When discussing employment contracts or rules of employment, one often hears of certain wage terms like ordinary wage and average wage, but it seems that a lot of people are not clear what those terms represent and how they are different from each other.

Under Article 19 of the Labor Standards Act of Korea (LSA), the ordinary wage is defined as the amount calculated by dividing the total amount of wages paid to the relevant worker during three calendar months prior to the date on which the event necessitating such calculation occurred by the total number of calendar days during those three calendar months.

The events under LSA that will necessitate the calculation of average wage include payment of severance pay to a retired employee, compensation of employees during a period of suspension of a business, and compensation for accidents. For instance, Article 34 of LSA provides that, if and when an employee resigns or retires, the employee is eligible for severance pay which accrues at the rate of thirty (30) days average wage for each consecutive year of service.

When calculating the amount of average wage to determine, say, severance pay amount, the items included in the said calculation are usually such items as base salary and other payments (i.e., position allowance, incentive allowance paid to all employees to promote efficiency) that are regularly and uniformly paid. As for bonus payments, if such payments are prescribed in rules of employment or customarily paid to employees, then they should be part of average wage calculation. However, those bonuses paid irregularly and one-time out of the company’s profit should be excluded when calculating the average wage. Usually, overtime payments are deemed part of the wages, as well as meal allowances provided in rules of employment or collective bargaining agreements (thus included in calculation of average wage).

Under Article 6 of Enforcement Decree to LSA, the term ordinary wage is defined as hourly wages, daily wages, weekly wages, monthly wages, or subcontract wages which are determined to be paid regularly or by lump-sum to the worker for a prescribed labor or the whole labor. Under LSA, the concept of ordinary wage is used as base for determining the amounts for overtime, nighttime and holiday work payments (additional compensation of at least 50% of ordinary wage is required). Ordinary wage is also used as a dismissal allowance, i.e., LSA requires a 30 days prior notice before dismissing an employee, but, in lieu of such notice, at least ordinary wage of 30 days may be paid to the relevant employee.

When calculating the amount of ordinary wage, unlike the calculation of average wage, the items like overtime, nighttime and holiday work payments are excluded, and bonus payments or allowances that are part of fringe benefits are also not included in the said calculation.

As can be seen above, the average wage and ordinary wage are two distinct concepts of wages under LSA that are applied in different situations, so those terms cannot be used interchangeably or be substituted one for the other.