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

1. 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 types of wages, ② a partial annual salary system including parts of legal allowances, 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 cumulative 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 components.
2. 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.

3. 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 items commonly applied to the employees, as the labor contract shall include individual items.
If the concept of the annual salary system is deemed disadvantageous to certain employees, while revising the rules of employment, an employer shall obtain the collective consent of the majority of employees according to Article 94 of the Labor Standards Act. In this case, obtaining such agreement is necessary only from the employees to whom the annual salary system will apply, 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 agreed wage increase rate after conclusion of a collective agreement will apply to the annual salary.

(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 continue to be applicable.

(4) Severance pay
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, severance pay in advance with annual salary, such payment does not have the same effect as lawful severance pay.

(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 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 are as follows:
Yearly ordinary working hours: (40 hours＋8 hours)×52 weeks 52 weeks: 52.14 = 365 days/7 days
= 2,508 (= monthly contractual working hours×12 months=209×12 = 2,508)

(7) Dismissal
An employer cannot terminate a labor contract merely because the contract date expires. When introducing an annual salary system to which the collective agreement, rules of employment, or labor contract legally and properly apply, 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, an employer who terminates the labor contract because of the employee's refusal to accept the proposal may be liable for unfair dismissal.