Many companies still incorrectly include employee incentives in calculating the total amount of wages. The following analyzes reviews whether employee incentives should be included when calculating wages under administrative guidelines, Labor Ministry Guidelines, and/or judicial rulings. Jung, Bongsoo, 『Major Labor Issues and Related Cases』, 3rd ed., 2014. Jungang, p. 212.


1. Characteristics of Bonuses in the Wage System

(1) Calculation Rules for Wages: Whether bonuses are included when calculating wages Article 476 of Regulations of the Ministry of Employment and Labor.

(i) Bonuses to be 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.
(ii) 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 wages. Ministry of Employment and Labor (MOEL) Guidelines: Jingsu 68607-285, on Jun. 9, 1994.

Among the incentives based on business performance, bonuses/benefits which have never been paid annually 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 Bonuses MOEL Guidelines: Kongdan Jingsu 6510-52, on Jan. 23, 2003.

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, quality assurance targets, 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(CBA), they are characterized as wages. Seoul Appellate Court ruling on Sep. 18, 2003, 2002Na18697.

A certain company claimed that employee incentives and production promotion bonuses were not calculated as wages because they had been an indefinite amount of 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 annually and were temporary in nature. When the above incentives and promotion bonuses are analyzed totally and substantively, they were wages determined to be as remuneration for work.

(2) Individual sales incentives that have been paid regularly and periodically shall be included in average wages. Seoul District Court ruling on Jun. 21, 2007, 2006Na20978.

A 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 fiscal year. The amount of severance pay the company gives reflects the basic annual salary without including the annual incentive. An 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 request 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 agreement, 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) The performance-based pay of public institutions corresponds to wages. Supreme Court ruling on December 13, 2018, 2018da231568

The performance-based pay for public institution management evaluation is provided based on the 'Public Institutions Operation Act,' according to the evaluation results of the Minister of Planning and Finance's management performance. Article 48, Paragraph 10 of the Public Institutions Operation Act specifies matters necessary for the procedure of management performance evaluation, measures based on management performance evaluation results, and the composition and operation of the management evaluation committee by presidential decree. Article 27, Paragraph 4 of the Enforcement Decree of the Law on the Operation of Public Institutions states that "The Minister of Planning and Finance may make recommendations and requests for personnel or budgetary measures based on the evaluation results through the deliberation and resolution of the operating committee, as well as determine the performance pay rate based on subsequent measures." The annual budgeting guidelines for public enterprises and quasi-governmental agencies announced by the Minister of Planning and Finance include information on budgeting for public institution management evaluation performance pay, and the budget execution guidelines for public enterprises and quasi-governmental agencies include specific methods for calculating and paying public institution management evaluation performance pay according to established criteria. Therefore, most public enterprises and quasi-governmental agencies specify in detail in collective agreements or employment regulations the timing, calculation method, and payment conditions for management evaluation performance pay based on the results of management performance evaluations.
The wages that form the basis for calculating the average wage are payments made by employers to employees as compensation for labor, which are continuously and regularly paid to employees and are obligatory for employers, as specified in collective agreements, employment rules, salary regulations, labor contracts, labor practices, and the like. If the public institution's management evaluation performance pay is continuously and regularly paid, and the recipients, payment conditions, and other details are determined, it should be considered as part of the wages paid as compensation for labor. Supreme Court ruling on October 12, 2018, 2015du36157.

On the other hand, since 2012, there has been no minimum payment rate or minimum payment amount set for performance-based pay for public institution management evaluation. Therefore, depending on the results of the management performance evaluation of the affiliated institution, individuals may not receive performance-based pay. However, even in cases where performance-based pay is not received, considering the proportion of performance pay in the total salary, the actual payment situation, and the purpose of the average wage system, it should be regarded as wages paid as compensation for labor.

3. Cases Where Incentives are Not Calculated as Wages

(1) Whether profit-sharing bonuses paid on the basis of business performance are considered wages. MOEL Guidelines: Wages 68207-134, on Feb. 28, 2002.

