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Korean Law Demystified!

Performance Bonuses Are Profit-Sharing, Not Wages: Supreme Court Excludes Management Bonuses from Retirement Pay Calculations

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South Korea’s Supreme Court has ruled that annual performance bonuses tied to a company’s net profit are not “wages” in the legal sense and therefore cannot be included in the average wage calculation used to determine retirement pay. Here are the key points.

Issue

Do management performance bonuses paid annually based on company profits constitute “wages” under Korean labor law, and must they be included in the average wage figure used to calculate retirement pension contributions?

Facts

  • Hyundai Marine & Fire Insurance paid management performance bonuses from 2003 to 2018 whenever annual net profit exceeded a set threshold. The payout rate ranged from a base of 100% of the bonus standard up to 700–800%, depending on how much profit exceeded the minimum.
  • The payment criteria changed every year. From 2009 onward, the company set the criteria unilaterally through internal decision-making, without labor-management agreement. Actual payout rates swung dramatically — from 0% to 716% — across different years.
  • Current and former employees sued, arguing the bonuses constituted wages and should be factored into their average wage for retirement pension purposes.

Rule

  • Under Korean labor law, “wages” are payments made in return for work performed. Only amounts qualifying as wages are included in the average wage base used to calculate statutory retirement pay and pension contributions.
  • A payment established through long-standing practice can acquire the character of wages if there is a recognized obligation on the employer to pay it. Conversely, payments that are discretionary, variable, and contingent on factors outside the employee’s control may be characterized as profit-sharing rather than compensation for labor.

Lower Court Decisions

  • Both the trial court and the appellate court sided with the employees, finding that a sufficiently established practice of annual payment had formed, creating an implied obligation on the company to pay the bonus. They also found the bonus closely linked to work performance, and therefore wage in nature.

Supreme Court Decision

  • The Supreme Court (Civil Division 2, presiding Justice Cheon Dae-yeop) reversed the appellate decision on February 26, 2026, and remanded the case to Seoul High Court.
  • The court held that no binding payment obligation had arisen through custom or practice, for three main reasons.
  • First, the bonus criteria were explicitly limited to the relevant year in each instance, and the specific terms changed multiple times. Labor-management agreement on the criteria existed for only about six of the sixteen years in question; for the remaining ten, the company set the terms unilaterally.
  • Second, given the company’s retained discretion to adjust or withhold the bonus based on business conditions, it could not be said that a genuine practice of guaranteed annual payment had been established.
  • Third, and most significantly, the actual payout rate fluctuated too wildly — from zero to over 700% — to be explained by variations in the quality or quantity of employees’ work. The Supreme Court found that the key determinant of whether and how much was paid was the company’s net profit outcome, a figure driven by factors largely outside employees’ control. The bonus therefore reflected profit distribution, not compensation for labor.

Key Takeaways

  • A performance bonus tied to company-wide net profit results — rather than individual or team work output — is more likely to be characterized as profit-sharing than as wages under Korean law.
  • Year-by-year payment criteria that are explicitly time-limited and frequently revised weigh heavily against a finding of an established wage-payment custom.
  • Unilateral employer control over bonus criteria, without labor-management agreement, undermines any argument that the payment became a legally obligated component of compensation.
  • Exclusion from the average wage base means such bonuses do not factor into retirement pension calculations — a significant financial consequence for long-serving employees.

Why This Matters

This ruling draws a clearer line between wages and profit-sharing in Korean employment law, with significant implications for how companies structure variable pay. For employers, it suggests that performance bonuses tied explicitly to company profitability — and subject to year-by-year discretion — carry less legal risk of being reclassified as wages. For employees and their counsel, it highlights the importance of securing labor-management agreements that lock in bonus entitlements, rather than leaving payment terms to unilateral employer discretion each year.

Article: https://www.lawtimes.co.kr/news/articleView.html?idxno=219000&page=2&total=20240

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