[Aftermath of the Wage Peak System] KT Wage Peak System Deemed 'Valid' by Court... How Did It Differ from the Supreme Court Case?

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] In a lawsuit filed by over 1,300 individuals including current and former KT employees and the bereaved families of deceased employees against the company demanding the return of wages reduced due to the introduction of the wage peak system, the court ruled on the 16th that KT's wage peak system, introduced in 2015, is valid, dismissing all claims of the plaintiffs.

This ruling attracted significant attention as it was the largest lawsuit following last month's Supreme Court decision that declared the wage peak system of the former Electronics and Telecommunications Research Institute (now Korea Electronics Technology Institute) invalid for violating the mandatory provisions of the Act on Prohibition of Age Discrimination in Employment of Older Persons.

Although the types of wage peak systems differed between the Supreme Court case and this case, as expected, the first-instance court applied the validity criteria for wage peak systems set forth by the Supreme Court in its earlier ruling.

Wage Peak System Maintaining Retirement Age vs. Wage Peak System Extending Retirement Age

What is the difference between the wage peak system of the research institute, which the Supreme Court ruled as 'invalid,' and KT's wage peak system, which the court ruled as 'valid'?

In the Supreme Court case, the wage peak system was a so-called 'retirement age maintenance type wage peak system,' which reduced wages from a certain age (55) without extending the retirement age. In contrast, KT's wage peak system was a 'retirement age extension type wage peak system,' which extended the retirement age while introducing the wage peak system, making the types different.

After the Supreme Court ruling, many in the legal community anticipated that the validity criteria for wage peak systems would be more lenient for the retirement age extension type because the 'compensatory measures' for wage reductions could include not only reduced workload or working hours but also the extension of retirement age.

This KT ruling can be seen as a clear confirmation of that point.

The Seoul Central District Court Civil Division 48 (Presiding Judge Lee Gi-seon) cited the Supreme Court ruling from last month, stating, “The legal principles in case 2017Da292343 pertain to the so-called 'retirement age maintenance type wage peak system,' but they can also serve as a reference standard for cases like this involving the 'retirement age extension type wage peak system.'”

Supreme Court Research Institute Case Without Compensatory Measures... Invalid for Violating the Act on Prohibition of Age Discrimination in Employment of Older Persons

The Supreme Court previously stated, “The phrase ‘without reasonable grounds’ in Article 4-4(1) of the former Act on Prohibition of Age Discrimination in Employment of Older Persons, which prohibits discrimination based on age, refers to cases where there is no recognized necessity to treat workers differently by age or where the method or degree of different treatment is inappropriate,” and presented the following criteria.

Specifically, the Supreme Court said, “When an employer implements a wage peak system that maintains the retirement age but reduces wages for a certain period before retirement, whether this constitutes unreasonable age discrimination depends on a comprehensive consideration of factors such as ▲the validity of the purpose of introducing the wage peak system ▲the degree of disadvantage suffered by the affected workers ▲whether compensatory measures for wage reductions were introduced and their appropriateness ▲and whether the funds reduced by the wage peak system were used for the original purpose of introducing the wage peak system.”

The Supreme Court's statement that “a comprehensive consideration of various factors is necessary” implies that specific circumstances in individual cases beyond the Supreme Court case can also serve as criteria for judging the validity of wage peak systems.

In the research institute case, which the Supreme Court ruled invalid, a new personnel system was agreed upon by labor and management in June 2008, introducing a performance-based pay system along with a voluntary retirement system.

The institute created 'Performance-Based Pay Operation Guidelines' in June 2008, implemented from January 2009, which were later replaced by 'Wage Peak System Operation Guidelines' in 2013.

The wage peak system involved maintaining the retirement age but significantly lowering the competency grade used as the basis for wage calculation for employees aged 55 and above, resulting in progressively reduced wages each year, with varying reduction rates by rank. In some cases, the competency grade dropped by 50 levels at age 56, causing monthly salary reductions of approximately 930,000 KRW for top performance grades and up to about 2,830,000 KRW for the lowest grades.

While the wage peak system caused significant disadvantages to workers, there were no changes in their job content. There was no evidence of reduced workload, decreased work intensity, or changes in assigned target levels.

According to data submitted by the institute, the achievement rate against order targets for regular employees aged 51 to under 55 was lower than that of regular employees aged 55 and above who were subject to the wage peak system.

