Legislative Developments on the Comprehensive Wage System and Implications for Employers

The new Korean administration has pinpointed “reducing excessively long working hours” and “eliminating unpaid labor” as key items on its national agenda for labor and employment. President Lee Jae-myung has consistently identified the comprehensive wage system as a primary cause of both excessive working hours and unpaid labor. In alignment with this key policy stance, we expect the new administration to initiate substantive discussions aimed at banning the comprehensive wage system soon.

Basis and Requirements of the Comprehensive Wage System

The comprehensive wage system is not expressly defined in Korean statutory laws, but rather has developed through Supreme Court precedents and is recognized in practice. Under Korean Supreme Court rulings, the comprehensive wage system - which provides employees with a fixed amount to cover statutory allowances, such as overtime pay, regardless of the actual working hours - is permissible only under exceptional circumstances. That is, unless it is very difficult to calculate working hours or virtually impossible to directly apply the Labor Standards Act (“LSA”) to employees based on how and where they perform their work, the comprehensive wage system is not permitted (Supreme Court Decision 2008Da6052, May 13, 2010). Therefore, it is important to understand that the Supreme Court has interpreted the requirements for a valid comprehensive wage system very strictly, prohibiting its use merely for an employer’s administrative convenience or as a means to incentivize employees.

Legislative Developments on the Prohibition of the Comprehensive Wage System

Current discussions on regulating the comprehensive wage system in Korea are primarily focused on two approaches: (i) strengthening labor inspections in line with existing Supreme Court precedents and (ii) introducing new legislative measures. While the new administration is expected to maintain rigorous labor inspection efforts, it is particularly noteworthy that several bills aiming to ban the comprehensive wage system are pending before the 22^ndNational Assembly as follows (based on proposals by various members of the National Assembly):

Classification

Bill A

(Proposed by Park Hae-Cheol)

Bill B

(Proposed by Park Hong-Bae)

Bill C

(Proposed by Park Joo-min)

Bills D and E

(Proposed by Lee Yong-Woo, Chung Hye-Kyung, respectively)

Scope of Prohibition of Comprehensive Wage Agreements

Agreements calculated in advance, including overtime, night shift, and holiday work allowances

Fixed Wage System^[1] / Fixed Allowance System^[2]

Fixed Wage System / Fixed Allowance System / Agreements that pay a fixed amount regardless of actual working hours

Fixed Wage System / Fixed Allowance System (including unused annual leave allowance) / Agreements that pay a fixed amount regardless of actual working hours

Scope of Measurement and Recording of Working Hours

Recording of working hours, including the start time, end time, and break periods (on a daily, weekly, or monthly basis)

Addition of actual working days and actual working hours to the payroll ledger

Recording of working hours, including the start time and end time (on a daily, weekly, or monthly basis)

Practical Considerations for Employers

Currently, the proposed amendments to the LSA, which would prohibit the comprehensive wage system, are still sitting at the standing committee review stage in the National Assembly, but deliberations are expected to begin soon. As these bills move forward, several key issues are likely to become the focus of debate for employers:

Whether widely used fixed overtime arrangements will be included in the scope of the prohibition on comprehensive wage agreements.
Whether the prohibition will apply retroactively to agreements executed before the amendments take effect.
Whether the amendments will prohibit lowering existing wage levels or impose an obligation on employers to provide measures for wage preservation.
Whether penalty provisions for non-compliance will be introduced.

These proposed amendments to the LSA closely align with the new administration’s priorities, particularly with regard to addressing excessive working hours and strengthening employee rights. Notably, the amendments provide greater clarity regarding the practical implementation of the prohibition on the comprehensive wage system. Additionally, since the amendments to the LSA introduce stricter requirements for measuring and recording working hours, robust and transparent management of working hours will become increasingly important, regardless of whether or not the comprehensive wage system is banned. Therefore, employers are strongly encouraged to proactively review their current practices and prepare for potential changes to ensure ongoing compliance and mitigate legal risks.

^[1] A wage system in which the total amount of the base salary and statutory allowances is paid as a monthly or daily wage without separately specifying the base salary.
^[2] A wage system in which a base salary is specified separately, but the total amount of individual statutory allowances is paid as a fixed amount regardless of the actual number of working hours.

[Korean Version]

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