Are Performance Bonuses Included in Severance Pay in South Korea? 2026 Supreme Court Ruling Explained
Table of Contents
- 1. Why Did the Supreme Court Reach Different Conclusions for Different Performance Bonuses?
- 2. How Did the Bonus Systems of the Four Companies Differ?
- 3. What Distinguishes Bonuses That Qualify as Average Wages from Those That Do Not?
- 4. How Does the Court Distinguish “Post-Hoc Settlement of Work Performance” from “Post-Hoc Distribution of Business Profits”?
- 5. What Should Companies Operating in South Korea Do Now?
- 6. FAQ
Real scenario: After 20 years at a major South Korean corporation, Mr. A reviewed his severance pay statement upon retirement and noticed something troubling — the performance bonuses he had received every year were entirely excluded from the calculation. On January 29, 2026, the Supreme Court of South Korea finally addressed this question. The answer: “It depends on the type of bonus.”
Why Did Identical “Performance Bonuses” Receive Different Legal Treatment?
※ This article is based on reports from the Korea Legal Times and the Supreme Court’s official case summaries, and is intended for general informational purposes only.
The critical takeaway from this ruling is that even when payments share the same label of “performance bonus,” their legal classification under South Korean labor law depends entirely on how they are structured. Samsung Electronics’ “Target Achievement Incentive” (TAI) was paid semi-annually based on business unit financial performance and strategic objectives, with payment criteria explicitly set out in the company’s employment rules. The Supreme Court characterized this as a “post-hoc settlement of work performance.” In contrast, bonuses tied to net income, EVA (Economic Value Added), or other metrics beyond employees’ control were classified as “post-hoc distribution of business profits” and were denied wage status. For companies with operations in South Korea, the practical implications of these distinctions are analyzed in detail below.
1. Why Did the Supreme Court Reach Different Conclusions for Different Performance Bonuses?
The Supreme Court applied the well-established three-part test for average wage inclusion — consideration for labor, continuous and regular payment, and the employer’s obligation to pay. Rather than creating new legal doctrine, the Court examined the specific design and operational characteristics of each company’s bonus system and applied existing criteria.
What Is “Average Wage” Under South Korean Law?
Under Article 2(1)(vi) of the Labor Standards Act (LSA), “average wage” means the amount calculated by dividing the total wages paid to an employee during the three months preceding the date on which a calculation event occurs by the total number of days in that period. Since severance pay under Article 8(1) of the Employee Retirement Benefit Security Act is calculated as at least 30 days’ worth of average wage per year of continuous service, whether a particular payment is included in the average wage directly impacts the severance pay amount.
The Three Criteria for Average Wage Inclusion
The Supreme Court reaffirmed the following three criteria from its established precedents (Supreme Court Decision 2001Da53950, decided October 23, 2001; Supreme Court En Banc Decision 2016Da48785, decided August 22, 2019):
First, consideration for labor. The obligation to pay must arise directly from or be closely related to the provision of labor. This was the most critical issue in these cases.
Second, continuous and regular payment. The payment must be made on a periodic and recurring basis, not as a one-time or incidental payment.
Third, the employer’s obligation to pay. The payment obligation must be established through collective agreements, employment rules, salary regulations, employment contracts, or labor practices.
The Court confirmed that all three criteria must be satisfied simultaneously for inclusion in average wage, and explicitly stated that even if a payment has been made continuously and regularly, it cannot be classified as wages if it is not consideration for labor (see Supreme Court Decision 94Da55934, decided May 12, 1995).
2. How Did the Bonus Systems of the Four Companies Differ?
On the same day — January 29, 2026 — the Supreme Court ruled on four types of performance bonuses across three companies: Samsung Electronics (two types), Seoul Guarantee Insurance (one type), and LG Display (one type). The structural design of each bonus was the key determinant.
| Category | Samsung Target Incentive (TAI) | Samsung Performance Incentive (OPI) | SGI Special Bonus | LG Display Business Bonus |
|---|---|---|---|---|
| Average Wage? | Yes | No | No | No |
| Payment Cycle | Semi-annual (twice/year) | Annual (once/year) | Annual (once/year) | Annual (once/year) |
| Payment Criteria | Business unit financial performance (70%) + strategic objectives (30%) | 20% of business unit EVA | Insurance premiums + net income realization | Financial performance + competitive metrics (market share, etc.) |
| Payment Range | 0–200% | 0–50% (salary system) / 0–700% (non-salary system) | 0–300% | 93–440% |
| Regulatory Basis | HR rules, salary/benefits/attendance standards | HR rules, salary/benefits/attendance standards | Salary and welfare regulations | Not specified in employment rules or salary standards |
| Payment History | Continuously paid since 1994 | Continuously paid since 2000 | 2006–2020 (with unpaid years) | Since 2005 (unpaid in 2006, 2011, 2018, 2019) |
As shown in the table above, only Samsung Electronics’ Target Achievement Incentive was recognized as an average wage. The Samsung Electronics cases (Supreme Court Decisions 2021Da249506 and 2021Da248299, decided January 29, 2026) and the LG Display case (Supreme Court Decision 2021Da270517, decided January 29, 2026) were handled by the 2nd Civil Division (Presiding Justice Oh Kyung-mi), while the SGI case (Supreme Court Decision 2022Da255454, decided January 29, 2026) was handled by the 1st Civil Division.
3. What Distinguishes Bonuses That Qualify as Average Wages from Those That Do Not?
A comparative analysis of the Court’s reasoning for each bonus reveals the key factors that determine average wage classification.
