Some organisations in South Korea reduce employees' wages when they near retirement under 'wage-peak' systems. However, the Supreme Court has recently ruled one scheme constituted illegal age discrimination, setting out four factors to assess when this type of scheme would be justifiable.
1. Background
On 10 June 2008, the Korea Electronics Technology Institute (KETI) reached an agreement with its labour union to introduce a wage-peak system. Under the agreement, KETI's pre-existing mandatory retirement age of 61 remained unchanged, but employees' wages would begin to decrease starting at age 55.
A KETI employee received lower wages due to the Wage Peak System from April 2011 to 30 September 2014 (last day of employment with KETI).
The former employee brought a civil action against KETI, claiming that the wage-peak system violated Article 4-4(1) of the Age Discrimination Act (full name: the Prohibition of Age Discrimination in Employment and Elderly Employment Promotion Act). This prohibits 'discrimination on the basis of age without a justifiable reason.' (This case involved a version of Article 4-4(1) prior to its amendment on 26 May 2020, however, the amendment has not substantially changed the text or meaning of the provision.)
The former employee sought, as damages, the difference between the wages paid under the Wage Peak System and the wages that would have been paid without applying the Wage Peak System.
2. The Supreme Court ruling
The Court made clear that Article 4-4(1) of the Age-Discrimination Act cannot be waived by individual agreement or in a collective bargaining agreement. That meant the Court had to decide whether the wage-peak system constituted unjustified age discrimination. Since a wage-peak system by definition discriminates based on age, the Court had to determine whether there was a 'justifiable reason' for the discrimination.
The Court laid out, for the first time, the relevant factors a court should examine to determine whether there is a justifiable reason for the discriminatory treatment imposed by a wage-peak system:
- 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.
Applying this standard to the totality of the circumstances in this case, the Supreme Court held that the Wage Peak System was unjustified age discrimination and therefore void. It cited the following particular facts:
- The purpose of the Wage Peak System was merely to improve KETI's financial performance by reducing labour costs. This cannot itself justify an age-based wage cut.
- The Wage Peak System caused a significant negative impact on the affected employees by imposing a large, immediate pay cut, but KETI did not take any appropriate counterbalancing measures such as reducing the affected employees' workload and/or working hours.
- The affected employees' performance targets or scope of work were the same before and after the Wage Peak System was introduced.
3. Implications of the decision for other wage-peak systems
This case is the first where the Supreme Court has held that a wage-peak system constitutes illegal age discrimination under the Age-Discrimination Act unless it can be specially justified based on the facts and circumstances. Whether a 'justifiable reason' exists for other wage-peak systems will be determined on a case-by-case basis by examining the four factors laid out by the Supreme Court, as stated above.
However, one very significant element that distinguishes the wage-peak system in this case from many other wage-peak systems, is that it was established despite there being no accompanying increase in the company's retirement age. KETI already had a mandatory retirement age of 61 when it introduced the Wage Peak System in 2008. That meant KETI did not have to raise its retirement age even in 2016 when the law was changed to make 60 the minimum mandatory retirement age.
By contrast, most organisations that maintain a wage-peak system established it in response to the amendment of the Age-Discrimination Act that became effective in 2016, which required many employers to raise their retirement ages to 60.
It is difficult to say how powerful a factor an accompanying increase in the retirement age will be. The Supreme Court's decision in this case did not provide a clear standard for determining the validity of these wage-peak systems, and the importance of this factor is likely to be resolved through future litigation. However, wage-peak systems that were adopted in connection with an increase in the employer's mandatory retirement age appear substantially more likely to be upheld than those that were not.
A lower court decision issued on 27 May 2022 (the day following the Supreme Court's decision) held that another wage-peak system did not constitute illegal age discrimination because, among other things, it was adopted in connection with an increase in the employer's retirement age pursuant to the 2016 law change. And on 16 June 2022 we obtained a judgment in which a lower court applied the Supreme Court's new standard and found that our client's wage-peak system, which had been adopted with an increase in the employer's retirement age, was valid.
Not only does it appear that these systems would be more likely to satisfy the Supreme Court's newly established standard described above; but in addition, wage-peak systems adopted in connection with an increase in the retirement age also may have a statutory basis on which to be defended.
When the Age-Discrimination Act was amended to allow employers to set their mandatory retirement age no lower than 60, the amendment also included a provision stating that employers and their workforces:
'shall take necessary measures, including restructuring the wage system, in consideration of the conditions at the relevant business or place of business.'
(Article 19-2(1))
For this purpose, the workforce is represented by a majority union or, if no majority union exists, another ad hoc representative of a majority of employees.
Although the revised Age-Discrimination Act does not expressly identify specific types of 'necessary measures', the legislative record makes clear that the government and lawmakers reached a consensus that raising the minimum retirement age required some adjustment of wage levels through a variety of measures including wage-peak systems.
The Ministry of Employment and Labor has also expressed its support for using wage-peak systems in commentary. So one can argue that the Age-Discrimination Act specifically intended to authorise wage-peak systems as a way to balance the impact of increasing the retirement age.
This argument was not available to KETI because it established its wage-peak system prior to the amendment and did not raise its retirement age. An employer raising its mandatory retirement age and adopting a wage-peak system in connection with that increase in the retirement age could also fall under the exception to the Age-Discrimination Act's prohibition of age-based discrimination in:
'cases where supportive measures are taken for maintaining and supporting the employment of a certain age group pursuant to this Act or other Acts.'
(Article 4-5(4))
That argument has been recognised by the Seoul High Court (2019na2029394). The Supreme Court dismissed an appeal from this decision without opinion (Supreme Court 2022da206841).
However, even wage-peak systems adopted in connection with an increase in an employer's mandatory retirement age might be deemed invalid under the standard now adopted by the Supreme Court. There will inevitably be litigation over this question, and further decisions applying the Supreme Court's standard to wage-peak systems adopted in connection with raised retirement age.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
