PRIVATE-SECTOR PERFORMANCE BONUSES AS "WAGES": SUPREME COURT'S FIRST RULING

-    What does it mean for employers and how should you respond?

I. BACKGROUND

On January 29, 2026, the Supreme Court issued a landmark decision establishing when private-sector performance bonuses qualify as “wages” under the Labor Standards Act—approximately four and a half years after Company A’s case was first filed. This decision comes after several years of differing court interpretations. In 2018, the Supreme Court held that performance bonuses at government-owned organizations linked to management performance constitute “wages.” Since then, lower courts have been divided on whether this standard extends to private-sector performance bonuses tied to overall company performance.

II. THE SUPREME COURT’S HOLDINGS

By way of background, Company A, an electronics manufacturer, offered employees two bonus programs: a “Performance Incentive” (i.e., profit-sharing) and a “Target Incentive” (i.e., productivity incentive) and Company B, an insurance company, offered a “Special Performance Bonus.” Each program included a component linked to company performance, raising the question of whether the bonuses should be treated as wages under the Act. The Supreme Court held that only Company A’s Target Incentive (i.e., productivity incentive) qualified as wages.

Below, we outline the payment terms and structures of each bonus program and summarize the Supreme Court’s determinations on which types of performance bonuses qualify as wages.

On the other hand, the Supreme Court held that Company B's special performance bonus does not constitute "wages" for the following reasons:

• The payment is premised on a specific type of management performance (realization of net income) which is significantly influenced by external and non‑work factors. Accordingly, the payment takes the character of a distribution of management performance. Specifically, the occurrence and size of net income depend on external factors beyond employees’ provision of work, and no payment is made if there is no net income. The maximum reward is contingent on factors that employees cannot control through their provision of work or that do not form a primary causal relationship with such work.

• The rules of employment reserve to the CEO discretionary authority over whether and how much to pay as a special performance bonus, with specific amounts set annually through collective labor-management agreements. Although payment rates were established through such agreements for 14 years, payments were made only because the agreed performance criteria were satisfied. The employer retained authority to withhold payment in the event of deteriorating business conditions. Accordingly, no payment obligation can be recognized based on established labor practice.

III. IMPACT ON EMPLOYERS AND REVIEW POINTS

Reaffirming existing legal principles on wage characterization, the Court held that, given the wide spectrum of performance based schemes, whether a payment constitutes “wage” turns on whether, in substance, it is an ex post distribution of management performance or an ex post settlement tied directly or closely to employees’ work performance (i.e., compensation for work already provided). As a result, there is no uniform rule for determining whether private sector company’s performance bonuses constitute "wages." Courts will examine multiple factors holistically, including the program’s purpose and intent, whether company wide profit (susceptible to substantial external influences) is a precondition to payment, whether the payment scale is fixed or highly variable, the calculation structure, the evaluation items, and other payment criteria to determine whether the payment is a distribution of performance or compensation for work provided.

In practice, companies will find it difficult to make definitive determinations on wage status without judicial guidance, and face meaningful risk of increased claims for statutory severance payment differences premised on inclusion in average wages. Employers should therefore avoid relying solely on formal factors such as the payment label, written provisions, or payment history. Instead, they should proactively assess: the underlying purpose and design of the performance bonus; whether actual profit realization is a precondition; the degree to which the payment amount is determinable in advance; the specific paymentconditions and detailed evaluation indicators; and thereby identify the payment's nature and its risk of being characterized as "wages." Key review items include the following:

• Purpose and intent of the performance bonus: whether it was introduced to boost morale and motivation by distributing or sharing profits from management performance.

• Preconditions to payment: whether payment is predicated on factors beyond employees’ control such as realization and magnitude of net income or EVA, capital structure, expense levels, market conditions, or managerial judgment.

• Fixity and variability of the payment scale: whether the amount is a fixed sum determinable in advance, or varies widely with management performance.

• Function of payment rates and conditions: whether organization‑level goals and evaluation results vary the payment rate as a metric for proportionally allocating a bonus already slated for payment based on groupwise work provided, rather than as a tool to decide payment versus non‑payment.

• Nature of evaluation indicators: whether employees can influence and control goal achievement through their provision of work and whether the indicators reflect a primary causal relationship with work (for example, sales revenue in an organized enterprise reflects company‑wide, specialized and sophisticated collective work by both production and office employees).

• Pre‑established criteria and payment obligation: whether eligibility, formulas, and rates are concretized in advance with payment scheduled upon satisfaction of conditions or instead are set annually by labor‑management agreement or reserved to employer discretion.

IV. KEY TAKEAWAYS

Performance bonuses are often tied to yearly results and can be substantial in strong years. If classified as "wages," they could significantly increase labor costs by expanding the average wage calculation used for statutory severance. Many schemes blend elements of both an “ex post distribution of management performance” and an “ex post settlement of work performance,” which underscores the need for advance review and proactive adjustments.

In light of the Supreme Court decisions, employers should comprehensively reassess their current performance bonus programs—examining the program's purpose, legal basis, and payment conditions.

If a program functions primarily as work compensation, companies may consider adjusting organization-level payment rates tied to group performance (which courts may view as collective work compensation). At the same time, companies could introduce or strengthen management performance indicators (such as net income or EVA) and increase actual variability in payment rates. These changes would better align the program with its intended purpose: distributing management performance results rather than compensating for work.

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Bae, Kim & Lee LLC’s Labor and Employment Group provides a wide range of advisory services on both individual and collective labor relations and handles disputes of various types. In particular, the Group has unmatched experience and expertise in wage-related disputes (including those concerning ordinary wages and average wages) as well as in advisory work such as reviews of compensation and wage structures.

If you have any questions, please feel free to contact us at any time.
 

[Korean Version]

1. EVA: profit calculated as adjusted after tax operating profit (after tax profit adjusted for management determined evaluation items), less the cost of equity and other relevant capital costs.

2. Financial performance: revenue related metrics (e.g., sales revenue, sales growth rate) and profit related metrics (e.g., pre-tax profit amount, pre-tax profit margin, pre-tax profit growth rate).

3. Strategic tasks: an assessment of how faithfully the organization executed assigned tasks, such as market share, brand index, and compliance with target distribution inventory levels.