Government: "Operating Profit N% Bonus Not Subject to Labor Disputes"... Voluntary Labor-Management Negotiation Allowed

Profit-Linked Bonuses Excluded from Mandatory Bargaining

The government has issued an interpretive guideline clarifying that labor unions' so-called "N% performance-based bonus" demands are difficult to classify as subject to labor disputes. The guideline specifies the criteria that consider management performance bonuses linked to corporate profits as not falling under mandatory bargaining, mediation, or industrial action demands.

On September 3, the Ministry of Employment and Labor announced the "Guideline on Subjects of Labor Disputes Regarding Management Performance Bonuses," which includes these provisions. This guideline was prepared to improve predictability in the field and prevent labor-management disputes, as demands to set a certain percentage of operating profit as a performance bonus or company investment decisions have recently become major bargaining issues amid industrial transitions such as the adoption of artificial intelligence (AI).

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Performance-Based Bonuses Linked to Corporate Profits Excluded from Mandatory Bargaining

According to the guideline, even management performance bonuses are, in principle, subject to mandatory bargaining if they pertain to the determination of working conditions, such as remuneration, welfare, or other treatment of workers. However, demands that fundamentally restrict business freedom or the rights and interests of third parties such as the state or shareholders are deemed difficult to protect as mandatory collective bargaining items.

In particular, the guideline distinguishes demands for bonuses specifically tied to corporate profits. Revenue is the income accrued before deducting costs, while operating profit is the profit before the deduction of interest, corporate tax, and dividends, and is thus associated with the rights of stakeholders including shareholders, creditors, and the state. Net income for the period includes non-operating income such as interest and dividends, which are not directly related to the provision of labor.

The government also cited the fact that corporate profits serve as resources for various management decisions, such as research and development (R&D), facility investment, and dividend payouts. The government explained that requiring the allocation of a fixed percentage of company profits to a performance bonus can fundamentally restrict a company's operational freedom. Accordingly, management performance bonuses linked to corporate profits may be autonomously negotiated between labor and management, but they are considered difficult to include as mandatory subjects of bargaining, mediation, or industrial action under the Trade Union and Labor Relations Adjustment Act. Instead, it is advisable for labor and management to negotiate on bonuses that are calculated as a certain percentage or fixed amount of annual salary or base pay, or to discuss the standards, timing, and eligibility for bonuses in ways not linked to a set percentage of corporate profits.

At a briefing held the same day, Vice Minister Kwon Chang-jun of the Ministry of Employment and Labor explained that the mere level of bonus demand is not the criterion that determines whether it is subject to mandatory bargaining. Kwon stated, "Excessive wage demands have always existed, and such matters can be resolved at the bargaining table." Even if a union demands a performance-based bonus of 1,000% of base pay, "that too should be resolved through negotiation," he said. However, he clarified that demands to set a performance bonus as a fixed percentage of operating profit or net income do not constitute a mandatory subject for collective bargaining.

However, the new guideline does not invalidate existing performance bonus systems previously agreed upon by labor and management. Vice Minister Kwon added that the guideline does not prohibit labor and management from autonomously negotiating and agreeing on performance-based bonuses linked to corporate profits, and that collective agreements or bonus arrangements already concluded do not become null and void because of this guideline. He explained that the guideline serves as a standard for determining whether a dispute that arises concerning these issues is subject to mandatory mediation or industrial action.

Regarding management decisions, the ministry reaffirmed the principles stated in the "Revised Guideline on the Interpretation of the Trade Union and Labor Relations Adjustment Act" announced last February. Decisions regarding corporate investment, mergers, spin-offs, transfers, or sales in the course of business management do not constitute mandatory bargaining subjects. However, if such decisions objectively entail concrete changes to working conditions, such as layoffs or personnel reassignments due to restructuring, related employment and working conditions may become bargaining issues.

The standard for judgment has also been clarified. If only a management decision has been announced or if there are only abstract references in long-term business plans or by executives, it is seen as merely indicating the possibility of changes to working conditions. In contrast, if specific plans for layoffs, for example, are established, or if there are internal announcements, labor-management council materials, or employer confirmations during collective bargaining that provide objective evidence that a change in working conditions is foreseen, these may become the subject of collective bargaining.

As for corporate investments such as establishing or relocating factories, demands for withdrawal or opposition to the investment decision itself, or for determining the site, scale, area for relocation, or timing, are not considered bargaining subjects. However, if layoffs, restructuring, or personnel transfers concretely result from the investment, negotiations may take place on changes in workplace or job type, working arrangements, or the provision of commuting or relocation expenses.

Decisions on Investment or Sale Themselves Excluded from Bargaining Subjects

The guideline also excludes business sales and acquisitions from collective bargaining when it comes to the decision itself, the conditions of the sale, or demands to change or exclude buyers. On the other hand, if the scope of employment succession or plans for layoffs or restructuring are concretely developed as a result of the sale, subjects such as employment succession, job security measures, and maintenance of existing working conditions become negotiable. Opposition to the introduction of new technologies such as AI and automation themselves are not mandatory bargaining subjects either, but if such introductions concretely lead to changes in job classifications or working arrangements, or result in layoffs or personnel transfers, negotiations may be held on job security measures, adjustment of working hours, or health and safety measures related to changes in work processes.

In mediation procedures before the Labor Relations Commission, demands for performance bonuses linked to corporate profits or management decisions themselves are also restricted. The commission may recommend that unions amend their demands to more reasonable proposals; if unions do not comply, those issues may be subject to administrative guidance on the grounds that they do not constitute labor disputes. Where such issues are the primary motivation for industrial action, a judgment on their legitimacy will be made according to Supreme Court precedents and related rulings. The guideline also makes clear that, as management performance bonuses tied to corporate profits or business management decisions are not mandatory bargaining subjects, if an employer refuses to bargain over those points, it is difficult to find this to be an unfair labor practice.

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