Based on these circumstances, the Supreme Court judged the institute's wage peak system as age discrimination in wages without reasonable grounds.

The court noted regarding the purpose of introducing the wage peak system, “The performance-based pay system in this case appears to have been introduced to reduce the defendant's labor cost burden and increase achievement rates. Even according to the defendant's claim, the achievement rate against order targets for regular employees aged 51 to under 55 is lower than that of regular employees aged 55 and above, so the wage reduction targeting only employees aged 55 and above cannot justify the purpose.”

Regarding compensatory measures, “the plaintiff suffered a sudden and significant wage reduction due to the performance-based pay system, and no compensatory measures were taken,” adding, “The voluntary retirement system claimed by the defendant as a compensatory measure encourages early retirement and cannot be considered a compensatory measure for workers continuing employment.”

In conclusion, the Supreme Court ruled that the research institute's 'retirement age maintenance type wage peak system' constituted unreasonable age discrimination in wages and was invalid under the mandatory provisions of the pre-amendment Act on Prohibition of Age Discrimination in Employment of Older Persons, Article 4-4(1).

Article 4-4(1) of the former Act on Prohibition of Age Discrimination in Employment of Older Persons prohibits employers from discriminating against workers or prospective workers based on age without reasonable grounds in areas such as ▲recruitment and hiring (Item 1) ▲wages, payments other than wages, and welfare benefits (Item 2) ▲education and training (Item 3) ▲placement, transfer, and promotion (Item 4) ▲retirement and dismissal (Item 5).

Until now, disputes over wage peak systems mainly concerned the legality of the introduction process, such as whether the employment rules containing the wage peak system constituted a 'disadvantageous change' and whether procedural requirements like obtaining consent from a labor union representing the majority of workers were met.

The Supreme Court ruling last month was the first to present criteria for judging the validity of wage peak systems.

KT's Wage Peak System Extending Retirement Age by 2 Years... Union Chairman Agreed with Management Without a General Assembly

The KT wage peak system in this case extended the retirement age from 58 to 60 and sequentially reduced wages over a 4-year wage peak period (ages 56 to 59), resulting in an overall reduction of about 100% of the annual total wage.

The base and competency pay sum at age 56 was set as the peak wage, and the peak wage rates for ages 56 (90%), 57 (80%), 58 (70%), and 59 (60%) were adjusted for 'base pay' and 'competency pay.'

The wage reduction rates were -10% at 56, -20% at 57, -30% at 58, and -40% at 59. In fact, compared to receiving 100% of the annual wage at ages 56 and 57 and no wages upon retirement at 58, the total wages paid to workers after introducing the wage peak system increased (from 200% to 300% of annual wages).

Although this is a simple comparison without considering annual wage increases for other employees (which was not a dispute in this case), the wage peak system applied only to 'base pay' and 'competency pay,' not to 'position pay,' so the actual wage reduction was likely less than 100% of the annual total wage, according to the court.

For example, a person with an annual salary of 100 million KRW would have originally received 100 million KRW each at ages 56 and 57 and then retired. Under the wage peak system, they would receive 90 million KRW at 56, 80 million KRW at 57, and continue working to receive 70 million KRW at 58 and 60 million KRW at 59, totaling 300 million KRW over four years.

For this reason, the court judged, “It is insufficient to conclude that workers suffered 'active damage' due to this wage peak system.” Regarding the second criterion of the Supreme Court's validity judgment?the degree of disadvantage suffered by affected workers?the court interpreted that although wages at ages 57 and 58 decreased compared to before the wage peak system, the extended two-year working period increased the total wages received from the company, making it difficult to view this as a disadvantage.

KT and the KT Labor Union agreed on April 8, 2014, labor-management agreement (regarding business rationalization, special voluntary retirement, and changes to the wage system), which included ▲implementing special voluntary retirement as of April 30, 2014 ▲abolishing the regular voluntary retirement system as of May 1, 2014, and introducing the wage peak system as of January 1, 2015.

The special voluntary retirement targeted employees with over 15 years of service, allowing them to choose between retirement and reemployment types freely. If choosing reemployment, the company would arrange employment within the group for two years considering job relevance.

Details such as the applicable age and reduction rates for the wage peak system were to be agreed upon later by labor and management.

On October 22, 2014, a question was posted on the union's website asking, “Will the wage peak system be implemented from next year?” The union replied the same day, “As you know, the wage peak system is scheduled to be implemented from January 1, 2015, as agreed by labor and management. However, due to significant differences between labor and management, detailed implementation plans have not been finalized. Once the implementation plan is finalized through sufficient discussions with the company, it will be decided after a general assembly of union members.”

