Ruling on Normal Wages Gives Rise to Triple Whammy for Kia Motors

Kia Motors fell into a crisis of bearing a one trillion won normal wage burden. On August 31, the court ruled in favor of the Kia Motors Labor Union in the first trial of its lawsuit against the company where the labor union asked the company to regard regular bonuses and other charges as normal wages.

“The company must pay a total of 422.3 billion won (US$380 million) including the principal and interest to workers,” said the Seoul Central District Court for Civil Affairs, ruling in favor of the labor union in a lawsuit where 27,424 Kia Motors employees demand a total of 1.092 trillion won (US$980 million) in normal wages from Kia Motors.

422.3 billion won (US$380 million) is 38.7% of 1.926 trillion won (US$1.73 billion) demanded by the labor union. This amount is back pays for three years from August 2008 to October 2011.

However, Kia Motors expects the total actual amount to be borne by the company to reach about one trillion won (US$900 million).

According to Kia Motors, the amount ruled by the court (42.23 billion won and an estimated amount expected from additional lawsuits will add up to about one trillion won (US$900 million).

Normal wages are a standard on normal wage-based allowances such as overtime pays, annual paid vacation allowances and variable bonuses and indirect labor cost such as retirement allowances, social insurance premiums and wage bond guarantee contributions and etc. Therefore, a rise in the amount of normal wages leads to an increment in various allowances to be paid to employees.

Since the ruling was made in the first trial, Kia Motors does not have to give back pays immediately. However, operating loss will be inevitable in the third quarter of this year because the automaker must accumulate the amount of money that it should pay in accounting as a reserve. If Kia posts an operating loss in Q3, the company will record an operating loss in approximately 10 years after the third quarter of 2017.

“The provisional amount we have to pay is about one trillion won (US$900 million),” Kia said in a statement on the day. "The judgment’s actual financial impact will be reviewed after the receipt of documents of the ruling, and we plan to apply it within the third quarter of this year,"

In the first half of this year, Kia's operating profit fell 44% year on year to 786.8 billion won (US$708 million), largely due to retaliations by China for South Korea’s deployment of the THAAD System. If the aftermaths of the retaliations continue in the third quarter, its operating profit is expected to reach 400 billion (US$360 million) similar to that of the second quarter. If Kia Motors applies one trillion won in provisions in the third quarter, the automaker will suffer a deficit of 600 billion won (US$540 million).

Kia said that the company will appeal immediately. "Although the amount claimed by the workers was partially reduced, Kia’s current business situation makes it hard for Kia to tolerate the current business situation," Kia Motors said. “It is very regrettable and unacceptable that the principle of good faith is not recognized."

Kia Motors has been so far in a position that it is a violation of the principle of good faith to break the original agreement between management and labor to exclude regular bonuses from normal wages while widening the scope of normal wage, as claimed by the union, would give rise to a financial burden of up to 3 trillion won (US$2.7 billion).

However, the court ruled that "Kia's union is not a violation of the principle of good faith because it earned net profit and was not in bad business conditions." The most important application condition for the principle of good faith is whether or not the company would face a financial and management crisis due to normal wage payments. The court judged that even though Kia Motors was suffering from sluggish sales in China recently, the automaker could afford to pay back pays of normal wages.

"We will analyze the impacts of the first court ruling on the company to find a countermeasure," Kia Motors said. "We expect judges to make a wise decision in the appeal court."

Pro-company groups in the Korean business world rebelled all at once. "Today's ruling, which does not apply the principle of good faith while recognizing regular bonuses as normal wages, accepts the union's claim which reverses labor-management promises and compels companies that have given trust in and complied with the agreement. We are deeply disappointed with the ruling," the Korean Employers Federation said,

"We regret that the court made the ruling without taking into consideration labor-management agreements on wages, social custom, the government’s administration guidelines, and enormous negative effects on an automobile industry ecosystem,” the Korea Automobile Manufacturers Association said. “We hope that the appeal court will make a decision not to bring about burdens of rises in labor cost."

It is unlikely that future negotiations over a labor-management collective bargaining agreement will be smooth. As the company is in a situation to have to accumulate large-scale allowances in the third quarter, there will be less room to make concessions in the course of negotiations with the union.

The labor union will draw up a strike plan by holding a strike committee meeting on September 1. The labor union is demanding a basic salary raise of 154,883 won or US$139 (6.93 percent of basic salaries and excluding salaries from promotions) and a 30 percent bonus payment for last year's operating profit and the inclusion of bonuses in normal wages among others.