Supreme Court Clarifies When Performance Bonuses Do Not Constitute “wages”

On 12 February 2026, the South Korean Supreme Court (Court) issued a significant ruling clarifying the circumstances in which employee performance bonuses constitute "wages" under the Labour Standards Act (LSA). The decision, which considered the bonus schemes of a semiconductor manufacturer and a glass manufacturer, reached the opposite conclusion to the Court's earlier ruling on 29 January 2026, in which a target incentive scheme was recognised as wages.

12 February Decision

In finding that the performance bonuses paid by both companies did not constitute wages, the Court applied a three-part test, examining:

• whether the payment was directly or closely related to the employee's provision of labour;
• whether the employer was under a binding obligation to pay; and
• whether the payment was made regularly and continuously.

Consideration for Labour

The Court examined whether each bonus was directly linked to the employees' provision of labour. The semiconductor manufacturer's scheme comprised two components: (i) a profit-sharing element paid on the basis of operating profit or Economic Value Added; and (ii) a productivity incentive. As for the glass manufacturer's scheme, the bonus was paid by reference to net income generation.

In both cases, the Court observed that the achievement of these financial metrics was determined not only by employees' efforts but by a range of external variables beyond their control, including market conditions, capital allocation, cost structures, and executive management decisions. On that basis, the Court concluded that neither bonus could properly be characterised as consideration paid in exchange for the quantity or quality of labour provided.

Obligation to Pay

The Court next considered whether a binding and continuous legal obligation to pay the bonuses existed. Specifically, the Court observed that for the semiconductor manufacturer, neither the profit-sharing element nor the productivity incentive was defined or governed by the company's Rules of Employment or wage regulations. The labour-management agreements underpinning the scheme were limited in validity to the relevant year, and the company retained discretion to decline to enter into such agreements depending on prevailing business conditions.

In those circumstances, the Court held that no continuous payment obligation arose under the Rules of Employment, any collective agreement, or established workplace practice.

Regularity and Continuity

Finally, the Court assessed whether the payments were made regularly and continuously, or whether they were contingent on variable conditions. On the facts:

• the glass manufacturer's scheme provided for no payment at all where net income fell below a prescribed minimum threshold; and
• the semiconductor manufacturer had, on a number of occasions, not paid performance bonuses in years where business results were negative or where no labour-management agreement was reached.

Focusing on this inherent contingency, the Court concluded that the bonuses, which may not be paid at all depending on the company's financial outcomes, could not be regarded as regular and continuous consideration for the employees' labour.

Differences between the 12 February and 29 January Decisions

The Court's recent decision is best understood alongside its earlier decision on 29 January 2026, in which a target incentive scheme was recognised as wages. The contrast between the two outcomes turns on the degree of certainty and stability built into each scheme.

In the earlier decision, the Court observed that the payment scale was pre-determined and the range of fluctuation was predictable and stable. In other words, employees could reasonably expect to receive the payment as part of their remuneration.

In contrast, payments in this latest decision were contingent on the achievement of financial thresholds that were structurally uncertain and subject to factors outside employees' control.

Key Takeaways

These decisions confirm that there is no universal answer to whether a performance bonus constitutes wages under Korean labour law. Rather, whether a bonus constitutes wages will depend on a fact‑specific analysis of:

• the extent to which payment is directly linked to employees’ labour;
• whether there is a binding and ongoing obligation to pay; and
• the regularity, continuity and predictability of payment.

In light of the Court's rulings, employers should:

• Review existing incentive scheme documentation — assess whether the basis and conditions for payment are clearly set out in the Rules of Employment, wage regulations or collective agreements, and whether those documents accurately reflect how the scheme operates in practice;
• Assess payment contingency — consider whether your scheme contains threshold conditions that could result in no payment being made in a given year, and whether this contingency is reflected in how the bonus is characterised and communicated to employees;
• Evaluate downstream statutory implications — where a bonus is or may be classified as wages, confirm whether it is being correctly factored into the calculation base for severance pay, overtime, annual leave pay and other statutory entitlements; and
• Seek legal advice before restructuring incentive schemes — given that classification turns on the specific design and operation of each scheme, employers contemplating changes to performance bonus arrangements should obtain a precise legal assessment of the implications before implementing any changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.