However, without holding a general assembly or listening to union members' opinions, the union agreed to implement the wage peak system through a labor-management agreement dated February 24, 2015.

The agreement included ▲extending the retirement age to 60 as of January 1, 2016, in accordance with government policy and ▲implementing the wage peak system for employees born in 1958 or later, to mitigate the impact of the retirement age extension starting March 1, 2015.

Regarding the wage peak system, the agreement included ▲introducing a 'post-retirement reemployment system (tentatively called Senior Consultant)' for employees retiring under the wage peak system to be reemployed within the group and ▲securing funds to boost employee morale through incentives for outstanding employees and family love programs.

Based on this labor-management agreement, the company revised the 'Personnel Regulations' and 'Compensation Regulations' and implemented them with the union's consent.

However, 226 union members dissatisfied with this wage peak system agreement filed a lawsuit on July 4, 2014, against the union chairman and the business support office manager who signed the labor-management agreement on behalf of the chairman, seeking nullification of the agreement and claiming mental damages for deterioration of working conditions and procedural rights violations as union members.

The claim for nullification was dismissed for lack of interest, but the court recognized that the union chairman violated union rules by concluding the agreement without a general assembly, infringing on members' procedural rights, partially granting damages against the chairman and the manager. This first-instance ruling was confirmed by the Supreme Court in July 2018.

Claims of Abuse of Representative Authority and Disadvantageous Changes... “Labor-Management Agreement Wage Peak System Invalid”

The following year, the plaintiffs filed a lawsuit claiming unpaid wage differences due to the wage peak system, arguing that the wage peak system was invalid.

The plaintiffs' grounds for invalidity included ▲the April 8, 2014, labor-management agreement containing the wage peak system was agreed upon without union general assembly approval, which was required ▲the union betrayed members' trust by posting on October 22, 2014, that the wage peak system would be decided after a general assembly but secretly concluded the labor-management agreement on May 24, 2015 ▲the company's extension of retirement age to 60 was merely compliance with the amended Act on Employment of Older Persons (which changed the retirement age provision from “should strive” to “must set” at 60) ▲the wage peak system reduced wages by 100% over four years without reducing workload or intensity, constituting unlawful age discrimination ▲the labor-management agreement introducing the wage peak system unreasonably worsened working conditions and exceeded the scope of collective agreements ▲the union chairman abused representative authority to conclude the agreement for the company's benefit, which the company knew or should have known, rendering the agreements invalid.

Abuse of representative authority refers to a corporate representative acting within apparent authority but in fact for personal or third-party benefit. The Supreme Court's mainstream view is that such acts are valid toward third parties unless the third party knew or should have known the abuse, applying the analogy of Article 107(1) of the Civil Act.

In this case, the plaintiffs argued that the union chairman concluded the agreement for the company's benefit, which the company knew or should have known, making the labor-management agreements invalid.

The plaintiffs also argued under the 'principle of favorability' that the labor-management agreement could not reduce individual employment contracts' annual salaries.

Initially, the plaintiffs claimed the return of reduced wages but, facing the company's argument of a short three-year statute of limitations on wage claims, newly argued that the company must return unjust enrichment or pay damages for tort.

Article 49 of the Labor Standards Act stipulates a three-year statute of limitations for wage claims, allowing claims only for wage differences within three years before filing. In contrast, claims for unjust enrichment have a 10-year limitation, and tort claims have a three-year limitation from knowledge of damage and perpetrator and a 10-year absolute limitation.

Unjust enrichment claims argue that the company gained benefits without legal grounds by not paying wages due to the invalid wage peak system, causing equivalent damage to plaintiffs. Tort claims argue that the company intentionally or negligently caused damage to plaintiffs.

The court noted that although the union raised new claims, it did not interpret this as withdrawing the wage claims, viewing the claims for 'wages' and 'wage equivalents' as selectively made.

In conclusion, the court considered the plaintiffs' claims for unpaid wages and delayed damages, unjust enrichment claims (primary), and tort claims (alternative) together.

Despite No General Assembly, Wage Peak System Labor-Management Agreement Valid

First, the court rejected the plaintiffs' claims that the labor-management agreements were invalid due to lack of a general assembly and abuse of representative authority by the union chairman for the company's benefit.

