Some organisations in South Korea reduce employees' wages when they near retirement under 'wage-peak' systems. The Supreme Court recently ruled one scheme was illegal age discrimination and provided guidance on when this type of scheme would be justifiable.
In recent years, many countries have struggled with the dilemma of how to manage the demographic shift towards an ageing workforce, at times accompanied by high levels of youth unemployment. In Korea, many employers have introduced compensation schemes under which employees' wages are gradually reduced after they reach a certain age, several years before reaching the employer's mandatory retirement age.
This type of compensation scheme is known as a 'wage-peak system'. These became more widespread in 2016 after the minimum age at which employers can set a mandatory retirement age was increased from 55 to 60.
However, on 26 May 2022, the Supreme Court held for the first time that an employer's wage-peak system illegally discriminated against employees on the basis of their age. The Supreme Court did not affirmatively hold that all wage-peak systems are per se illegal age discrimination. Rather, the Court laid out a standard by which to evaluate whether other wage-peak systems constitute illegal age discrimination. The four points that must be assessed are:
- whether the purpose of introducing the wage-peak system is justifiable;
- the degree of negative impact on the affected employees;
- whether any counterbalancing measures that can justify the wage cut have been taken, and their appropriateness;
- whether the savings from establishing the wage-peak system have actually been used for the originally intended purpose.
Employers and unions are closely watching this development to understand its impact and the implications for their own wage-peak systems.
We explain the background to the recent Supreme Court case, provide a brief summary of the ruling and discuss its potential implications for employers here.
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