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 that 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 condition for the payment is variable, temporary, and based on the company's performance, this payment cannot be regarded as part of wages.
That company’s 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) Determination if employee incentives are included as wages Daegu District Court ruling on Feb. 21, 2014, 2013Gahap8360.

The characteristics of valuables that a company pays to its employees: The Labor Union requested that the Company pay employee incentives, which the Company discussed with the Labor Union, but actual payment and method of payment of the incentives could not be agreed upon. The Company decided to pay an incentive based on business performance and paid an actual incentive on March 4, 1999, December 23, 1999, and December 29, 2000, only to incumbent employees, and with different payment criteria and payment rate per employee.
Ruling: The company regulated the employee incentives and general criteria for payment in the Internal Wage Rules, but there were no other rules related to payment, period, or concrete rate for incentives in the Rules of Employment or Collective Bargaining Agreement. Employee Incentives were paid irregularly, with no fixed rate and at different amounts per employee. The company determined payment and method according to company performance. In consideration of this situation, it is hard to deem that employee incentives were paid continuously and periodically as remuneration for work or that such a customary practice was established. As the employer has no obligation to pay incentives in the Rules of Employment, Collective Bargaining, or Wage Regulations, the employee incentives shall not be interpreted as wages.

(3) Whether profit-sharing bonuses are included as wages. Changwon District Court ruling on May 17, 2001, 2000Gu3242.

The characteristics of valuables that a company pays to its employees: There were no regulations for profit-sharing bonuses in the Collective Bargaining Agreement. Since the company exceeded its production target by more than 100% from December 1996 to 2000, it paid 100% profit-sharing bonuses on average.
Ruling: The wages regulated in the company's Collective Bargaining Agreement consist of base pay, bonuses, and allowances, but there are no regulations for employee incentives. According to the Wage CBA concluded every year, profit-sharing bonuses are to be paid according to whether a production target scheduled in a given year was achieved. Therefore, the payment method and amount of profit-sharing bonuses were the same each year and these bonuses were paid irregularly. Accordingly, the Company does not have a legal duty to pay profit-sharing bonuses. This means that these bonuses are not considered wages. Changwon District Court ruling on May 17, 2001, 2000Gu3242.


(4) Determination if performance bonuses for each company section are to be included as wages. MOEL Guidelines 02-03886, on Dec. 14, 2002.

The characteristics of remuneration that a company paid to its employees: "The Company stipulates in the Rules of Employment that it can pay employee incentives once a year in consideration of business performance for each company division; the payment, method, criteria, and size of incentive shall be determined according to business performance every year." Since establishment of the employee incentive regulations in 1995, payment rates and payment subjects were applied differently in the second half of 1995, in the first half and second half of 1996, in the first half and second half of 1999, and in the first half and second half of 2000. Bonuses were not paid in 1997 and 1998.
Ruling: “Employee incentives were not fixed amounts each time and the Rules of Employment stipulate that ‘the Company can pay incentives once a year in consideration of business performance for each company section; the method, criteria, and size of incentive shall be determined according to annual business performance.’ Since the reason for the incentive, the concrete payment criteria, the amount, and the time are unfixed, it is difficult for employee incentives to be definitely determined and paid. In consideration of the fact that employee incentives in 1997 and in 1998 were not paid, the employee incentives shall be included as remuneration granted temporarily and irregularly according to the company's business performance.”

(5) Whether variable employee incentives are included as wages. MOEL Guidelines 02-03729, on Nov. 18, 2002.

A company paid variable employee incentives in appreciation of employee efforts in smoothly implementing the core business. There were no regulations for variable incentives in the rules of employment. Even though they have been paid a few times temporarily in 1999 and 2000, these bonuses were not paid uniformly and varied individually in payment.
Ruling: "There are no regulations concretely stipulated in the Rules of Employment related to variable or regular incentives. There is also no agreement for variable incentives in the Collective Bargaining Agreement. These bonuses were only paid once each year, in 1999 and 2000, so it is difficult to regard the variable incentives as a repeated practice to be paid to all employees uniformly and regularly. In consideration of these facts, variable employee incentives cannot be regarded as wages, but remuneration to be paid to employees under friendly and favorable terms according to each employee's business performance.”