[Aftermath of the Wage Peak System] With the Invalid Ruling... Are Wages No Longer Being Cut?

Supreme Court Sets Standards to Prevent Age Discrimination Without Rational Grounds
Implicitly Acknowledges Implicit Bias
Different Situations for Companies and Individuals

[Image source=Yonhap News]

[Asia Economy Reporters Song Hwajeong and Lee Minwoo] The financial sector is abuzz following the Supreme Court's ruling on the wage peak system. The National Financial Industry Labor Union (Financial Union) has begun assessing the status of the wage peak system by branch, while management is analyzing court precedents and contemplating countermeasures. As various questions arise on the ground, the related information has been organized in a Q&A format.

▲ Does the invalidation of the wage peak system mean wages will no longer be cut?

=On the 26th of last month, the Supreme Court upheld the appellate court's ruling partially in favor of Mr. A (67), who filed a lawsuit against the Korea Electronics Technology Institute (formerly Electronics Components Research Institute), demanding payment of the wage difference deducted under the wage peak system. The Supreme Court agreed with the lower courts' judgment that the wage peak system violated the Act on Employment Promotion and Vocational Rehabilitation of Older Persons and was therefore invalid. Mr. A, who joined the institute in 1991, claimed that when the wage peak system was applied in 2011, his position was downgraded by two levels and his competency grade by 49 levels, resulting in a reduced base salary. He filed the lawsuit upon his retirement in 2014, seeking the wage difference.

However, this ruling does not declare all wage peak systems invalid. It only set the criteria for an 'unfair' wage peak system by examining whether it violates Article 4-4 of the Act on Employment Promotion and Vocational Rehabilitation of Older Persons, which prohibits discrimination against workers based on age without reasonable grounds in wages or welfare. The Supreme Court outlined four conditions to determine whether the wage peak system constitutes reasonable grounds and is not age discrimination: ▲ validity of the purpose of introduction ▲ degree of disadvantage to the affected workers ▲ whether measures commensurate with the disadvantages such as wage cuts (e.g., reduced working hours) are in place ▲ and the use of funds reduced by the wage peak system. Ultimately, the wage peak system itself is recognized, but individual cases can be judged based on these conditions.

▲ What about financial sector workers, where many are subject to the wage peak system?

=The wage peak system guarantees employment by adjusting wages or working hours after a certain age. It was designed to reduce employment insecurity among middle-aged and older workers and increase job opportunities for youth. The system can be categorized into two types: the retirement age maintenance type, which reduces wages a few years before retirement without changing the retirement age, and the retirement age extension type, which extends the retirement age but reduces wages a few years before the extended retirement age. Most companies opt for the retirement age extension type.

In the financial sector, the Korea Credit Guarantee Fund first introduced the system in July 2003. Following that, KDB Industrial Bank, Export-Import Bank, Woori Bank, KB Kookmin Bank, Hana Bank, and IBK Industrial Bank introduced it in 2005. Most use the retirement age extension type, extending the retirement age to 60 from 55 and reducing wages annually. According to data provided by the Financial Supervisory Service to Rep. Yoon Doohyun of the People Power Party, as of the end of last year, 725 employees at the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?were subject to the wage peak system. The proportion of employees under the wage peak system relative to total staff is approximately 2.3% at KB Kookmin Bank, 0.1% at Shinhan and Hana Banks, and 2.1% at Woori Bank. The ratio is higher at policy banks: 8.9% at Industrial Bank, 7.1% at IBK, and 3.3% at Export-Import Bank.

▲ Why do policy banks have more employees under the wage peak system?

=The higher application rate at policy banks compared to commercial banks ultimately comes down to 'money.' Commercial banks offer retirement compensation packages that are more advantageous than continuing employment under the wage peak system. A department head at a commercial bank, Mr. B, said, "Commercial banks offer substantial annual salaries plus retirement and voluntary retirement bonuses, so many employees choose not to enter the wage peak system. Entering the wage peak system means losing annual leave compensation and position allowances, and considering the stress from expenses like meals and transportation while continuing to work, many perceive it as a loss."

On the other hand, policy banks differ. Like other public institutions, they are subject to government controls on total personnel expenses, making it difficult to expect large retirement bonuses. A department head at a policy bank, Mr. C, revealed, "The government restricts giving voluntary retirees compensation comparable to commercial banks for fairness with other public institutions, so employees reluctantly choose the wage peak system."

▲ Has employment increased due to the wage peak system?

=The government actively emphasized the need for the wage peak system when it enacted the so-called 'Retirement Age Extension Act' in 2016, which legally extended the retirement age to 60 (Act on Prohibition of Age Discrimination in Employment and Promotion of Employment of Older Persons). In 2016, Professor Kim Hyewon of Korea National University of Education and others surveyed workplaces that introduced the wage peak system from 2009 to 2013 and analyzed that companies with the wage peak system had about a 14% higher youth employment growth rate. However, subsequent studies have increasingly suggested that the effect is not significant.

According to a 2020 report titled 'Employment Effects of Mandatory Retirement at Age 60' commissioned by the Ministry of Employment and Labor to the Korea Labor Institute, there was no significant change in employment of older workers depending on whether the wage peak system was operated. In a report from August last year by Senior Research Fellow Lee Byunghee of the Korea Labor Institute titled 'Necessity and Support Measures for Promoting Continued Employment of Middle-aged and Older Workers,' analysis of the wage peak system's impact on companies surveyed from 2005 to 2018 showed that companies with the wage peak system had a 2.6 percentage point lower employment share of workers aged 50 and above compared to companies without it, and after the retirement age extension, the employment share dropped by an additional 6.0 percentage points.

There are also studies indicating minimal effects on new youth hiring. In 2020, Assistant Professor Kim Seungtae of the Department of Economic Law at the Korea Military Academy and others analyzed the employment effects of the wage peak system among 8% of 1,886 companies participating in the Korea Labor Institute's panel survey from 2005 to 2017 that had introduced the system. The results showed no significant increase in new hiring rates in companies with the wage peak system. Four years after introduction, the proportion of regular employees decreased by 2.5 percentage points, while the proportion of non-regular employees increased by 2.5 percentage points.

▲ Lawsuits expected to increase... What impact on the financial sector?

=Following the Supreme Court ruling on the wage peak system, the Financial Union held a briefing on legal responses with policy officers from branches on the 8th. Since situations vary by company, they decided to provide legal support for individual inquiries. Among commercial banks, KB Kookmin Bank's union was the first to prepare a lawsuit challenging the invalidity of the wage peak system. After holding meetings with employees subject to the wage peak system following the Supreme Court ruling, they plan to recruit plaintiffs by the end of this month and start the lawsuit next month. Currently, 343 employees are subject to the wage peak system at KB Kookmin Bank.

Policy banks already have ongoing lawsuits. The Industrial Bank senior union filed a lawsuit in 2019 demanding repayment of wages cut under the wage peak system. At IBK, 470 current and former employees filed a lawsuit against management in January last year, seeking invalidation of the wage peak system and return of deducted wages.

Banks anticipate not only numerous lawsuits but also intensified demands in future labor-management negotiations for retirement age extension and improvements to the wage peak system. Especially in policy banks, where voluntary retirement is not freely chosen, they are on high alert. As employees subject to the wage peak system step back from their duties, the workload for regular employees increases and personnel bottlenecks worsen, fueling strong demands for change.