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Editorial

Flying Under the Radar

January 2019 - Employment . Legal Developments by Lee & Ko .

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Flying Under the Radar: Companies Must Increase Awareness of the Potentially Dormant and Disruptive Changes to the Minimum Wage in Korea

Korea has experienced unprecedented yearly increases to the statutory minimum wage since 2017 in addition to changes in the applicable legislation. While companies are aware of the more patent impacts of the recent major changes to the Labor Standards Act and have initiated proactive measures to ensure legal compliance, companies often overlook the impacts of the significant changes to the statutory minimum wages and associated legislation until it is too late. And as an employer may face criminal sanctions (i.e., imprisonment up to 2 years or criminal fine not exceeding KRW 20 million) for unpaid wages, companies must be aware of the changing legislation related to the statutory minimum wage and – as with changes to the Labor Standards Act – take proactive measures to ensure continued legal compliance.

When then-candidate Jae-In Moon campaigned for the Korean presidency in 2017, his campaign focused heavily on job security and job creation by, in part, reforming Korea’s employment and labor laws. In accordance thereto, after taking office in May 2017, President Moon and his administration have made ambition measures toward employment and labor law reforms, including significant legislative changes to the Labor Standards Act (e.g., reduction of weekly work hours to 52 hours, greater annual leaves) and efforts toward achieving the target statutory minimum wage of KRW 10,000 per hour by 2020.

As a result, and in accordance with the Moon Administration’s campaign initiatives, Korea has experienced unprecedented yearly increases to the statutory minimum wage. While the average yearly increase from the early 2010s hovered around 5%, the yearly increases since 2017 have ranged from 10% - 15%, resulting in a minimum wage of KRW 8,350/hour for 2019. Companies, especially small to mid-size businesses, have struggled to increase the salaries of their employees in accordance with the minimum wage increases. Yet employers’ efforts toward legal compliance have been hindered by discrepancies between the Ministry of Employment & Labor (“MOEL”) and the courts regarding the calculation methods for the hourly minimum wage. Specifically, the MOEL and courts differ on the payment items to be included and the base number of the standard monthly work hours to be used when calculating the hourly minimum wage. And in 2019, the MOEL now seeks to settle the discrepancy through amendments to the Enforcement Decree of the Labor Standards Act.

  • Regarding Payment Items Included when Calculating Hourly Minimum Wage

As a general proposition, payment items that are paid monthly are included when calculating an employee’s hourly wage rate to determine if the rate is greater than the applicable minimum wage. However, when a non-monthly allowance or bonus such as an annual bonus (which, in theory, is payable annually) is paid in monthly installments, the MOEL held that the amount should not be included, while the court held that the amount should be included.

To address this discrepancy, amendments to the Minimum Wage Act (effective January 1, 2019) stipulate that:

  1. monthly installments of non-monthly allowances/bonus must be included when calculating minimum wage; however,
  2. an employer must exclude up to 25% (in the case of relevant non-regular bonuses) or 7% (in the case of non-regular benefits/allowances) of the minimum monthly salary (i.e., the minimum monthly salary required to satisfy the minimum wage) (“Minimum Monthly Salary”) from the monthly installment of the relevant non-monthly bonuses/allowances (the “Percentage Exclusions”). Please also note that the excludable percentages will decrease each year so that by 2024, the excludable percentages would be zero.

For example, in the case of a non-regular bonus such as an annual bonus:

  • The minimum wage for 2019: KRW 8,350/hour
  • The standard monthly hours: 209 hours, assuming a 5-day, 40-hour work week. (209 hours = (40 hours/wk + 8 hours on weekly paid holiday) * (365 days / 7 days / 12 months))
  • The Minimum Monthly Salary: KRW 1,782,770 (= 7,530 x 209)
  • The Percentage Exclusions per month: KRW 445,692 (= 1,782,770 x 0.25)

The legislative intent behind the Percentage Exclusions is to protect employees whose salaries are near the current minimum wage rate (KRW 7,530 per hour for 2018). More specifically, if a company can include more payment items when calculating an employee’s hourly rate (to determine if it is greater than the minimum wage) while the monthly working hours for the employee remains the same, the hourly rate would consequently increase without any actual increase in salary. Therefore, employees whose hourly rates may have fallen below the applicable minimum wage might no longer be entitled to a salary increase when previously-excluded payment items are allowed to be reflected in their hourly rate calculations. Therefore, the law seeks to mitigate this potentially adverse impact on employees by requiring employers to exclude the Percentage Exclusions of the Minimum Monthly Salary.

  • Regarding the Standard Monthly Work Hours when Calculating Hourly Minimum Wage

The MOEL and the Supreme Court also differ with respect the standard monthly work hours that should be used when calculating the hourly minimum wage. The MOEL takes the position that the hours for the weekly paid leave (i.e., the one paid day off per week that an employee is entitled if he/she works the full contractual workweek per the Labor Standards Act) should be included. This inclusion would increase the standard monthly hours to 209 hours. Meanwhile, the Supreme Court held that the standard monthly hours should be 174 hours (i.e., 40 hours per week, excluding the hours for the weekly paid leave). Notwithstanding the discrepancy, the MOEL seeks to settle the discrepancy through amendments to the Enforcement Decree of the Labor Standards Act. While the additional clarification can be beneficial to companies, we note that the MOEL’s push on – what may be seen as – measures to circumvent the Supreme Court’s position through administrative authority may set a dangerous precedent and inadvertently cause greater confusion in the legal market.

  • Updating the Current Employer Policies

While employers are advised to pay close attention to the changing standards on the standard monthly hours, employers are highly recommended to take measures to include the monthly installments of non-monthly bonuses and allowances. And to do so, employers would likely need to update or amend their rules of employment (or the collective bargaining agreement, if necessary and applicable) to convert to a monthly payment structure.

To help employers update or amend their respective policies, the legislators take the position that:

  1. For changing collective bargaining agreements, the union’s consent would be required; however,
  2. For changing the rules of employment, the legislative intent indicates that the change(s) would not be considered as disadvantageous. Therefore, in accordance with the Labor Standards Act, consent from the majority of the employees are not required. Instead, employers need only to hear the opinions of the majority of the employees in a town-hall setting.

As stated above, an employer may face criminal sanctions for unpaid wages, and companies often find themselves facing a sudden financial burden if tens or even hundreds of their employees’ salaries must be increased simultaneously. Therefore, we highly recommend being aware of the changing legislation related to the statutory minimum wage and – as with changes to the Labor Standards Act – take proactive measures to ensure continued legal compliance.

If you have any questions regarding this article, please contact below:

Jae Hoon KIM (jaehoon.kim@leeko.com)

Seungwan HAHM (seungwan.hahm@leeko.com)

William KIM (william.kim@leeko.com)

For more information, please visit our website: www.leeko.com

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