Wage Peak and Poor Performer HRM in South Korea
On December 30, 2015, the Ministry of Employment and Labor (MOEL) issued a discussion draft of guidance on two highly controversial current issues in Korean employment law. The discussion draft contains two topics: (a) a discussion draft for “Performance-Based HR Management Guidebook”, which addresses termination of employees for poor performance, among other human-resources management issues; and (b) a discussion draft for “Guidelines on Amending Work Rules”, which focuses on the introduction of so-called “wage-peak” systems, intended to mitigate increased labor costs due to the newly introduced mandatory minimum retirement age of 60.
Both parts of the discussion draft are tentative proposals intended to promote discussion among the government, business, and labor, and ultimately lead to the issuance of final guidance. Neither this material nor the finalized guidance represents any change in the law or will be binding on courts. However, both documents are to a large degree based on existing legal precedents and scholarly opinion. And even in their current preliminary form they may provide a window into the government’s positions on these salient issues.
Virtually all employers, other than those with fewer than five (5) employees, are prohibited from dismissing an employee without “just cause.” Just cause is not defined at all in the relevant statute, except somewhat with respect to redundancies. Instead, standards for just cause have largely been developed through case law. In the context of dismissals due to poor performance, Korean courts have generally required persistent and significant performance deficiencies that do not improve despite the employer giving significant opportunities and assistance for the employee to improve.
But due to the vagueness of the standard, it is generally very challenging for employers to be certain whether they have just cause to dismiss a poor performer, and employers have long sought a more specific standard by which to predictably manage performance issues.
Employers have also recently been pushing to introduce wage-peak systems in which wages cease to rise with seniority, and begin to fall, after a certain age. This drive is in response to a recently passed amendment to Korea’s age-discrimination law, which requires that the mandatory retirement age that employers set in their internal rules and policies must be no lower than 60. This change is effective as to government owned or controlled companies, as well as private employers with 300 or more employees, effective January 1, 2016; and all other employers will become subject to this rule effective January 1, 2017.
Many employers want to use wage-peak systems to mitigate the increased labor costs that they will incur from being required to raise their retirement ages—before which it is very difficult to lay off employees—by making retention of older employees less expensive. They have been supported in this drive by the current government, but strongly opposed by labor.
Establishing a wage-peak system is challenging for employers because generally, changes to an employer’s internal policies and established practices relating to terms and conditions of employment cannot be changed adversely to employees without collective consultation with, and the majority consent of, the affected class or classes of employees.
The government earlier floated the idea of announcing guidelines for unilaterally amending Work Rules (sometimes also translated as “Rules of Employment”) to introduce a wage-peak system, in reliance on a judicially crafted exception to the general prohibition of unilateral changes to Work Rules. According to the relevant Supreme Court precedent, such a unilateral change may be made where it is “reasonable in accordance with established social norms,” such reasonableness to be evaluated very strictly based on a list of factors enumerated by the Court. But during recently resumed tripartite talks among government, business, and labor, the three parties reached a very broad, high-level agreement on a number of labor-reform issues, which included the government’s agreement not to issue guidelines endorsing the unilateral adoption of a wage-peak system.
The government’s discussion draft states that it is intended to address management of workforce performance issues from recruitment to retirement, including standards and procedures for termination due to poor performance. The draft is already being decried by labor advocates as intended to make termination of employees easier, and criticized by business as providing no meaningful clarity and, if anything, introducing additional requirements.
The draft lays out the following set of standards for termination due to poor performance:
1) Specification of poor performance as a potential ground for termination
The discussion draft states that poor performance should be included in the employer’s Work Rules or CBA as a potential ground for termination, to minimize the potential for disputes. This is already the recommended practice based on legal precedents.
2) Objectivity and fairness of evaluation
The draft states that the employer’s system for evaluating employee performance should be designed to use objective, measurable, and specific criteria—as opposed to subjective or relative criteria—which will enhance its reasonableness. And, the draft advises seeking input from the employer’s labor-management committee or union (or another employee representative if no council or union exists in the workplace), on the design of the evaluation system.
Evaluations should be conducted fairly and reasonably, using objective, measurable, specific criteria. Whereas relative criteria (i.e. performance in comparison to peer employees) should generally be avoided in favor of absolute performance targets, although they may be used in a supplementary manner.
Use of multiple evaluators or a committee, or of multiple evaluation steps, will increase the reliability or fairness of the result according to the draft guidebook. In addition, availability of an appeal system will also increase reliability.
3) Performance improvement assistance
According to the draft, prior to dismissal for poor performance, the employer must provide education and/or training to help improve the employee’s performance. Court decisions have long emphasized the necessity to provide opportunities and assistance to improve.
4) Efforts to avoid termination
And finally, the employer should make efforts to address performance problem through means other than termination where possible. For instance, if the poor performance is due to a lack of fit between worker and role, the employer might consider other potential roles that provide a better fit for the employee. Efforts to avoid termination is an explicit statutory requirement in the context of layoffs, so it is interesting that the government has included it in the context of performance-based dismissals.
According to the draft, if an employer has satisfied all of the criteria above, and the employee nonetheless does not show improvement or continues to hamper the employer’s business, the employer may terminate the employee.
Adoption of Wage-Peak
Although the title of the discussion draft’s “Guidelines on Amending Work Rules,” appears to address the amendment of Work Rules generally, its main theme is how to introduce a wage-peak system. In the draft, the government takes the position that introducing a wage-peak system is an adverse change to the company’s Work Rules. Some jurists had expressed the opinion that introduction of a wage-peak system by companies forced to raise their retirement age was in fact not an adverse change—and thus did not require any employee consent—because it merely regulated the new employment conditions of older workers who otherwise would have been required to retire but now may remain at the company. It is notable that the government rejects that position in this draft.
An adverse change to an employer’s Work Rules generally requires collective consultation and a majority vote by the employees. But there is a very limited judicially crafted exception where the change is “reasonable in accordance with established social norms.” According to the draft, if an employer is trying to introduce a wage peak system to mitigate the financial impact of a mandatory increase in its retirement age, and it makes a reasonably diligent effort to obtain the consent of its employees but they unreasonably refuse to provide it, unilateral amendment to introduce a wage-peak system may be “reasonable in accordance with established social norms.”
The draft describes six factors to consider in determining whether adopting a wage-peak system satisfies that standard, which essentially mirror the elements already described by the Supreme Court but adapted to the particular situation of adopting a wage-peak system. These factors are:
1) The degree of adversity to the employees (i.e. how much they will lose financially).
2) The financial impact on the company of the mandatory retirement-age increase, absent adoption of a wage-peak system.
3) The general reasonableness of the work-rules changes.
4) The effects of any other changes that accompany adoption of a wage-peak system (i.e. any countervailing benefits).
5) The process of adoption, particularly the degree of effort made to negotiate the changes with the union or appropriate employee representative.
6) The prevailing practices or trends in the relevant industry, such as any action by comparably-placed companies.