Labor Peace on Line Again for Korean Automakers

Korea’s five automakers all face serious competition at home and abroad and consumer apathy in some of their traditional export markets. But their gravest problems in the months ahead must be resolved in contract negotiations with their respective branches of the Korea Metal Workers Union.

Wage and collective-bargaining-agreement discussions formally launch this month. In some cases pre-negotiation discussions already are being held in efforts to work out new ground rules.

The KMWU’s wage demands this year (at Hyundai, reportedly a monthly increase of 160,000 won ($153) is not excessive, based on past settlements.

But the way the basic wage is calculated could hit each automaker with an enormous bill for back wages and, at the least, a much greater increase in labor costs going forward than the simple pay-raise objective would indicate.

The KMWU is demanding a change in wage calculations consistent with a Supreme Court ruling made in December 2013, in a worker’s lawsuit filed against KB Auto Tech. The worker sued for three years of back wages, alleging the parts supplier had underpaid him by excluding bonuses and certain fringe benefits in calculating his overtime pay.

Previously, any fixed bonus with a payment interval of more than one month customarily was excluded from ordinary wages. The automakers traditionally have paid bonuses in a single lump sum, bimonthly or in some other pattern that circumvented monthly payments.

In light of the Supreme Court ruling, the KMWU now insists employers include bonuses in their basic pay calculations when negotiating new wage agreements.

The union also contends employers must recalculate past wages on this same basis and compensate all workers for any shortages going back three years, the statutory limit for an employer’s liability for unpaid wages.

However, the Korean automakers believe they can get out of doing that by arguing employee demands for back wages do not meet “good faith and trust principles,” which was vaguely included in the Supreme Court ruling as a possible defense employers could use.

It stipulates if employers could show they would have made offsetting wage or payment adjustments in other areas, while knowing bonus payments would be used in fixing the basic wage, they could then claim exemption from the back-pay demands.

The Supreme Court also ruled that if an employer could prove back payment of wages would seriously hurt the company, it could be exempted from making the retroactive adjustments.

This has left lots of litigious wiggle room. Indeed, labor lawyers are smacking their lips, anticipating much consultative work not only from the automakers, but also suppliers and virtually all Korean manufacturers.

But appeals and counter-litigation help only in cases where the court has ruled in favor of workers suing their employer for nonpayment. The Supreme Court thus far has not ruled on any case filed against any of the five automakers, and all lower-court rulings in the workers’ favor are quickly appealed to higher courts.

So with contract negotiations upcoming, Hyundai, Kia, GM Korea, Renault Samsung and Ssangyong can take little comfort from that litigious wiggle room this spring and summer.

No law prevents the auto worker unions, which all are branches of the KMWU, from making demands for back pay.

However, most employers and many analysts that follow the companies do not think the unions will make full 3-year back payments a cause celebre worthy of strong strike action.

But it is an enormous bargaining chip – or threat – even though the companies have no legal liability to make such payments unless their own cases are resolved at the highest court level in favor of the workers who launched them.

Bonuses in Pay Calculations Remain Sore Point

One thing none of the automakers can escape is the union’s contention that in the wages to be negotiated in the new 2013-2014 contracts, bonuses must be included in calculating both ordinary wages and overtime pay, severance pay and any other benefit on which “ordinary wages” are based.

Denying liability for making good on any underpayments that are retroactive for three years will be a Hyundai Group policy that will be followed by Hyundai, Kia, Hyundai Mobis and other key companies within the group.

Acquiescence by one unit, short of receiving an order from the Supreme Court in a case filed against it, would open the floodgates for similar claims by unions at all other member companies.

The KMWU wants a uniform settlement at all of its branches. Workers at Kia will want to receive the same benefits their counterparts at Hyundai are able to negotiate, and vice versa.

According to Korean news reports, Hyundai Vice Chairman Yoon Yeol-chul, who is in charge of labor matters, already has denied the company is liable for including some of its bonuses in regular pay calculations because they can be excluded under the “good faith and trust” principles stipulated in the KB Auto Tech case.

That indicates management at both Hyundai and Kia will not easily give in to union pay demands.

While both Hyundai and Kia forecast sluggish markets that will limit growth for 2014, and report operating and net income was down year-on-year in 2013, union negotiators likely will not perceive them to be in dire straits and therefore unable to afford the recalculated wage, either retroactively or going forward.

Hyundai’s 2013 operating profit was down 1.5% and net income was off 0.7% to roughly 9 trillion won ($8.7 billion). Kia’s 2013 figures showed operating profit slipped 9.8%, with net income falling 1.2% to 3.81 trillion won ($3.7 billion).

In the eyes of union workers and their negotiators the income of each automaker is enormous, and they are not blind to the fact that both companies paid high dividends to shareholders. Many of the workers themselves are shareholders, having been awarded stock in previous wage settlements.

Analysts believe a recalculated basic wage rate would increase labor costs as a percentage of revenue at Hyundai and Kia by 1%, to about 10.3% of revenue.

Whether the Hyundai and Kia branches of the KMWU will press for three years of retroactive payments remains unclear, but analysts do not expect them to give up the tactic lightly. They can argue that of the five Korean automakers, Hyundai and Kia can best afford to make good on it.

Hyundai Workers’ New Leader Presided Over Strike-Free 2009-2011

One thing in Hyundai’s favor this year is that a union moderate noted for his negotiating skills was elected president of the Hyundai Motor branch of the KMWU in November. Lee Kyung-hoon was president of the union from 2009 to 2011, the automaker’s only strike-free period.

Still, the new president has his own agenda as well as the tough pay-recalculation matter to negotiate. In his election campaign he promised members he would reduce current working hours from 17 per day (one 8-hour shift and one 9-hour shift) to 16 hours (two 8-hour shifts) by 2015, although Hyundai is not planning such a move before 2016.

