South Korea’s Supreme Court ruling to broaden the definition of what constitutes basic wages is fueling concern that labor costs are poised to rise in Asia’s fourth-largest economy.
In yesterday’s ruling, the court told car-parts maker KB AutoTech Co. to count regular bi-monthly bonuses as part of base salary, siding with employees who first sued their Asan, South Korea-based employer in July 2010. Still, the court rejected workers’ claims for seasonal allowances and welfare benefits to be recognized as ordinary wages.
The decision, the first of about 160 similar cases to reach the nation’s highest court, is a setback for employers who’ve opposed changes because in Korea, base wages are used to calculate everything from overtime payment to annual raises. The ruling will translate into at least 13.75 trillion won ($13 billion) in added annual labor costs for companies, according to estimates by the Korea Employers Federation.
“This doesn’t sound like a positive factor for South Korean firms,” Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd., which oversees about $7.9 billion, said by phone. “But it’s likely that losses will be minimized as companies will find ways to go around it. For example, companies can establish a greater number of production facilities overseas instead of Korea and hire workers from those countries.”
Before yesterday’s ruling, regular bonus payments unrelated to the company’s performance were exempt from annual increment negotiations between management and labor unions because they weren’t considered part of base wages.
In the KB AutoTech case, the court said the company doesn’t have to pay the three years of retroactive payments demanded by the workers if it can prove the amount will pose a major threat to its business.
Had the court ruled unilaterally in favor of the union workers, the Korea Employers Federation estimated companies would be stuck with additional labor costs of at 38.5 trillion won next year.
Labor unions at automakers including Hyundai Motor Co. (005380) and General Motors Co. (GM:US)’s South Korean unit have similar cases pending before the courts, according to union statements.
GM’s South Korean unit has set aside more than 1 trillion won ($950 million) in provisions in connection with cases involving the wage litigation, according to the company.
Hyundai Motor shares fell 3.1 percent to close at a five-month low of 220,500 won, while Kia Motors Corp. (000270) dropped 1.8 percent. The Kospi stock index gained 0.1 percent.
“For now, it looks like both the company and the union avoided the worst-case scenario,” Koh Tae Bong, an analyst at HI Investment & Securities Co., wrote in a report today. The court’s decision to reject workers’ demands for retroactive payments “greatly minimized” the burden on employers, he said in the report.
If the ruling was applied to Hyundai Motor, overall costs for the automaker could increase by about 0.5 percentage point, though that’s still 0.9 percentage point less than if the court had ruled in favor of the retroactive payments, according to the report.
The employers’ lobbying group said it was concerned that the court decision to expand the definition of a regular wage will bring confusion to the workplace, according to an e-mailed statement.
South Korea’s government said related ministries will consider steps to help small and medium-sized companies most affected by the ruling, according to an e-mailed statement.
“It is important for labor to understand that a win in the courts could prove a hollow victory from a structural perspective,” said Shaun Cochran, head of research at CLSA Asia Pacific. “If we see a rise in the real cost of labor in Korea without a commensurate increase in productivity, ultimately it means that the long term process of jobs being sent offshore in manufacturing will continue.”
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