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Chipping Away at Corporate Competitiveness
Ordinary Wages
Chipping Away at Corporate Competitiveness
  • By matthew
  • August 21, 2013, 12:03
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Pictured above is GM Korea’s plant in Boryeong, which focuses on manufacturing transmissions and engine components.
Pictured above is GM Korea’s plant in Boryeong, which focuses on manufacturing transmissions and engine components.

 

“I’m so worried about my company that I can’t fall asleep these days,” said the CEO of a local auto parts manufacturer, adding, “If the court rules in favor of the employees, I have to shoulder about 10 billion won [US$8.95 million] of additional costs for ordinary wages to be paid to the 400 or so employees. The amount is a considerable sum of money given the current business conditions.”

If bonuses for employees are ruled by the court to be included in ordinary wages, the CEO has to spend 6.4 billion won at once (US$5.73 million), which is the difference in wages for the past three years not subject to sunset provisions. Besides, the personnel expenses he has to burden each year increase by 18.7% in that case. In this year alone, the additional costs amount to approximately 2.5 billion won (US2.2 million), close to 2.4 times the company’s current profits for 2012. The sum is no little amount for a small-sized firm in financial difficulties. 

The example shows the gravity of the issue surrounding how to interpret the range of ordinary wages. The business community is dead set against the expansion of the scope, claiming that a wider application will result in 38 trillion won (34 billion) of additional expenses and great confusion in the labor market. In contrast, workers are positive about the issue. Politicians, legal experts, and scholars are declaring themselves for one side or another day after day, too. 

According to the current Labor Standard Act, the ordinary wage is defined as the time, daily, weekly, monthly, and subcontract wages paid regularly and uniformly to employees for their work. But court rulings are split over the regularity of the payment. Some courts have judged that bonuses are within the scope of ordinary wages if the payment is made on a regular basis, whereas others have ruled that the bonuses are out of the scope of ordinary wages because these are paid based on the work performance of employees. 

At a first glance, the inclusion of bonuses in ordinary wages may look like an absolute privilege on the part of workers, putting a greater burden on the management. However, experts are pointing out that many high-income permanent employees of big businesses benefit from regular bonuses to widen the wage gap between them and their counterparts in smaller firms. In addition, workers could take a hit from the instability of employment once companies face financial difficulties for ordinary wages. 

“The problem must be tackled without delay with the ordinary wage issue hindering many companies’ day-to-day business operations,” said Park Jong-gap, managing director at the Korea Chamber of Commerce & Industry. He added, “If the scope of interpretation is widened, firms will find themselves in increasing cost-related burdens with less leeway for investment and employment, to the point of being worried about the discontinuation of their business.”

Triggered by GM Chairman’s Request 

The issue rose to the surface in May this year during president Park Geun-hye’s state visit to the United States. 

At that time, GM Chairman and CEO Daniel Akerson said that he would invest US$8 billion in GM Korea for the next five years on the assumption that the ordinary wage issue be dealt with appropriately. In response, President Park promised to cope with the problem, turning the matter into a hot-button issue. Local entrepreneurs welcomed the remark, saying, “Now is the time to discuss the issue considering the social costs.” Meanwhile, labor unions have criticized her as trying to overturn the Supreme Court ruling delivered in March this year that required regular quarterly bonuses to be included in ordinary wages. 

More recently, the Seoul High Court of Justice decided partially in favor of the plaintiff in July in the suit filed against GM Korea by 1,025 office staff members of GM Daewoo. There, the latter claimed that their overtime allowance and compensation for unused leaves be newly calculated to count in family allowance and incentives. The judge said that the incentives, which are paid every month based on each employee’s base pay, are regarded as ordinary wages. 

Once the ruling becomes final, GM Korea has to pay them 8.203 billion won (US$7.341 million), which is equivalent to the ordinary wages covering March 2004 to February 2007. The same ruling was made by a court of appeals, but it increased the amount to be paid to 5.707 billion won (US$5.108 million). The court of appeals ruled, “The incentives are fixed regardless of the annual work performance and paid to first-year employees as is the case with the base pay,” continuing, “These can be looked upon as ordinary wages because the fixed amount is paid over 12 months.”

Backlash Expected in the Form of Shrinking Investment and Employment 

Including bonuses in ordinary wages means an increasing burden on employers, and could lead to declining investment and employment. According to the Korea Employers Federation, the extra expenses add up to 38.5509 trillion won (US$34.5031 billion) for the three years to come in that case. 

“If the ordinary wage is recalculated following the Supreme Court decision, the investment in the four key industries including automobile and electronics decreases by 2.3%,” said economics professor Jo Joon-mo at SungKyunKwan University. He went on, “Then, the total exports are likely to fall by 0.5% while the imports increase 2.6% as well.” He calculated the extra overtime allowance for the past three years by including the fixed bonus in the ordinary wage, referring to the data of the Ministry of Employment and Labor on the wage negotiations concluded between 2010 and 2011, which show the wage structures of individual businesses in detail. 

Moreover, no less than 27,446 jobs are expected to disappear across industries due to decreasing investment and deteriorating trade conditions. “If the regular bonuses are included in ordinary wages, a total of 372,000 to 418,000 jobs are estimated to disappear for the upcoming three years to drag down the employment rate by one percentage point,” said business administration professor Park Joon-seong at Sungshin Women’s University. 

Firm Standard Is Needed

Nowadays, more and more lawsuits are raised surrounding the ordinary wage issue. An increasing number of companies are burdened with litigation and labor-management disputes are weakening their competitiveness. Under the circumstances, the government has proposed some measures to lead them to an agreement. Still, there is a consensus that the feud is nothing to be tackled by compromise or talks, but should be handled by a Supreme Court full bench decision followed by full compliance by all members of society. 

The Supreme Court is well aware of the significance of the issue and is working on a full bench decision that it can give before the end of this year. The full bench is the highest department of justice presided over by the Chief Justice of the Supreme Court, in which all 12 justices reach a decision by majority vote. Full bench decisions make criteria for rulings by all courts. The Supreme Court is considering holding a public hearing before the full bench decision so that the general public can get a chance to become familiar with the facets of the issue.