LABOR LAW GUIDE

Chapter 3 Wages

Section 3 Annual Salary Systems

116)

1. Concept

The annual salary system is a structure that determines wages according to the criteria of ability and performance during one average year.


2. Types

(1) Division according to constituent items of annual salary
The annual salary system is not a legal concept, thus each company can use it differently. The annual salary consists of ① a complete annual salary system including all contents of wages, ② a partial annual salary system including parts of legal allowance, and ③ a performance-based annual salary system including allowances and bonuses but excluding legal allowances.

(2) Division according to the level of annual salary adjustment
The annual salary system is divided into two systems. One is the accumulative annual salary system which is distinguished by individuals and usually exceeds the previous year's amount without reduction. The other is the reduction-type annual salary system that deducts from the previous year's amount.

(3) Division according to the range of annual salary adjustment
The annual salary system is divided into two systems in the range of annual salary adjustment. One is the simple annual salary system that includes several items in wages and adjusts the total amount in the annual salary. The other is the mixed annual salary system that is mixed with seniority-type base pay, annual level-up portion, and adjustable parts.


3. Application

The annual salary system is generally applied to directors, managers, or general managers who are working in specific positions such as managerial or supervisory, researching, professional, and sales positions. The company accepts the annual salary system exclusively for these particular areas because it is difficult to apply it to all employees due to restrictive factors such as payment for legal allowances, working hours, etc. of the Labor Standards Act. Even if the annual salary system is applied to a limited number of employees, it does not violate Article 6 of the Labor Standards Act, which prohibits discrimination by nationality, religion, gender, and social status.


4. Application of Legal Working Conditions

(1) Labor Contract
All constituent items of wage and methods of calculation and payment shall be specified in the labor contract according to the Labor Standards Act. Accordingly, a contract in the annual salary system shall also specify personnel data; individual annual salary; methods of calculating and payment of annual salary; duration of annual salary; matters on payment and promotion; legal allowances excluding annual salary; various allowance calculations and payment methods; matters on severance pay; bonus and minimum annual salary; matters on the process of making a protest, etc.
In particular, it is desirable that mutual parties specify legal allowances and calculation of severance pay in a written labor contract in order to prevent any possible conflict between the employee and the employer, provided that, if the annual salary system is applied, the items applied to all employees in general shall be acceptable to regulate the Rules of Employment.

(2) Rules of Employment and Collective Agreement
In order to introduce the annual salary system, an employer shall specify certain rules in the Rules of Employment and Collective Agreement, as well as in a labor contract to the related employee. It is desirable that the Rules of Employment shall regulate commonly applied items of the employees, as the labor contract shall include individual items.
If the Concept of the annual salary system is deemed disadvantageous to certain employees, in revising the Rules of Employment, an employer shall obtain a collective consent from the majority of the employees according to Article 94 of the Labor Standards Act. In this case, obtaining the agreement is applicable to the employees of the annual salary system, and it is enough to collect opinions from other employees.
If the annual salary system is enforced without specific regulations in the Collective Agreement, the increase of annual salary will be applicable to the agreed wage increase rate after the closing of the Collective Agreement.

(3) Working hours and legal allowances for off-days and leave
Although the annual salary system is applied, working hours and articles concerning off-days and leave shall be applicable.

(4) Severance pay
1) Principle
Severance pay in the annual salary system shall be paid according to the Labor Standards Act. Even if the company pays, as part of the employment contract, a severance pay in advance with annual salary, such payment does not have the same effect as the lawful severance pay.
2) Exception: interim adjustment
In introducing the annual salary system, an employer may draft an annual salary contract to regulate an interim adjustment for one year severance pay per year. According to Article 8(2) of the Employees' Retirement Benefit Guarantee Act, the interim adjustment of severance pay shall be requested first and consented to by an employer; thus the regular and uniformly interim adjustment by labor contract, Rules of Employment, or Collective Agreement shall not be admitted. However, it is possible that an employer can complete the interim adjustment of severance pay upon application by the employee when it is entailed in the annual salary contract.

(5) Principle of fixed-day payment
The Labor Standards Act stipulates that wages shall be paid once or more per month on a fixed day. Accordingly, the previously decided annual salary shall be paid regularly once or more per month.

(6) Calculation of ordinary wage and average wage
Annual salary is the fixed wage to be rendered during the one-year period of wage calculation, so it includes ordinary wage as well as the average wage.
In such a case where legal standard working hours are measured as contractual working hours, the yearly ordinary working hours computed as hourly ordinary wage is as follows:
Yearly ordinary working hours:(40 hours+8 hours)×52weeks117)
=2,508 (=monthly contractual working hours×12 months=209×12=2,508)

(7) Dismissal
An employer cannot terminate the labor contract merely because the contract date expires. When introducing the annual salary system that legally and properly applies to the Collective Agreement, Rules of Employment, or labor contract, an employer has to evaluate work performance based on the job plans submitted during the annual contract period and determine the annual salary for the ensuing period. In this case, if the employer terminates the labor contract because of the employee's refusal to accept the proposal, it can be liable for unfair dismissal.

116) Reference: Gaprae Ha, 『Labor Standards Act』Volume 26, 2015, pp516-523.
117) 52 weeks: 52.14 = 365days/7days

For further questions, please
call (+82) 2-539-0098 or email bongsoo@k-labor.com

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