The court cited Supreme Court precedents stating that a union representative concluding a collective agreement without internal procedures affecting members' important working conditions constitutes an illegal act infringing union members' rights, but even if union rules require a general assembly before concluding collective agreements, such rules do not affect the validity of the collective agreement concluded by the union representative.

Therefore, the court found that “each labor-management agreement in this case met both substantive and formal requirements as a collective agreement.”

The court also noted that ▲the special voluntary retirement and wage peak system were announced to all employees immediately after the April 8, 2014, labor-management agreement ▲the union chairman who concluded the agreement was re-elected with 71.47% of votes in the November 19, 2014, election (suggesting tacit approval by union members, which is separate from claims for damages due to procedural rights violations) ▲six labor-management cooperation meetings were held from December 23, 2014, to February 24, 2015, to discuss details of the wage peak system ▲the union website's responses do not have binding legal effect on the company or union, leading to the conclusion that “the labor-management agreements' validity cannot be denied.”

Retirement Age Extension, Government Subsidies, Reemployment, Additional Compensation... Sufficient Compensatory Measures in KT Case

The court examined whether KT's wage peak system constituted unreasonable age discrimination prohibited by the Act on Prohibition of Age Discrimination in Employment of Older Persons, citing the Supreme Court's criteria:

▲validity of the purpose of introducing the wage peak system ▲degree of disadvantage suffered by affected workers ▲whether compensatory measures for wage reductions were introduced and their appropriateness ▲whether the funds reduced by the wage peak system were used for the original purpose.

The court stated that although these principles were developed for the 'retirement age maintenance type wage peak system,' they could serve as reference standards for the 'retirement age extension type wage peak system' in this case.

Regarding the validity of the purpose, the court found that the 2013 amendment mandating retirement age at 60 and KT's deteriorating business conditions made the introduction of the wage peak system unavoidable, so it was difficult to conclude that the system constituted unreasonable age discrimination or exceeded the scope of collective agreements.

The court explained, “The main point of the May 2013 amendment to the Act on Employment of Older Persons is to guarantee work opportunities for capable workers by obligating employers to set retirement age at 60 or above (Article 19) and requiring labor unions representing the majority of workers to take measures such as wage system restructuring due to retirement age extension (Article 19-2).”

It added, “Since the employer's financial burden naturally increases with retirement age extension, legal grounds were established to allow measures like wage system restructuring to prevent adverse effects such as workforce restructuring or reduced new hiring, imposing obligations not only on employers but also on labor unions.”

The court also referenced Article 23 of the Employment Insurance Act and Enforcement Decree Article 28-2, which provide subsidies for wage system restructuring like wage peak systems for workplaces extending retirement age to 60 until December 31, 2018, noting that “the relevant laws already anticipated wage peak systems corresponding to retirement age extension.”

At the time of the April 8, 2014, labor-management agreement, KT had about 32,000 employees, with 23,000 having over 15 years of service. Although 8,356 employees retired through special voluntary retirement, as of the February 24, 2015, labor-management agreement, 18,185 of 22,908 employees (79.4%) were aged 40 or above, and employees aged 50 or above accounted for 30.3%.

KT's operating profit (loss) sharply declined from 1.0067 trillion KRW in 2012 to 309.9 billion KRW in 2013 and -719.4 billion KRW in 2014, with net profit (loss) also dropping from 708.8 billion KRW in 2012 to -392.3 billion KRW in 2013 and -1.1419 trillion KRW in 2014.

The court concluded, “Considering KT's workforce structure and business conditions, the company had an urgent need to reduce labor costs by implementing wage peak systems in response to the retirement age extension under the Act on Employment of Older Persons.”

It added, “The fact that many employees took voluntary retirement in 2014 alone does not suffice to conclude that the reason for implementing the wage peak system disappeared.”

Regarding the degree of disadvantage suffered by affected workers, the court reiterated that total wages actually increased, so it was insufficient to conclude that workers suffered active damage.

Furthermore, the court noted, “KT maintained welfare benefits such as meal and commuting allowances, communication subsidies, medical expenses, funeral support, and welfare points for wage peak workers.”

Regarding the introduction and appropriateness of compensatory measures, the court highlighted a key difference in the 'retirement age extension type wage peak system' compared to the Supreme Court case.

