Bonus (상여금)
Overview
Bonus (賞與金, bonus; Korean: 상여금) refers to monetary remuneration that an employer pays to workers in addition to ordinary wages or salary. It is paid under various names and forms, including regular bonuses, holiday bonuses, performance bonuses, and special incentive payments; under the Labor Standards Act, any money or valuables paid as compensation for work constitutes wages regardless of its name. Bonuses are not merely welfare benefits but are directly linked to ordinary wage and average wage, which serve as calculation bases for overtime and holiday work premium pay, severance pay, and various allowances, and have long been a core issue in labor-management disputes.
Key details
Definition and legal nature
Article 2, Paragraph 1, Item 5 of the Labor Standards Act (근로기준법) defines wages as 'all money and valuables that an employer pays to a worker as compensation for work, whether under the name of wages, salary, or any other name.' Therefore, even if the term bonus is used, if its substance is compensation for work, it is treated as wages.
However, for a bonus to be recognized as wages, the obligation to pay must be established. Case law recognizes a right to claim wages only when ① payment conditions are stipulated in the employment contract, rules of employment, collective agreement, etc., and ② it has the character of a 'legal obligation' under which payment must be made as a matter of course when certain facts occur. Conversely, if payment and amount are left entirely to the employer's discretion as a gratuitous or discretionary benefit, the worker has no right to claim payment. In practice, whether the payment rate, payment time, and eligible recipients are specified in the rules is a key criterion.
Types of bonuses
- Regular bonuses: Bonuses paid at least twice a year, such as for Seollal and Chuseok, often set at a certain percentage of base pay (e.g., 100–800% of base pay).
- Performance bonuses: Variable pay paid by linking company performance with individual or organizational evaluations. Examples include profit sharing (PS), performance pay (OPI/PI), and target achievement incentives.
- Holiday bonuses and incentive payments: Small payments made on holidays, foundation anniversaries, etc.
- Special bonuses: Payments made temporarily according to labor-management agreement or special business performance.
- In-kind bonuses: Cases paid in non-cash forms such as gift certificates, shares (employee stock ownership or stock options), or travel also broadly have the character of bonuses.
Relationship with ordinary wages
Ordinary wage is the wage that serves as the calculation basis for overtime, night, and holiday work premium pay, advance notice of dismissal allowance, shutdown allowance, and paid annual leave allowance, etc. If bonuses are included in ordinary wage, premium pay increases accordingly and the burden of labor costs on companies grows, so this has long been the biggest issue.
Previously, the Supreme Court required fixedness, uniformity, and regularity as elements of ordinary wage, and in a 2013 en banc decision (the Gap Eul Auto Tech case, 갑을오토텍), it held that regular bonuses could also constitute ordinary wage. Here, 'fixedness' meant that if a worker provided a certain amount of work, payment was confirmed without additional conditions, and this has been the basis for the logic that bonuses subject to continued-employment conditions or performance conditions are not ordinary wages.
Taxes and social insurance
Bonuses are classified as earned income and are subject to withholding of income tax and local income tax. At the time of payment, tax is withheld according to the simplified earned income tax table, and the amount is included in total salary in the year-end tax settlement. They are also included in the income base for calculating premiums for the National Pension, National Health Insurance, Employment Insurance, and Industrial Accident Compensation Insurance, and in principle are included in average wage, which is the basis for calculating severance pay (for performance bonuses, judgments differ depending on the recipients and period).
Calculation methods
- Fixed payment as a certain percentage of base pay (n% of base pay)
- Monthly base pay × number of months paid (e.g., 400%, 600%)
- Separating a certain percentage of total annual salary as performance bonus
- Differentiated payment according to goal achievement rate (operating profit, sales, individual KPI)
Recent trends
December 2024 Supreme Court en banc decision
On December 19, 2024, the Supreme Court en banc ruled to exclude 'fixedness' from the requirements for ordinary wage. Accordingly, regular bonuses subject to continued-employment conditions or conditional performance bonuses can also be included in ordinary wage if uniformity and regularity are recognized. Significant changes are expected in the wage design of companies that have denied ordinary wage status on the basis of fixedness.
Retroactive application and corporate burden
In ordinary wage litigation, unpaid premium pay is usually disputed for wage claims covering three years. After the ruling, large companies in particular have been reviewing past wage systems and moving to reorganize wage structures around base pay, reduce bonuses, or convert them into performance pay. Conversely, labor circles are demanding retroactive payment and wage system reform in line with the ruling's intent.
2025 wage system reform trends
- Base pay increases and bonus reductions: To reduce ordinary wage risk, the approach of lowering the proportion of bonuses and raising base pay is spreading.
- Follow-up litigation on ordinary wage status of performance bonuses: Litigation continues according to practices of paying conditional performance bonuses.
- Performance bonus reductions amid economic slowdown: In sectors such as semiconductors, finance, and distribution, bonus payout rates are trending downward due to worsening performance.
- Discussion on inclusion in minimum wage: Discussion continues on whether to include regular bonuses in the scope of minimum wage calculation.
- Strengthened transparency: Calls are growing to specify bonus payment standards and conditions at the time of hiring, and personnel policies from a Total Rewards perspective that includes bonuses are spreading.
Related topics
- [[ordinary wage]]
- [[performance bonus]]
- [[Labor Standards Act]]
- [[minimum wage]]
- [[severance pay]]
- [[earned income tax]]
- [[four major social insurances]]
- [[wage system]]