South Korea: Recent Court Decisions On The Peak Wage System In Korea – Focusing On Violation Of The Act On Prohibition Of Age Discrimination In Employment And Elderly Employment Promotion

1. Overview

The peak wage system is a system that gradually reduces the salary of employees while guaranteeing employment in exchange. The system was first implemented domestically in the Korea Credit Guarantee Fund in 2003. Following the amendment of the Act on the Prohibition of Age Discrimination in Employment and Elderly Employment Promotion (“Elderly Employment Act”) in 2013, which increased the retirement age to 60, the Korean government accelerated the widespread adoption of the peak wage system by the public sector by presenting the “Peak Wage System Guidelines” in May 2015.

2. Peak Wage System Types

The peak wage system can be classified into three types: i) the “retirement-age guarantee”, which guarantees employment until the retirement age stipulated in collective agreements and rules of employments, but adjusts wages from a certain age; ii) the “retirement-age extension”, which extends the employee's retirement age, but adjusts the wages for the years extended prior to retirement; and iii) the “employment extension,” in which extends employment by rehiring the employee as a contract worker after the employee retires at the retirement age.

3. Whether Article 4-4(1) of the Elderly Employment Act, which prohibits age discrimination, is a mandatory provision

The purpose of the Elderly Employment Act is to contribute to the employment security of the aged and to the development of national economy by preventing discrimination in hiring practices on the grounds of age without justifiable grounds and supporting and promoting the employment of the aged to ensure they have occupations suitable for their abilities (Elderly Employment Act, Article 1).

In particular, Article 4-4(1) of the Elderly Employment Act fundamentally prohibits discrimination on the grounds of age.

 On whether the regulations above are compulsory provisions (provisions which have effect notwithstanding to the will of the parties. The Korean Civil Act renders legal acts that violate these provisions illegal and void), the Court held that “considering the legislative intent of the former Elderly Employment Act, which aspires to realize the constitutional right to equality by prohibiting discrimination on the grounds of age in the field of recruitment and employment, Article 4-4(1) of the Elderly Employment Act is a compulsory provision. Therefore, collective agreements, rules of employment, and labor contracts that are contrary to the provision are nullified.” (Supreme Court Decision, 2017Da292343, Decided May 26, 2022.)

However, not all discrimination caused by age are deemed age discrimination under Article 4-4 of the Elderly Employment Act as Article 4-5 of the same Act stipulates exceptions to the Prohibition on Age Discrimination.

Because the essence of the peak wage system is a gradual reduction of an employee's wages after a certain age, recent court decisions have presented conflicting views according to the type of peak wage system on whether the peak wage system constitutes age discrimination prohibited under Article 4-4 of the Elderly Employment Act and should be invalidated, or whether the system is included in the exceptions to prohibition on age discrimination prescribed under Article 4-5 of the same law.

4. Supreme Court Decision on the Validity of the “Retirement-Age Extension” Peak Wage System (Supreme Court Decision 2017Da292343, Decided May 26, 2022)

A landmark court decision in South Korea on the validity of the peak wage system is Supreme Court Decision 2017Da292343, Decided May 26, 2022 (“2017Da292343”). This decision presented a standard for determining the validity of the “retirement-age guarantee” peak wage system, which guarantees employment until the retirement age.

