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Recent Supreme Court Ruling Putting Business Circles on Red Alert
Trap of Ordinary Wages
Recent Supreme Court Ruling Putting Business Circles on Red Alert
  • By matthew
  • December 30, 2013, 09:54
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The recent Supreme Court ruling relating to the expanded scope of ordinary wages is stirring the economic community in the form of labor-management disputes, reduction in investment, and employment shrinkages. Korean enterprises, which are already concerned over mounting uncertainties, are about to be additionally burdened with the ordinary wages risk, finding it inevitable to redo their business plans for next year. In particular, major business groups in the automobile, shipbuilding, and steel industries, where overtime and holiday work is much more frequent than in others, are supposed to reflect the increments in night work, holiday work, and overtime allowances right away.

Companies have followed the government’s policy, not including regular bonuses in the ordinary wage, for the past 25 years, and, as such, they are quite shocked at the ruling. The Korean government came up with its guidelines for ordinary wage calculations in 1988 in the framework of the Labor Standards Act, and the industries have excluded bonuses from the ordinary wage since then in labor-management negotiations.

However, the talks have become invalid for the Supreme Court ruling delivered on December 19 to see regular bonuses as a part of the ordinary wage. In the Ministry of Employment & Labor’s June survey on 978 businesses with 100 or more employees, just 19.4% of the respondents answered that they included their regular bonuses in the ordinary wage. This means that most of the companies in Korea will have to revise their collective agreements. The scope of various statutory allowances based on the ordinary wage and when to begin to apply the new ruling depend on labor negotiations at each company.

More Labor-management Disputes and Less Employment Predicted

“The judgment is likely to result in some chaos, only to exacerbate the conflict between management and workers,” said an entrepreneur, adding, “My company is currently recalculating the increment in labor costs based on the judgment, and our employment as well as investment plans for next year have become uncertain due to this ambush of ordinary wages.”

An increasing number of companies are reshaping their wage structures to minimize the additional burden of labor costs. Meanwhile, the labor world is trying to expand the ordinary wage while maintaining current pay structures. Besides, they have opposite opinions as to the retroactive application of the ruling, signaling that a series of lawsuits will follow over time.

The intensifying conflict and increase in labor costs are forecast to lead to declining investment and less room for employment. The Korea Economic Research Institute (KERI), an organization associated with the Federation of Korean Industries (FKI), is predicting that the employment rate will be cut by at least 1% in the near future.

At the same time, an exodus of foreign companies in Korea is likely to accelerate for the same reason. “It seems that GM Korea and many other foreign enterprises will move to other countries to avoid the high-cost and low-efficiency economic structure in Korea,” said the FKI.

Economic Organizations Voicing Severe Concerns

Local economic organizations have expressed concerns with one voice since the Supreme Court ruling. For example, KERI mentioned the expansion of ordinary wages as the biggest challenge faced by the entire industrial community, while predicting that a drastic cut in investment would follow, as many of them will prepare reserve funds against potential lawsuits. It also explained that the ruling will have the negative impacts of manufacturing automation, plant relocation, and labor force reduction in the long term.

The institute added that the judgment could cast a damper on economic recovery signals that had been expected next year. “The expansion of the scope of ordinary wages means higher labor costs, slower investment, and increased product prices, which, in turn, will affect the export, import, and foreign investment sides altogether,” said Byeon Yang-kyu, head of KERI’s Division of Macroeconomic Policy Research. He went on, “Previously, we thought that the investment by major conglomerates in the manufacturing sector will lead economic growth next year, but if things turn out wrong, the growth rate could be cut by 0.2% to 0.3%.”

He also pointed out the possibility of wage divides among workers. “It is expected that the full-time employees of big businesses, who are paid with more bonuses and do more overtime work, will benefit the most from the ruling, and thus the wage gap among workers can be widened,” he explained.

The Korea Employers Federation (KEF) complained about the ruling, saying that between 710,000 and 800,000 jobs would disappear for five years to come, too. “The administrative interpretation that continued for a quarter of a century has been overridden to give rise to a severe confusion,” it mentioned, “Although it is a fortunate thing that we do not have to make an additional payment for the past three years, the expression of significant business difficulties is very ambiguous and can cause more disputes down the road.” According to KEF’s estimates, the ruling generates 13.7509 trillion won (US$12.9533 billion) of burden for the first year and then 8.8663 trillion won (US$8.3521 billion), excluding the 4.8846 trillion won (US$4.6013 billion) increment in severance and retirement benefits, each year from then on. The amount of 13.7509 trillion won is equivalent to 8.9% of the investment promised by the 30 major business groups in Korea for this year.

The Korea Chamber of Commerce & Industry (KCCI) echoed by saying that the ruling is likely to lead to greater pressure on the management side and affect employment.

It is small and mid-size enterprises (SMEs) with weaker financing capabilities that are more shocked by the ruling than anyone else.

“Many companies will lose their trust in Korea’s legal system due to the ruling amid a huge confusion,” the Korea Federation of SMEs emphasized, “Countermeasures must be prepared so that the additional cost burden is not shifted from big businesses to small firms.” The federation is forecasting that each SME should pay 14.3 trillion won (US$13.5 billion) more in a lump sum and 3.4 trillion won (US$3.2 billion) every year if regular bonuses are included in the scope of ordinary wages.

In the meantime, Minister of Trade, Industry and Energy Yun Sang-jik joined a breakfast meeting held at the KCCI on December 19 and remarked that he also thinks of the ruling as a factor that could strain SMEs in Korea. “Still, I also think that we have avoided an extreme situation, thanks to the principle of good faith, that is, the restriction on the retroactive claim for additional payments,” he said. “What we need now is close cooperation between labor and management to achieve a better and simplified wage system.”

Adjustment of Wage Structures Needed Urgently

Those in the economic circles agree to the necessity of a simplified pay structure, too. “Companies have to shoulder a very large sum of additional costs due to the ruling, and we will seek to deal with the problem by reshaping the pay structures,” said the KEF.

“In the Korean economy, it is becoming increasingly difficult to use manpower without renovating the wage structure, and this is why we need to simplify the structure while increasing the correlation between work and reward,” another source explained. “We may be relatively freer from the ordinary wages issue if we adopt an annual pay system in which the overtime, night work, and holiday work allowances are combined.”