[Aftermath of the Wage Peak System] "Companies, Be Careful of the Wage Peak System Aimed at 'Dismissal'"

Legal Community Presents ImpiJe Checklist
Checklist and Current Status · Future Issues Q&A

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok]

As the Supreme Court ruled in the lawsuit between the Korea Electronics Technology Institute and employee A that the wage peak system, which reduces wages solely based on age without a 'rational reason,' is invalid, significant repercussions are emerging in the industrial field. Meanwhile, the legal community is drawing attention by creating a checklist to help companies themselves assess the validity of the wage peak system. This article organizes the checklist proposed by attorney Lee Seri of the law firm Sejong along with the current status of the wage peak system debate and anticipated future issues.

▶Why did the Supreme Court ruling cause confusion?

- The Supreme Court ruled that a company operating a 'retirement age maintenance type' wage peak system, which reduces wages for employees above a certain age for a period before retirement, may be unfair. The problem is that the Supreme Court did not separately provide standards for the 'retirement age extension type.' Currently, the vague principle shared is that as long as companies do not apply a wage peak system for overt wage cuts or workforce dismissal, they are unlikely to receive an invalidation ruling from the court.

▶How do you distinguish whether the wage peak system is 'retirement age extension type' or 'retirement age maintenance type'?

- If the retirement age is extended and the wage peak system is introduced, it is considered the retirement age extension type; if the wage peak system is implemented without changing the retirement age, it is the retirement age maintenance type. If the retirement age was under 60 before May 2013 and the wage peak system was introduced after the amendment of the 'Employment of Older Persons Act' in May of that year, it can be regarded as the retirement age extension type.

▶Why is reducing labor costs (wages) in exchange for employment security problematic?

- From the perspective that wages are the compensation for labor, it is natural for companies applying the wage peak system to reduce the workload of the relevant employees. The logic is that paying less should correspond to less work. In the second trial of the recent Supreme Court lawsuit, 'equal pay for equal work' was a key issue. In other words, it means that cutting the salary of a wage peak system participant who performs similar work to a non-participant is considered unfair and may be applied in court.

▶What will be the key issues in future wage peak system lawsuits?

- The core issue is whether the court recognizes the wage peak system as invalid. Depending on this judgment, it will be decided whether companies must return the deducted wages to employees. Criteria such as 'work equivalence' and 'retirement age extension' have been presented as standards for proving invalidity. In other words, how well companies have properly handled these aspects is expected to become a major point of contention. The statute of limitations is also a matter of debate. Whether the amount claimed by employees to be returned is considered a wage claim (3-year limitation) or a claim for damages due to illegal acts (10-year limitation) greatly affects the limitation period.

▶What should companies prepare to avoid being ruled as 'age discrimination'?

- Companies only need to prove that the 'degree of disadvantage' to wage peak system employees is not excessive. The judgment criterion will be fairness compared to non-participants. Therefore, it is essential to formalize all internal wage-related regulations such as employment rules, personnel regulations, compensation regulations, and collective agreements. It is also a method to specify in documents such as employment contracts, annual salary contracts, salary notices, and salary consent forms how much salary and work level will be applied to the participants. It is necessary to collect examples of wage peak system application periods and rates from other companies in the same industry. Supporting materials showing the implementation timing and reduction rates of the wage peak system should also be prepared.

▶Are there other documents that should be prepared for litigation response?

- All materials necessary to clearly verify the contractual relationship with employees. Specifically, materials related to the measures taken at the time of wage peak system implementation, individual agreements or confirmation letters made during the implementation process, and related documents if interim settlement of severance pay was made during the wage peak system implementation are required. Additionally, materials proving that the funds reduced by the wage peak system were used for the original purpose of the system introduction (such as employment increase) are essential. Annual new hiring status and hiring rate trends after the introduction of the wage peak system should be organized. It is also beneficial to record where the increased funds from the wage peak system were spent.

▶What are the expected future repercussions?

- It will lead to increased corporate costs and greater management uncertainty. Although litigation costs and brand value decline due to social criticism are issues, the fact that precedents may remain as labor negotiation data such as wages and collective agreements is painful for companies. If companies introducing the wage peak system are perceived as focusing solely on reducing labor costs, it may lead to rulings of 'age discrimination' or 'invalid wage peak system,' increasing management uncertainty. Securing data on the wage peak system application period for the relevant employees, the extent of wage reduction, changes in job performance after system introduction, and reduced working hours is fundamental, and companies may need to redesign the wage peak system to secure and utilize such data.

Corporate Impi-Je Checklist Created by Lawyer Lee Seri of Law Firm Sejong. (Source: Korea Chamber of Commerce and Industry)