Existence of the Employer’s Payment Obligation
For both Samsung Electronics incentives, the payment obligation was recognized because the employment rules specified the payment basis, eligible employees, and conditions. In contrast, SGI’s employment rules reserved discretion to the CEO, and payment criteria were changed annually through labor-management negotiations; the establishment of a binding labor practice was also denied. For LG Display, no explicit basis for the business performance bonus existed in collective agreements, employment rules, or salary regulations, so the payment obligation itself was denied.
Consideration for Labor — The Core Issue
The consideration-for-labor element was the decisive factor. The Court recognized Samsung’s Target Achievement Incentive as consideration for labor for the following reasons:
- Direct and close relationship to the provision of labor
- Employees could control target achievement through collective effort
- The bonus functioned as compensation for collaborative group work
- Payment amounts were pre-determined to a degree as fixed sums
Conversely, the consideration-for-labor element was denied for the remaining three bonuses for these shared reasons:
- EVA generation or net income realization was required as a precondition
- Factors outside the provision of labor (industry trends, market conditions, management decisions) had a greater impact on payment
- Payment was determined by factors beyond individual employees’ control
- The bonuses were characterized as post-hoc distribution of business profits
Continuous and Regular Payment
Both Samsung incentives were recognized as continuously and regularly paid — the Target Incentive semi-annually and the Performance Incentive annually, with fixed payment schedules. However, SGI’s bonus, though paid over many years, had unpaid years and uncertain payment prospects. LG Display also failed this test, with confirmed non-payment in 2006, 2011, 2018, and 2019.
4. How Does the Court Distinguish “Post-Hoc Settlement of Work Performance” from “Post-Hoc Distribution of Business Profits”?
The most significant conceptual distinction introduced by the Court is between bonuses that represent a “post-hoc settlement of work performance” and those that constitute a “post-hoc distribution of business profits.” This distinction effectively determined the outcome in each case.
Post-Hoc Settlement of Work Performance (Average Wage Recognized)
Samsung’s Target Achievement Incentive was paid based on financial performance and strategic objective attainment at the business division and unit levels. The Court found that these targets could be achieved through the collective efforts of employees within each business unit, meaning that employees formed the primary causal relationship in achieving the targets. In other words, the bonus represented a post-hoc settlement of the results of labor already provided.
Additionally, the payment range was pre-determined at 0–200% of the bonus base amount, giving the payment the character of a “fixed sum” with a predictable range of variation.
Post-Hoc Distribution of Business Profits (Average Wage Denied)
The remaining three bonuses were all classified as post-hoc distributions of business profits. Samsung’s Performance Incentive was based on EVA (Economic Value Added), which represents excess profit after deducting the cost of equity capital from net income. The Court found that EVA generation and magnitude were not proportional to the quantity and quality of employees’ labor, and that external factors unrelated to labor provision (market conditions, exchange rates, economic cycles) had a greater influence.
The practical framework that emerges from these rulings can be summarized as follows:
| Assessment Factor | Post-Hoc Settlement (Wage Recognized) | Post-Hoc Distribution (Wage Denied) |
|---|---|---|
| Nature of Payment Criteria | Business unit KPIs, sales target achievement | EVA, net income, excess profits |
| Employee Control | Achievable through collective effort | Dominated by external market factors |
| Predictability of Amount | Payment range pre-determined | Significant fluctuation based on business results |
| Payment Continuity | Continuously paid without interruption | Unpaid years exist |
| Regulatory Basis | Specific criteria in employment rules | No clear provisions or discretionary decisions |
5. What Should Companies Operating in South Korea Do Now?
This ruling demands that all companies operating in South Korea with performance bonus systems urgently assess whether their bonuses could be classified as average wages. Drawing on extensive experience in corporate advisory work, the following practical steps are recommended.
Structural Analysis of Your Bonus System
The first priority is to analyze whether your company’s performance bonus system could be evaluated as an average wage under the criteria established by the Supreme Court. Specifically, the following items should be reviewed:
- Regulatory basis in employment rules: Determine whether the payment basis, eligible employees, and conditions for the bonus are specifically set out in employment rules or salary regulations. Greater specificity increases the likelihood of a payment obligation being recognized.
- Pre-determination of payment criteria: Assess whether payment rates or amounts are pre-determined to any degree, or whether they are decided entirely on a post-hoc basis depending on business results.
- Regularity and continuity: Verify whether there have been any years of non-payment and whether payment timing is fixed.
- Employee control over target achievement: Analyze whether the bonus criteria are KPIs that employee groups can collectively achieve, or whether they depend on external business environment factors beyond employees’ control.
Financial Risk Assessment
Companies should quantify the financial impact that would result from the inclusion of performance bonuses in average wage calculations. Key areas to assess include:
- Retroactive severance pay differentials: Identify the scope of retroactive claims, considering the three-year statute of limitations for severance pay claims under South Korean law.
- Reserve adjustments: Retirement benefit reserves may need to be recalculated under applicable accounting standards.
- Future labor cost restructuring: Consider adjustments to DB pension contributions and potential redesign of bonus systems.
Bonus System Redesign Considerations
If restructuring the bonus system in light of this ruling, companies seeking to avoid average wage classification should strengthen the post-hoc profit distribution structure based on business performance, while comprehensively reviewing the rationale, decision-making process, and payment procedures. However, system changes made solely to circumvent average wage inclusion risk creating a gap between form and substance, which courts may look through. It is advisable to secure legal compliance through labor and legal counsel before implementation.
6. FAQ
Atlas Legal provides comprehensive legal advisory services on performance bonus system design and severance pay disputes, drawing on extensive experience handling labor and employment matters for corporate clients operating in South Korea.
※ The legal information presented in this article is intended for general guidance only and does not constitute legal advice. Legal conclusions may vary depending on the specific facts of each case. Please consult with an attorney for advice on actual legal matters.
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