Specifically, the court stated, “Although the plaintiffs argue that the wage peak system constitutes unreasonable age discrimination because workload and intensity were not reduced despite wage reductions, in cases like this where the wage peak system is linked to retirement age extension, the extension itself is the most important compensation for wage reductions, and wages paid for the extended working period are the primary use of the reduced labor costs.”

It added, “Therefore, the absence of explicit reductions in workload or intensity alone does not justify concluding that the wage peak system constitutes unreasonable age discrimination.”

The court also pointed out that under Enforcement Decree Article 28-2 of the Employment Insurance Act, workplaces extending retirement age to 60 and implementing wage peak systems can receive government subsidies, and KT received over 9.5 billion KRW from the Employment Stability Center.

Since the subsidies were clearly for implementing the wage peak system, the fact that the subsidies came from the government rather than the company does not negate their nature as compensatory measures for wage reductions.

The court further noted that the February 24, 2015, labor-management agreement included provisions to pay fixed performance bonuses based on personnel evaluation grades to continuously motivate wage peak workers, introduce a post-retirement reemployment system (Senior Consultant) for some retirees to be rehired by KT or group affiliates, secure funds annually for employee family love programs (We Love Our Family Filial Piety Leave), and allocate separate TOs for wage peak workers as additional compensatory measures.

Denial of Abuse of Representative Authority and Violation of Principle of Favorability... Rejection of Unjust Enrichment and Tort Claims

The court addressed the plaintiffs' claim that the union chairman abused representative authority to conclude the labor-management agreements, stating, “Acts infringing union members' procedural rights and acts abusing representative authority solely for the company's benefit must be distinguished.”

It noted that ▲the obligation to restructure wage systems due to retirement age extension applies to both employers and labor unions ▲KT's workforce structure and worsening business conditions were objectively clear ▲the union chairman was re-elected with a high vote share after agreeing to the wage peak system ▲six labor-management cooperation meetings were held with eight union executives as negotiators ▲the wage reduction rate was reduced from 140% to 100% through negotiations ▲the agreement included performance bonuses, post-retirement reemployment, and family love programs, concluding that “there is insufficient evidence that the union chairman concluded the agreements solely for the company's benefit.”

The court also rejected the plaintiffs' claim of violation of the 'principle of favorability.'

Article 94(1) of the Labor Standards Act requires employers to hear the opinions of labor unions representing the majority of workers or, if none, the majority of workers themselves when drafting or changing employment rules, and obtain consent if the changes are disadvantageous.

The plaintiffs argued that the wage peak system was a disadvantageous change made without their consent, rendering it invalid.

However, the court cited Supreme Court precedents stating that collective consent under Article 94 is a requirement for valid changes to employment rules, but even if employment rules are changed disadvantageously with collective consent, the principle of free determination of working conditions under Article 4 of the Labor Standards Act still applies.

Article 4 of the Labor Standards Act states that working conditions must be determined freely by workers and employers on equal footing.

The Supreme Court has held that disadvantageous changes to employment rules with collective consent do not override more favorable individual employment contracts, which remain valid unless individually consented to be changed.

The KT case court stated, “The principle of favorability presupposes the existence of individual employment contracts or salary agreements more favorable than employment rules, but there is no evidence of such contracts between the plaintiffs and the company.”

It added, “The plaintiffs appear to have been paid wages according to the 'Compensation Regulations' annually, so their claim to deny the wage peak system based on the principle of favorability is unfounded.”

The plaintiffs' claim based on the principle of favorability assumes that disadvantageous changes to employment rules require consent beyond collective consent, but this presupposes more favorable individual contracts, which do not exist here, so their claim is rejected.

Finally, the court stated, “All plaintiffs' claims that the labor-management agreements are invalid are unfounded,” and concluded, “Therefore, the plaintiffs' claims for unpaid wages or their equivalents, unjust enrichment claims, and tort claims are all dismissed.”

If the labor-management agreements are valid, the company did not unjustly gain unpaid wages nor cause damages to wage peak workers intentionally or negligently.

In conclusion, this KT case involved a different type of wage peak system extending retirement age while reducing wages, and the court demonstrated that the four criteria set by the Supreme Court for the validity of retirement age maintenance type wage peak systems can also apply to retirement age extension type wage peak systems.

Moreover, in judging whether appropriate compensatory measures existed, the court emphasized that in retirement age extension type wage peak systems, the extension of retirement age itself is the most important compensation for wage reductions and regarding the fourth criterion about the use of reduced funds, the wages paid for the extended working period are the primary use of the reduced labor costs.