2017Da292343 stipulates that the phrase “‘without justifiable grounds' as referred to in Article 4-4(1) of the Elderly Employment Act, which prohibits discrimination based on age, refers to cases where the need to treat workers differently depending on age is not recognized or the method and degree in the different treatment is not appropriate. When employers implement the peak wage system, which ensures employment until the worker's retirement age in exchange for reduced wages for a certain period before retirement (Note: this refers to the “retirement-age guarantee” peak wage system), as there is no reasonable reason for discrimination based on age, the determination of whether the measure is invalid shall be made in full consideration of various circumstances including the validity of the purpose of implementing the peak wage system, the degree of disadvantage suffered by workers in question, whether or not measures for wage reduction are introduced and their appropriateness, and whether the expenses saved thanks to the peak wage system are used for the original purpose of introducing the peak wage system, etc.” The defendant of the above ruling implemented a performance-based annual salary system (Note: this refers to a type of peak wage system) to reduce wages for permanent employees aged 55 or older while maintaining the existing retirement age of 61. The Court Decision stated that i) although the above performance-based annual salary system was introduced for the purpose of mitigating the burden of labor costs and raising the performance achievement rate, it is difficult to see the above purpose as a justifiable ground for wage cuts for regular employees aged 55 or older; ii) due to the performance-based annual salary system, Party B suffered from a drastic drop in wages all at once, and no target measures were taken for such disadvantages; and iii) considering the fact that there was no difference in the target level or work content given to Party B before and after the performance-based annual salary system, the mentioned system discriminated against Party B in the field of wages on the grounds of age. Therefore, the Court ruled that the performance-based annual salary system was invalid, holding that there was no reasonable reason for such discrimination.

In light of 2017Da292343, confusion and anxiety has increased for companies that operate the “retirement-age guarantee” peak wage system as they risk having the peak wage system invalidated if they do not provide a justifiable reason for implementing such system.

5. Whether the reasoning of 2017Da2922343 can be directly applied to “Retirement-Age Extension” Peak Wage System

As seen above, 2017Da292343 examined the effectiveness of the “retirement-age guarantee” peak wage system, and further attention was paid to whether it could be applied to the “retirement-age extension” peak wage system.

However, after the above decision, the judgments on the "retirement-age extension" peak wage system (such as Seoul Central District Court Decision 2019Gahap592028 Decided June 16, 2022, Seoul High Court Decision 2021Na2049858 Decided August 19, 2022, etc.) considered the following points and held that the "retirement-age extension" peak wage system was valid.

• The main content of the Elderly Employment Act amended on May 22, 2013 prescribes that employers shall set the retirement age of workers to 60 or older (Article 19) to ensure working opportunities for workers with working abilities. However, labor unions comprised of a majority of employers and workers are required to take measures such as reforming the wage system in accordance with the extension of the retirement age. Article 19-2 even expected wage adjustment or reduction because it became a natural premise that social costs, as well as benefits from extending the retirement age, should be shared between labor and management. The Employment Insurance Act also anticipated wage cuts due to the extension of retirement and provided a legal basis for the government's support measures.
• Considering the Defendant's financial state, it could be deemed that there was an urgent need to reduce labor costs by implementing a peak wage system in response to the extension of the retirement age.
• When comparing the wages that the Plaintiffs were entitled to receive before the extension of the retirement age and the implementation of the peak wage system and after, in this case, the Plaintiffs were paid more in terms of the "total amount of wages" even after the implementation of the peak wage system. Thus, it is difficult to acknowledge that active damage was caused by the peak wage system to the Plaintiffs.
• While implementing the peak wage system in question, the Defendant provided workers subject to the peak wage with the opportunity to maintain welfare benefits or offset the disadvantages of wage cuts by adjusting the labor provision or working hours.
• This case falls under the exception to the prohibition on age discrimination prescribed in Subparagraph 4 of Article 4-5 of the Elderly Employment Act in that the budget secured by the implementation of the peak wage system was used for new recruitment.

As described above, in the case of the "retirement-age extension" peak wage system, unlike the "retirement-age guarantee" peak wage system, there are clear benefits for workers from extending the retirement age. In other words, it is difficult to say that the disadvantages suffered by workers are clear, such as the "retirement-age guarantee" peak wage system. In addition, it is interpreted that these decisions affirm not only the benefits of extending the retirement age but also the sharing of social costs between labor and management in consideration of the purpose of Article 19 and 19-2 of the Elderly Employment Act.

Since Korea's public institutions have introduced the "retirement-age extension" peak wage system, most of which are based on the government's peak wage system guidelines announced in 2015, it is likely that the determination of whether the peak wage system violates the Elderly Employment Act will also remain different from the "retirement-age guarantee" peak wage system.

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