.com