He also said he would seek a bonus equivalent to 30% of Hyundai’s 2013 net income and 60 shares of the automaker’s common stock for every worker. The latter is no small promise. At a recent rate of 230,000 won ($223) per share it translates to 13.8 million won ($13,368) per worker.

Kia negotiators can expect to face the same issues, although the demand for 60 shares of stock may pertain only to Hyundai until the rank and file at Kia get wind of it.

GM Korea, certainly no Hyundai or Kia in financial performance, likely could demonstrate three years of retroactive make-up wages would be detrimental.

GM Korea is so confident it can escape the 3-year liability that at the end of 2013 it reversed a 789 billion won ($763.5 million) contingency that was held in reserve in 2012 to cover the expense if it lost pending lawsuits.

That resulted in 2013 net income of 100.9 billion won ($97.7 million), compared to a net loss of 108 billion won ($104.5 million) posted in 2012. The 2013 income flowed through to General Motors International Operations and so to GM headquarters in Detroit.

Despite the lawyers’ and accountants’ confidence, GM Korea CEO Sergio Rocha recently told reporters that negotiating wage and collective-bargaining agreements without strikes posed the biggest challenge to the company this year.

With its plant in Gunsan operating on a single shift and 1,000 of its workers on layoff, union negotiators will be sensitive to the need to keep production lines churning at the other GM Korea plants.

Strikes would be especially hurtful while the automaker is struggling to rebuild its drastically eroded export base.

At Korea’s fourth-largest automaker, Renault Samsung, the KMWU Branch does not appear to be making an overly strong wage-increase demand, given that the automaker is limping along with its only assembly plant, in Busan, running at less than half-capacity.

The union reportedly seeks a monthly increase of 119,700 won ($116), a 200% bonus and guarantees that management will not terminate any more workers.

While RSM’s business plan targets a herculean rise in sales by 2016 – from 131,100 last year to 200,000, to place it ahead of GM Korea – recent monthly sales gains do not indicate such stellar performance.

Like all of the other automakers, RSM must reduce operating costs to remain competitive. It shed 800 workers last year to try to achieve that. This year it offered an early-retirement program aimed at the 500 workers with the most seniority, but reportedly only 20 opted to accept it.

There is a curious aspect to worker pay in Korea.

Each year, the employee gets a small raise based upon completion of that year’s service. When the worker reaches 20 years of service at RSM, he or she automatically is taken off of regular production work and given a supervisory job.

RSM this year announced it would not give supervisory positions to workers who achieve 20 years of service. The automaker is at a point where one-third of its workforce would be supervisors and only two-thirds would be engaged in actual production work if that happened, officials say.

The union is not happy with management’s stance on this. It sees the early retirement program as a method of cutting the highest-paid workers out of the picture to quickly reduce labor costs, and a further downsizing of the company.

Hyundai and Kia are considering scrapping the similar annual-service-increment wage method that has been in force for decades in favor of incentive-performance-based pay. This likely is not the year the union could be persuaded to accept such a move.

Talks Will Revisit Part-Time Workers’ Status

All five automakers also face the complicated issue of converting irregular, part-time workers to fulltime employees in line with criteria established by the courts. This is a thorny issue, although not one strongly supported by the various regular-worker branches of the KMWU.

The irregular workers have their own unions but are not allowed to strike, a right reserved only by the regular workers’ unions as parties to the collective-bargaining agreements with the companies.

Korea’s smallest automaker, Ssangyong, is at risk in this year’s negotiations to the same degree as the big guys. The company showed a modest profit of 10.7 billion won ($10.4 million) for first-quarter 2014, but still is struggling.

In reporting first-quarter performance the company warned that costs arising from a new wage agreement could make the earnings outlook less optimistic.

Ssangyong has a load of negatives to deal with.

In addition to a new wage and collective-bargaining agreement, the company must provide for the return of 153 workers to its ranks, as ordered this year by an appeals court.

The workers, who were among 2,600 let go in 2009, sued for reinstatement and an appellate court judge agreed Ssangyong in 2009 was not in financial peril to the degree its books indicated and the layoffs were not necessary.

The court ordered their immediate reinstatement, plus a token payment of 1 million won ($970) for their suffering. Ssangyong has appealed, but the thorny matter still stands.

The union, meanwhile, is hopping mad that the Pyongtaek Branch of the Suwon District Court recently found for Ssangyong and police in Pyongtaek in a lawsuit filed in 2009 against some 150 workers. About 400 defendants originally were named in the suit.

Ssangyong and the police had sued them for injury, equipment and production-loss damages arising from a 77-day strike and plant sit-in protesting the massive 2009 workforce reduction.

The Pyongtaek court ordered the 150 individual workers to pay Ssangyong 3.3 billion won ($3.2 million) in damages, much less than the automaker had sought.

The court also ordered the workers to pay the police 1.38 billion won ($1.3 million), a heavy financial burden for a group with many members still unemployed. The union says it will appeal the decision.

None of the adverse court actions have put workers and their union representatives in a happy mood.

If the wage burden increases dramatically going forward, they automatically likely will slash overtime in efforts to soften the financial impact. That could benefit the companies if there is an offsetting increase in worker productivity. Otherwise, it merely translates into lost production.

Some analysts believe it would be a pyrrhic victory for the unionists if they win too much in the upcoming talks.

They say the automakers might allocate some of their current Korean production to overseas plants where productivity is higher and costs are lower. Some even believe the companies might consider importing vehicles into Korea from their overseas subsidiaries or joint ventures.

That certainly is a threat or bargaining chip management could play at the negotiating table, but they must walk very softly. The unions clearly understand the rewards of a bargaining victory could result in big money for their members.