"The Two Years Without Payment Were Decisive"... Why SK hynix and Samsung Electronics Faced Different Judgments

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[Financial News] Former employees of SK hynix filed a lawsuit demanding that their management performance bonuses be reflected in the calculation of their severance pay, but the Supreme Court of Korea rejected their claim. The court held that the company had no obligation to pay these bonuses, so it is difficult to regard them as wages, that is, as consideration for labor.
In the SK hynix case, the Supreme Court of Korea applied the same reasoning it used in the lawsuit brought by former employees of Samsung Electronics. This reaffirmed that the decisive factor in determining whether a management performance bonus constitutes wages is whether the company is under a mandatory obligation to pay it. The reason the outcomes differed for Samsung Electronics and SK hynix, despite similar lawsuits, also lies in this point.
■ The ‘two years without payment’ were decisive
On the morning of the 12th, the First Petty Bench of the Supreme Court of Korea, presided over by Justice Ma Yong-ju, upheld the lower court ruling that had dismissed the severance pay claim filed by two former SK hynix employees against the company.
The former employees argued that SK hynix should have included management performance bonuses such as the productivity incentive, Performance Incentive (PI), and the profit-sharing bonus (PS) in their average wage when calculating severance pay. In January 2019, they filed a lawsuit seeking unpaid amounts on this basis.
Average wage is calculated by dividing the total amount of wages paid during the three months prior to retirement by the total number of days in that period. Employers must set up a system under which they pay severance equal to at least 30 days of average wage for each year of service. If the average wage increases, the severance pay also increases.
In the first and second instance, the courts sided with SK hynix. They found that the company’s management performance bonuses were influenced by external factors such as market conditions and were not directly linked to the employees’ labor. They also noted that the collective bargaining agreement and the work rules merely stated that the company “may pay” such bonuses, meaning there was no fixed obligation to pay them.
The Supreme Court of Korea likewise focused on SK hynix’s work rules, collective bargaining agreements, and labor practices. Under Supreme Court precedent, wages that form the basis for calculating average wage must be paid to employees continuously and regularly, and the employer’s obligation to pay must arise from collective bargaining agreements, work rules, salary regulations, or established labor practices.
The Supreme Court of Korea found that SK hynix’s work rules did not establish an obligation to pay these bonuses. It also concluded that neither the collective bargaining agreements nor labor practices created such an obligation. Although SK hynix had paid management performance bonuses over a long period based on labor-management agreements, there were no such agreements at all in 2001 and 2009, which the court viewed as significant.
The court stated, "In light of these circumstances, the labor-management agreements that the defendant (the company) entered into each year were effective only for the year in question, and it appears that the defendant could refuse to enter into a labor-management agreement on management performance bonuses at any time depending on its business situation."
It continued, "It is also difficult to see that the practice of paying management performance bonuses every year was so firmly supported that it can be regarded as having been clearly recognized as a normative fact or established as a de facto system."
Regarding the profit-sharing bonus (PS), the Supreme Court of Korea further held that its amount was determined not only by the provision of labor but also by other factors such as the company’s capital and expenditure levels, cost management, market conditions, and management decisions. Therefore, it stated, "It cannot be viewed as consideration corresponding to the quantity or quality of labor." In practice, the PS payout rate fluctuated widely, ranging from 0% to 50% of annual salary.
■ Diverging fortunes over ‘clarity of the rules’
Viewed only in terms of the outcome, the SK hynix case differs from the Samsung Electronics lawsuit decided on the 29th of last month. At that time, the Supreme Court of Korea ruled in favor of the former Samsung Electronics employees, holding that the “target incentive (PI)” among the company’s management performance bonuses must be included in severance pay, while excluding the “performance incentive (PS).”
The key issue was PI. Unlike SK hynix, Samsung Electronics had clearly specified in its work rules, in advance, the criteria for paying PI, and had paid it continuously and regularly. The Supreme Court of Korea also found that the base amount for bonuses was predetermined for each employee based on their base salary, and that the payment level showed a certain degree of stability. Considering the purpose and method of evaluation, the court viewed PI as closer to a “post-adjustment” of pay rather than a simple ex post distribution of management performance.
A labor law attorney at a major law firm explained, "For a management performance bonus to qualify as wages, there must be an obligation to pay it and a primary causal relationship between the provision of labor and the payment of the bonus." The attorney added, "Samsung Electronics has both an obligation to pay bonuses and that primary causal relationship, whereas SK hynix has neither."
Another attorney, who heads the labor team at a different major law firm, commented, "The legal principle is the same, but what is different in the SK hynix ruling is that the court found no basis for an obligation to pay management performance bonuses." The attorney went on, "The court not only found no explicit provision in the rules, but also held that there was no established practice, and the basis for that was the existence of past cases where bonuses were not paid when performance was poor."
kyu0705@fnnews.com Kim Dong-gyu Reporter