“Obligation to Pay” Standard Splits Samsung and SK Hynix Severance Rulings, Sending Shockwaves Through an Industry Facing a Wave of Lawsuits

Appeal Dismissed, Performance Bonuses Not Recognized as Wages
Key Factors: Obligation to Pay Bonuses and Presence in Internal Rules
Recognition as Compensation for Work Also Affected by Bonus Linkage

The Supreme Court has denied the wage nature of management performance bonuses in a severance pay lawsuit involving SK Hynix, issuing a ruling that diverges from an earlier decision on Samsung Electronics’ bonuses. Industry observers analyze that this confirms once again that, even when payments are labeled as performance bonuses, the legal judgment can differ depending on their payment structure and whether they are compensation for work. As severance pay claims against companies have recently been filed one after another, this decision is expected to affect future rulings as well.

On the morning of the 12th, the First Division of the Supreme Court (Presiding Justice Ma Yongjoo) dismissed the plaintiffs’ appeal and upheld the lower court’s decision in the final appeal of a severance pay claim filed by two former SK Hynix employees against the company. The court found that management performance bonuses such as the Productivity Incentive (PI) and Profit Sharing (PS) did not constitute mandatory payments under work rules or collective agreements. In particular, it held that bonuses linked to operating profit are difficult to regard as direct compensation for the provision of labor.

SK Hynix headquarters in Icheon, Gyeonggi Province. Yonhap News.

This ruling is drawing attention in the industry as it is being compared to the Supreme Court’s decision on January 29 recognizing the wage nature of Samsung Electronics’ Target Achievement Incentive (TAI). The court’s main basis in both cases was whether the company was under an “obligation” to pay the bonuses. In the Samsung Electronics case, the Supreme Court held that there was room to view TAI as compensation for work because it had been paid continuously and on a regular basis in accordance with predetermined payment criteria and norms such as work rules. In contrast, in the SK Hynix ruling, the court did not recognize the wage nature of the management performance bonuses, noting that whether they were paid and at what rate changed each year depending on labor-management negotiations, and that they were not specifically stipulated in work rules or salary rules.

In addition, whether the bonuses constitute “compensation for work” is also expected to be a key criterion. In the SK Hynix case, the decision was influenced by the fact that the bonuses were more heavily affected by external factors such as cost control and market conditions than by whether employees actually provided labor. By contrast, in the Samsung Electronics ruling, the court found that TAI was paid as wages in return for work, since it was calculated based on each business division’s performance.

However, given the Samsung Electronics precedent, whether management performance bonuses will be recognized as wages is expected to remain a contentious issue in the industry. Even before fully implementing the ruling, Samsung Electronics has decided to proactively change its severance pay calculation standards in line with the court’s reasoning. If the basis for calculating severance pay for all employees is changed, the company could face additional annual labor costs on the order of several trillion won.

Companies are most concerned about the additional severance costs that may arise when long-serving employees retire. An industry official said, “Recent court decisions are tilting toward reflecting performance bonuses in severance pay,” adding, “Companies inevitably face higher labor costs, and they are closely monitoring developments to determine whether and how to apply such systems going forward.”

This content was produced with the assistance of AI translation services.