[Wage Peak System Q&A] Dongchae Lim, Partner Attorney at I&S Law Firm

Dongchae Lim Partner Attorney at Law, I&S Law Firm

[Asia Economy, Legal Affairs Reporter Choi Seokjin] After the Supreme Court ruled last month that the “retirement age maintenance-type wage peak system” at the former Electronics and Telecommunications Research Institute (now Korea Electronics Technology Institute) was invalid, both the business community and labor sector have been thrown into confusion.

Executives and employees at various companies implementing wage peak systems similar to or different from the Supreme Court case have begun to examine whether the wage peak system at their own company is valid, and how to prepare for potential lawsuits.

Amid this, on June 16, a lower court ruled that KT’s “retirement age extension-type wage peak system” was valid. We asked Dongchae Lim, partner attorney specializing in labor law at I&S Law Firm, about the significance of these two rulings and how both management and labor unions should respond.

- First, what is the significance of the recent Supreme Court ruling?

▶In the past, the main issue regarding wage peak systems was the legality of their introduction process. However, the recent Supreme Court ruling is significant in that it declared wage peak systems based on age discrimination invalid, and for the first time presented clear criteria for determining the validity of such systems.

- Can the criteria set by the Supreme Court be applied as-is to other types of wage peak systems?

▶Since this ruling concerns the retirement age maintenance-type wage peak system, it cannot be concluded that it applies directly to retirement age extension-type or employment maintenance-type systems. However, the criteria for determining the validity of retirement age maintenance-type wage peak systems are expected to significantly influence the criteria for other types as well. Wage peak systems were introduced as a solution to the problems of the seniority-based wage system (where employees receive high wages due to long service despite a decline in actual labor productivity). Therefore, the criteria presented in this ruling are likely to have a considerable impact on evaluating the validity of other types of wage peak systems with similar intent. In fact, the first-instance court in the KT case last week stated, “Although the Supreme Court’s legal principle pertains to the so-called ‘retirement age maintenance-type wage peak system,’ it can serve as a reference for cases like this ‘retirement age extension-type wage peak system.’” In practice, the court applied the four criteria set by the Supreme Court-necessity of introducing the system, the degree of disadvantage to employees, the measures taken in response to wage reduction, and the use of reduced labor costs-directly to the case.

- Should we understand that a more relaxed standard was applied to the retirement age extension-type wage peak system compared to the retirement age maintenance-type?

▶Rather than the standards being relaxed, the retirement age extension-type and maintenance-type wage peak systems are viewed differently. Specifically, the retirement age extension itself is clearly recognized as the most important compensatory measure in response to wage reduction.

- Have inquiries from employees or companies increased since the Supreme Court ruling?

▶There has been a slight increase, but many workplaces that have adopted the retirement age extension-type wage peak system seem to be taking a wait-and-see approach, perhaps because they believe the Supreme Court ruling does not apply directly to them.

- What evidence should employees or companies prepare in advance in anticipation of future lawsuits?

▶According to the criteria set by the Supreme Court, it is necessary for employees to prepare evidence showing the absence of grounds for the starting age of the wage peak system, the absence of compensatory measures such as job adjustment or reduction in working hours in response to wage cuts, and the absence of utilization of reduced labor costs for new hires. Conversely, companies should prepare evidence to prove the existence of these factors.

- If employees file lawsuits collectively, but there is no labor union or representative body within the company, how should they prepare?

▶If there is no labor union or representative body, each employee must file a lawsuit individually. However, since the validity of the wage peak system is a matter of common interest, multiple employees may select a representative plaintiff to proceed with the lawsuit on behalf of the others.

- Since the statute of limitations for wage claims under the Labor Standards Act is three years, can those who retired more than three years ago not file a lawsuit?

▲Only wage differences for up to three years retroactively from the time the lawsuit is filed can be claimed. Therefore, those who retired more than three years ago cannot make a claim. If a certified letter demanding payment of the wage difference is sent to suspend the statute of limitations, this constitutes a formal demand under Article 174 of the Civil Act, so a lawsuit must be filed within six months of sending the certified letter for the suspension to be effective.

- Is there any possibility of remedy through claims for return of unjust enrichment or damages from tort, which have a 10-year statute of limitations?

▶To claim return of unjust enrichment or damages from tort, the wage peak system introduced by the company must first be found invalid. In the KT case, when the company argued the short statute of limitations for wage claims, employees countered with claims for return of unjust enrichment or damages from tort for the reduced wages. However, the court stated, “Since the plaintiffs’ claim that the labor-management agreement adopting the wage peak system is invalid is unfounded, claims based on a different premise cannot be accepted,” and did not make a separate judgment. If the wage peak system is found invalid, claims for return of unjust enrichment or damages from tort would be possible, but even then, requirements such as causality and intent or negligence must be met. Considering that most companies introduced the wage peak system through agreements with labor unions rather than unilaterally, it seems unlikely that intent or negligence would be recognized.

- How should companies prepare for potential lawsuits?

▶For companies, not only the validity criteria set by the Supreme Court but also the legality of the introduction process is at issue. Therefore, companies need to check whether the introduction of the wage peak system constitutes a “disadvantageous change” to the rules of employment, and if so, whether procedures such as obtaining the consent of a majority labor union were followed. Regarding the validity of the wage peak system, it is also necessary to closely examine whether the four criteria set by the Supreme Court are met. In particular, companies should review the basis for determining the starting age of the wage peak system, whether compensatory measures such as job adjustment or reduction in working hours were taken, and whether the reduced labor costs were used for new hires.

- What should companies pay attention to when newly introducing or revising a wage peak system in the future?

▶In the Supreme Court case, wages were reduced starting at age 55, but compensatory measures for the wage reduction were insufficient, and the basis for starting at age 55 was also lacking. Therefore, companies should establish a clear basis for the starting age, prepare compensatory measures such as job adjustment or reduction in working hours for employees subject to the wage peak system, and devise ways to utilize the reduced wages.

- If an employee wishes to continue working until the retirement age even with reduced wages, is it possible to maintain the effect of an invalid wage peak system through an individual agreement with the company?

▶Even if such an individual agreement exists, if the wage peak system at the workplace is invalid, the agreement would be considered void as it violates the mandatory provision of the former Act on the Prohibition of Age Discrimination in Employment, Article 4-4, Paragraph 1 (which prohibits discrimination against workers or job seekers based on age without reasonable cause in wages and other matters).

- Any advice for employees or companies regarding the implementation of wage peak systems?

▶It is necessary to closely review whether the wage peak system at each workplace is valid according to the criteria set by the Supreme Court. If there are shortcomings in meeting the validity criteria, it is advisable for labor and management to proactively negotiate improvements before resorting to individual lawsuits.