CONTENTS
- 1. Unpaid Wages | Passage of the Partial Amendment to the Wage Claim Guarantee Act
- 2. Unpaid Wages | Strengthened Recovery and Expanded Joint Liability
- - Expansion of Joint Liability in Subcontracting Businesses
- 3. Unpaid Wages | Key Points for Employers and Risk Management Measures
- - The Necessity of Risk Management in Subcontracting Businesses
- - The Need for an Accurate Understanding of the Substitute Payment System
1. Unpaid Wages | Passage of the Partial Amendment to the Wage Claim Guarantee Act
The amendment to the Wage Claim Guarantee Act, which contains the reforms to the substitute payment system for unpaid wages, passed the State Council on November 4 and was promulgated on November 11.
This amendment concerning unpaid wages signals significant changes in the operation of the system and in the responsibilities of employers.
It indicates a shift toward substantially increasing the enforceability and speed of recovering unpaid wages (substitute payments) that the State has paid on the employer's behalf, and, in particular, toward strengthening joint liability in subcontracting businesses.
2. Unpaid Wages | Strengthened Recovery and Expanded Joint Liability
This amendment seeks to shift the paradigm of the substitute payment system for unpaid wages in two principal respects.
The first change that warrants attention is the application of the national tax delinquency disposition procedure to the method of recovering substitute payments.
The method by which the Korea Workers' Compensation and Welfare Service (hereinafter the "Service") recovers reimbursement of substitute payments for unpaid wages from employers is to be changed from the existing civil procedure to one that follows the example of the national tax delinquency disposition, and its enforceability and promptness are expected to improve.
In step with this amendment, the Service has announced plans to further strengthen its recovery enforcement by establishing a team dedicated to the intensive recovery of high-value claims and by setting up dedicated recovery centers in key regional hubs, so that practical pressure regarding the recovery of substitute payments for unpaid wages is expected to become visible.
Expansion of Joint Liability in Subcontracting Businesses
A basis for claiming recovery against direct upper-tier contractors and higher-tier contractors has also been newly established.
This is a matter that warrants attention in that it has expanded the scope of responsibility for unpaid wages arising within the structure of subcontracting businesses.
Companies that operate subcontracting businesses must closely review the wage management status of lower-tier subcontractors and promptly establish legal countermeasures, such as strengthening clauses on the prevention of arrears and the allocation of responsibility at the time of contracting.
3. Unpaid Wages | Key Points for Employers and Risk Management Measures
Beginning in 2026, a system for providing credit information on employers who fail to perform their obligation to reimburse substitute payments for unpaid wages is scheduled to take full effect.
This system aims to impose credit-related disadvantages on employers who do not pay the reimbursement, thereby clarifying responsibility for unpaid wages and preventing the occurrence of further wage arrears.
Even ahead of the sanctions taking effect, the Service has, through advance notices, induced employers' voluntary repayment, recovering approximately 2 billion won, and it intends to continue providing advance notices to enhance the effectiveness of the credit sanction system.
The provision of credit information goes beyond a matter of one-off monetary recovery and can have a critical effect on the creditworthiness and external transaction capacity of the corporation and the employer as an individual.
Accordingly, where there is reimbursement of a substitute payment arising from unpaid wages, it is most important to repay it immediately or, where this is difficult, to prevent credit disadvantages in advance by arranging a repayment plan with the Service.
The Necessity of Risk Management in Subcontracting Businesses
A direct upper-tier contractor or a higher-tier contractor has, in effect, come to bear an obligation to review the wage management system of lower-tier subcontractors from a legal standpoint.
Where unpaid wages arise, preemptive legal measures are needed to prevent the financial losses and damage to corporate credibility that may result from joint liability.
- Specifying anti-arrears clauses in contracts : When entering into a subcontract, clearly set out clauses providing for termination of the contract or a claim for damages in the event of a breach of the wage payment obligation
- Procedures for confirming performance of wage payment : Include in the contract a requirement for periodic submission of wage payment records and similar measures
- Strengthening supervision of subcontractors : Manage the matter so that the statutory minimum wage and appropriate labor costs are reflected when calculating the consideration for work, to ensure that subcontractors are not exposed to the risk of wage arrears
The Need for an Accurate Understanding of the Substitute Payment System
Category | Bankruptcy Substitute Payment | Simplified Substitute Payment |
Grounds for Payment | A court's decision on rehabilitation or bankruptcy, or a recognition of facts such as insolvency by the local employment and labor office
| A court's final and conclusive judgment, or a certificate of unpaid wages and similar amounts
|
Eligible Workers | Retired workers only
| Retired workers or low-income current workers (below 110% of the minimum wage)
|
Maximum Limit | 21 million won (varying by age)
| Retirees: 10 million won / Current workers: 7 million won
|
Employers must accurately understand the overview of the substitute payment system, its grounds for payment, and its scope.
In particular, attention should be paid to the fact that the simplified substitute payment is a system introduced to provide prompt protection for workers even at workplaces that have not become insolvent, and that it accounts for the majority of total substitute payments disbursed (approximately 92% as of 2024).
Even in ordinary situations of deteriorating business conditions, it is difficult for an employer to evade the obligation to pay unpaid wages through legal procedures such as a final and conclusive judgment.
Rather than addressing matters after unpaid wages arise, companies need to reexamine their wage payment systems as a preventive measure and, in particular, to reduce risk by obtaining the advice of a legal expert on subcontract management and financial management.
Under the amendment to the substitute payment system for unpaid wages, the possibility for employers to evade responsibility for unpaid wages has been markedly reduced.
The time has come to recognize that unpaid wages are an obligation that must be paid.
If you require advisory services on legislative monitoring and the review of internal regulations in this regard, or if a dispute concerning unpaid wages has arisen, please proceed with a 🔗Legal Consultation Reservation.
