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Subject   May 2018 - Legal Effect of a Retention Bonus (Signing Bonus)
Legal Effect of a Retention Bonus (Signing Bonus)

I. Introduction
A company can use several methods to retain highly-skilled workers for a long time, with two representative examples. One is through a non-compete clause in the employment contract or rules of employment, whereby the employer prevents capable workers from transferring to competitive companies, and the other is through a signing bonus, where the employer tries to restrict the transfer of workers through financial means. A non-compete clause is hard to validate as it restricts the freedom of a worker’s occupation. The Supreme Court has argued that "even if there is a non-compete agreement between the employer and the employee, if such an arrangement excessively restricts the constitutionally-guaranteed freedom of occupation, or the right to work or free competition, an action contrary to good social order, such as good customs as set forth in Article 103 of the Civil Law, should belong to invalidity.” For this reason, many companies prefer signing bonuses, which have a direct effect on the reduction of turnover by good manpower.
I recently received an inquiry from a company about the effectiveness of a retention bonus clause . For this company, 30% of the annual salary is set as bonus, with 50% paid with the 1st year's salary in January, and the remaining 50% paid in January of the following year. In return, the worker must work for three years. The employer wants to include the following clause: "If the employee resigns prior to the agreed three years, the retention bonus shall be returned." The company asked for a legal review of the validity of this. In this case, I concluded that for the retention bonus to be set for three years would be no problem, considering related matters such as the nature of the related wage, the prohibition of forced labor, the Prohibition of Predetermination of Nonobservance, etc.
In this article, I would like to deal with this issue in more depth, reviewing (ii) the characteristics of a special bonus and violation of the Labor Standards Act; (iii) the legal effect of a signing bonus; and (iv) the criteria for a signing bonus.

II. The Characteristics of a Special Bonus and Determining Whether it Violates the Labor Standards Act

1. The Characteristics of a Special Bonus
The term "wages" as defined in Article 2 of the Labor Standards Act refers to “wages, salaries and any other money and valuable goods an employer pays to a worker for his/her work, regardless of how such payments are termed." Regarding the wage status of bonuses, such bonus can be regarded as wage if payment conditions and payment timing are set in a collective agreement or employment rules, etc. and if the payment of such bonus is customary for all employees. If the above conditions are satisfied, such special bonus can be recognized as having the characteristics of wages. Concerning the legal characteristics of a "Retention Bonus", the Ministry of Employment and Labor judged that this bonus could not be considered as wages under the Labor Standards Act if payment was not stipulated in a collective agreement or rules of employment, etc., and if the employer temporarily or voluntarily paid it on condition of securing longer employment. Therefore, it is not included in the average wage for the calculation of severance pay.

2. Determining Whether a Special Bonus Violates the Labor Standards Act
“Prohibition of forced labor” as stipulated in Article 7 of the Labor Standards Act means that “No employer shall force a worker to work against his own free will through the use of violence, intimidation, confinement or any other means which unlawfully restricts mental or physical freedom.” It is forced labor to cause workers to carry out unwanted work. However, it is not forced labor for an employer to direct, supervise or legally sanction workers to fulfill their obligation to provide work under an employment contract. The penal provisions of Article 7 (prohibition of forced labor) impose a penalty of imprisonment of not more than 5 years or a fine of not more than KRW 30 million, while the penalty for violation of Article 20 (Prohibition of Predetermination of Nonobservance) is a fine of less than KRW 10 million. Therefore, in the application of the signing bonus case, Article 20 of the LSA Act, which includes the voluntary intentions of the employees, is more appropriate than Article 7, which governs only direct physical and mental restraint, such as assault, intimidation and confinement.
The prohibition of predetermination of nonobservance prescribed in Article 20 of the Labor Standards Act stipulates that "No employer shall enter into a contract by which a penalty or indemnity for possible damages incurred from breach of a labor contract is predetermined.” This is to prevent an employee from being forced to continue to work against his/her will by previously agreeing to pay a certain amount of money without determining the type and degree of the actual damage to the employer because of non-fulfillment of the employee’s employment contract. In order to guarantee performance in a contractual relationship, the Civil Act may apply penalties or damages for default in advance at the conclusion of a contract (Article 398 of the Civil Code ‘Liquidated Damages’). However, while a penalty for non-fulfillment of work is a means of securing long-term employment of good manpower for the employer, it does prohibit employees from resigning, because of the burden of penalty payment. As concerns provisions for the prohibition of ‘Liquidated Damages’, labor contracts in the form of penalties for existing wages are not allowed, but reimbursement of training costs and bonuses with reasonable and valid content is permitted, because it does not unduly limit freedom of resignation.

III. Legal Effectiveness of a Signing Bonus

1. Situations where the return commitment of the signing bonus is valid
(1) Suwon regional court ruling on May 13, 2013: 2002gahap12355: An employee agreed that he would receive KRW 150 million as a retention bonus for 3 years’ compulsory stay, which he would repay if he left the company prematurely. After 7 months of service, he moved to a competitor company. The court ruled, “The retention bonus does not belong to the wage and can be excluded from application of Article 20 of the LSA (Prohibition of Predetermination of Nonobservance), but the company paid the bonus for the purpose of retaining the employee for 3 years. Therefore, the employee should repay the retention bonus.”
(2) Seoul regional court ruling April 29, 2013: 2013kahap231: An employee received a signing bonus of KRW 50 million, which he agreed to repay if he left the company before two years after receiving this money. He then left the company after 7 months. The court ruled, “This signing bonus to retain the employee for a certain period of service cannot be translated as forced labor, and it also does not violate Article 20 of the LSA (Prohibition of Predetermination of Nonobservance).”
(3) Changwon District court ruling on November 17, 2007: 2007na9102: According to a mutual agreement between a company and an employee, the company was to pay a special bonus to the employee in accordance with the length of service, ranging from 12 months to 41 months of the normal wage, in return for which the employee would stay for two years from the date on which the employee was paid. The agreement stipulated that in the event that the employee resigned from the company, the special bonus would be returned to the company for a period not exceeding two years. The employee who received the compensation from the company submitted a resignation letter and resigned on the day after the receipt of the compensation. In this case, returning compensation based on two years of obligatory work does not restrict the freedom of cho

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