Unpaid Wages | Reform of the Substitute Payment System, Application of the National Tax Delinquency Disposition Procedure

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.

• Strengthening of the joint liability obligation : A legal basis has been newly established that allows recovery of substitute payments for unpaid wages to be claimed against direct upper-tier contractors and higher-tier contractors under the Labor Standards Act as well. This compels the prime contractor or a higher-tier contractor to bear joint liability for substitute payments disbursed by the State in respect of wage arrears arising at a subcontractor's workplace.
• Anticipated effect of preventing arrears : This provision is expected to bring about the effect of preventing wage arrears at subcontracting work sites by pressuring higher-tier contractors to thoroughly review and manage the wage payment capacity of lower-tier subcontractors in advance.

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.

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

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.