Ordinary wage uncertainty

By Simon Ferry

Over the last few months there has been some considerable coverage of the issue of what constitutes the “ordinary wage.” This is an important issue as ordinary wage is the basis for a range of other payments, such as overtime, severance or retirement benefits and leave payments.

The issue was important enough to be cited by the chairman and CEO of General Motors, Daniel Akerson, as being a key barrier to investment in Korea. It’s also been referenced by President Park Geun-hye in a meeting with U.S. business leaders in May.

The issue relates to whether bonuses should be included as part of ordinary wages. Historically, many companies have excluded any bonuses that are not paid on a monthly basis from ordinary wage, but a court case earlier this year found that, at least in some cases, fixed bonuses may be included as part of ordinary wage.

Aon Hewitt recently conducted a survey on this issue, with almost 160 HR professionals responding. A key result of this was that currently, around 30 percent of respondents currently include fixed bonuses in their ordinary wage definition. However, over 60 percent expect it to be included in the future.

Following a similar trend, increasing numbers of companies expected to include a range of other allowances in the definition of ordinary wage.

The direct implication for this is a potential significant increase in labor cost for some employers. I’ve seen estimates of 38 trillion won in additional potential costs being reported in the press. It’s therefore understandable that this could be a barrier to investment. In a time when Korea faces increasing pressure from global competition and demand pressures on exports, the timing of this issue is far from ideal.

Of the participants in our survey, almost 80 percent answered that a change in ordinary wage would have a financial impact. More worryingly, almost 25 percent answered that the impact would be hard to handle.

To me, there is big concern that this could be a symptom of a wider issue. Namely, if there is a lack of clarity in labor regulations, it can become a significant risk for companies doing business in Korea.

On the face of it, a lack of clarity and differing interpretations can give some flexibility, or wiggle room for companies to try and find a competitive advantage. However, there is a significant risk that greater clarity or court challenges can result in a fundamental change in the cost of doing business. For companies that are knowingly cutting a fine line on what’s permissible, it may be fair that they take such a risk. However, for many companies that operate in a way they believe is in full compliance with the labor regulations and then are potentially burdened with a significant additional unexpected cost, it’s highly questionable as to whether the change is fair.

The issue of any immediate cost is not trivial by any means, but it’s something many companies will try to find a way to manage over time. However, the risk of anything similar occurring in the future could be an even greater concern to many companies.

In the short term, anyone who might earn more as a result of the change will doubtlessly be happy. However, in the longer term, the reduced competitiveness and risk of future similar changes could have a significant impact on investment in Korea and cause greater issues for job security and opportunities in the long term.

Change is part of life and it’s quite understandable that changes in labor regulations and interpretations will happen in the future to adapt to the changing environment.

However, care needs to be taken to ensure that the impact of any change will not be destructive and the wider implications of what appears to be a decision on a specific case is well thought through before a decision is made. It’s also evident that there is a need for as much clarity and transparency in regulations is possible to help manage the risk of such differences of interpretation occurring.

If the potential impact of this change in the interpretation of the ordinary wage definition is born out in reality, then I’m sure many overseas companies considering investment in Korea would think very carefully about how this and future changes may impact the business case for doing so.

Likewise, for Korean companies, if the cost of labor is significantly increased, they may be forced to seriously consider where they invest in the future and continue to move more production overseas.

There is a saying, “once bitten, twice shy” which I think will be particularly appropriate with the companies most affected by the change, perhaps being most concerned about making significant further investment in Korea.