LABOR LAW GUIDE

Chapter 3 Wages

Section 5 Employee Incentive

127)

Many companies still incorrectly include employee incentives in calculating the total amount of wages. The following analyzes analyze whether employee incentives should be included when calculating wages under administrative guidelines, Labor Ministry Guidelines, and/or judicial rulings.


1. Characteristics of Bonuses in the Wage System

(1) Calculation Rules for Wages: Whether bonuses are included when calculating wages128)
Bonuses included as wages
In cases where payment conditions, amounts, and payment rates are regulated in the Rules of Employment, or where employees are paid habitually and naturally expect to get paid: regular bonuses, exercise subsidies, etc.
Bonuses not included as wages
In cases where payments are not paid habitually, but paid temporarily or definitely based on company profits at the employer's discretion: employee incentives, production bonuses, reward bonuses, incentive allowances, etc.

(2) Bonuses/benefits paid temporarily or indefinitely are excluded when calculating the total amount of wages.129)
Among the incentives based on business performance, bonuses/benefits which have never been paid customarily but have been paid temporarily based on corporate profits (or where the purpose is not specific) shall be excluded when calculating total wages for determining the Industrial Accident Compensation Insurance premium.

(3) Criteria for Business Performance Bonuses130)
The Employee Welfare Corporation has regulated the “Criteria for Business Performance Bonuses” as follows: 1) if the condition for payment is related to business performance, the bonus is not to be considered wages; 2) business performance is acceptable in various areas such as corporate profits, output, total sales, cost-saving measures, defect rate, accident ratio, market share, labor disputes, and so on; and 3) if the payment was decided by the results of business performance (such as sales, profits, etc.), even though the bonus has been paid regularly for a certain period due to good business performance, payment is not usually recognized as a general practice regulated as remuneration for work. Even though the company has included the business performance bonus into average wages to calculate severance pay, or the company has stipulated in the Rules of Employment, ‘the bonus is paid according to the results of company business,’ a business performance bonus whose payment and amount is determined by business results is not wages regardless of whether or not there is repeated payment. However, regular bonuses with no connection to business performance shall be included in total wages.


2. Cases where incentives are included when calculating wages

(1)If employee incentives and production promotion bonuses of the same amount are paid periodically and given to all employees pursuant to the collective bargaining agreement, they are characterized as wages.131)
A certain company claimed that employee incentives and production promotion bonuses were not calculated as wages because they had been an indefinite money paid at the discretion of the employer for the purpose of preventing labor disputes or bringing about early termination of wage negotiations with employees.
However, although there had been slight changes in bonuses since 1996, the above bonuses/benefits had been paid uniformly in regards to payment amount, payment period, etc. It was a burden for the employer to pay employee incentives and production promotion bonuses to all employees uniformly according to the Wage CBA. In terms of formal items such as payment rules, purpose, etc., the payment was also definite and scheduled, so these bonuses were not paid customarily and temporarily. When the above incentives and promotion bonuses are analyzed totally and substantively, they are wages to be regarded as remuneration for work.
(2) Individual sales incentives that have been paid regularly and periodically shall be included in average wages.132)
The Company's salary system consists of the basic annual salary and annual incentives. The basic annual salary is paid monthly, and the annual incentive is paid in January as a lump sum payment based upon the valuation of sales targets and outcomes for the corresponding year. The amount of severance pay the company gives reflects the basic annual salary without including the annual incentive. The Employee requested that the Company re-calculate his severance pay, insisting that the annual incentive should be included in the calculation of average wages because the annual incentive belongs to the wage concept. When his application was rejected, he filed a suit against the Company. In determining whether individual items of pay may be identified as wages reflected in the calculation of average wages, the following criteria is considered: 1) the items are paid regularly and periodically; 2) they are mandated by the employer according to collective bargaining, Rules of Employment, salary regulations, the labor contract, or habitual practice; or 3) Employees identified under general conditions are paid uniformly. If individual items of pay meet any of these criteria, the items of pay shall be considered wages regardless of their titles. The annual incentive was ruled as wages.


3. Cases Where Incentives are not Calculated as Wages

(1)Whether profit-sharing bonuses paid on the basis of business performance are considered wages.133)
According to Article 2 of the Labor Standards Act, the term "wages" means wages, salary, and any other kind of money or valuables (regardless of title), which the employer pays to a worker as remuneration for work. In cases where employee incentives were previously determined in regards to the method of payment, amount, and payment period in the Rules of Employment, the employee incentives were paid customarily to all employees. This repeated payment led employees to expect a bonus. Accordingly, these bonuses shall be regarded as a part of wages.
However, without regulating this working condition, which was previously provided in the Rules of Employment, the company management and labor determined the business profit target. In the event that the employer makes a decision to pay a fixed amount (e.g., a certain incentive rate or a one-time bonus), then if the target is achieved, such bonuses will not be treated as wages, because what they received is dependent upon the result of business performance. Whether a payment condition is met or not determines the actual payment, that is, the amount being disbursed based on an evaluation of the company's performance. Therefore, since the reason for the payment is indefinite, temporary, and based on the company's performance, this payment cannot be regarded as part of wages.
The Rules of Employment stipulate that "the bonus can be paid in consideration of yearly corporate performance. If business performance is good, as in the case of company profit, the company may, through internal decision-making, determine whether to pay special incentives, the amount and conditions required for payment for each department." Accordingly, this type of profit-sharing bonus is paid according to whether a business surplus is achieved or not. Therefore, in consideration of the payment conditions and purpose, it is difficult to deem this payment as wages according to Article 2 of the Labor Standards Act.

(2)Whether employee incentives are included as wages134)
The characteristics of valuables that a company pays to its employees: "The Labor Union requested that the company pay employee incentives and the company discussed this issue with the Labor Union, but actual payment and method of payment of the incentives could not be

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