Same bonus, different rules: how formula shapes bargaining duty under new labor guidelines

The government has issued a standard holding that demands for a fixed percentage of operating profit as a performance bonus are unlikely to qualify as mandatory bargaining subjects — while leaving open the door for unions to demand the same amount as a lump-sum bonus instead. The result is that bargaining obligations can differ even when the total payout demanded is identical, depending solely on whether the formula ties the bonus to corporate earnings.

Because disputes over profit sharing could shift toward fixed-sum bonus demands or calls for base-pay increases, how much the new guidelines will actually reduce labor conflicts remains an open question.

The Ministry of Employment and Labor's "Implementation Guidelines on Labor Dispute Subjects Including Management Performance Bonuses," released Thursday, stipulate that demands for bonuses pegged to a set percentage of corporate earnings — including sales, operating profit or net profit for the period — are unlikely to constitute mandatory bargaining subjects. By contrast, demands for a fixed-sum bonus not directly linked to corporate earnings, or for a bonus expressed as a percentage of annual or base salary, are recognized as mandatory bargaining subjects when they relate to working conditions.

Under the ministry's framework, identical bonus demands can be treated differently depending on how they are framed. If a union at a company with 1 trillion won ($730 million) in operating profit demands that 10 percent of that profit be set aside as a bonus pool, the demand comes to 100 billion won — and falls outside mandatory bargaining under the guidelines. However, if the union uses the same earnings figure as a reference point but demands a flat bonus pool of 100 billion won without tying the amount to a profit-linked formula, the demand leaves room for bargaining as a fixed-sum working-condition claim.

"A demand for a specific amount is not a proportional distribution," a ministry official said. "If it falls within the scope of working conditions, it must be protected under law even if the claim is excessive."

In practice, unions can calculate the bonus size they want based on company performance and then present a lump-sum figure rather than a percentage. Companies have gained grounds to refuse bargaining over profit-distribution ratios, but they have not gained a blanket right to reject fixed-sum demands of the same scale. A bargaining obligation means only that a company must come to the table — not that it must pay the amount the union demands.

The government's rationale for distinguishing between the two approaches rests on whether corporate earnings are being directly distributed. Operating profit and similar metrics serve as the funding source for management decisions such as research and development, capital investment and dividends. Requiring that a set percentage be allocated to bonuses first, the ministry argues, could constrain a company's freedom to operate and infringe on the rights of third parties such as shareholders and bondholders.

Deputy Minister of Employment and Labor Kwon Chang-jun said that while parties may voluntarily negotiate over demands that fundamentally constrain a company's operational freedom or third-party rights, "whether the state provides institutional protection is a separate matter." He said a distinction must be drawn between matters that can be settled by mutual agreement and those that can give rise to unfair labor practice liability if a company refuses to bargain.

The government thus draws a line between using corporate earnings as a reference for calculating a demanded amount and structurally linking the payout to earnings through a formula. The two approaches differ in how the final figure is determined, but the distinction does not place a ceiling on the size of a bonus demand.

If a union uses company performance as a basis and demands a fixed-sum bonus of the same scale, negotiations over compensation levels can continue — and the total bonus burden a company would bear upon accepting such a demand could be identical to what it would face under a profit-linked arrangement. Distinguishing the bargaining obligation for direct profit-sharing demands is therefore a separate matter from reducing bonus disputes overall.

The guidelines leave unanswered why two approaches that impose the same financial burden should be treated differently in terms of their effect on operational freedom and third-party rights.

The boundary becomes more complex when a formula ties the bonus multiplier on base pay to operating profit brackets.

Even when a payout is expressed in base-pay terms, it must be examined whether the arrangement qualifies as profit-linked if the amount changes automatically with performance. Kwon also said that when a bonus formula incorporates corporate earnings indicators, "the design of the system needs to be examined."

Whether a company has already reached an agreement also affects its position. Companies that have already settled on bonus payments — such as Samsung Electronics — cannot use the new guidelines to void those commitments. Samsung Electronics and its union reached a tentative agreement on May 20 and signed a wage accord on May 27.

"A collective agreement is a promise that has been made, and these guidelines do not invalidate it," Kwon said. The ministry said disputes arising from a failure to honor existing agreements must be assessed separately from new demands for profit sharing.

For companies that have not yet reached an agreement and are demanding a set percentage of corporate earnings for the first time, the ministry said it will issue an administrative guidance order covering that portion if the company does not comply with a recommendation to modify its demand. Companies that have already agreed must honor their commitments, while those that have not gain grounds to refuse bargaining.

Even so, it is difficult to conclude that companies without existing agreements have escaped bonus obligations entirely, since unions can still demand the same amount as a fixed sum or as a percentage of base pay. Kwon said the guidelines were not drafted with an eye to which side benefits. "If the standard provides predictability, it can reduce unnecessary conflict between labor and management," he said.