The Principle of Complete Payment of Wages & Exceptions
I. Introduction
Company A gives a 20 percent discount to its employees when they buy company products, up to a maximum of KRW 2 million per year. Only employees and their direct family members living together may receive this discount when they purchase products. However, it was confirmed that one employee violated this company regulation, so the company issued a written warning and deducted, with the employee’s agreement, KRW 500,000 from his salary: the amount involved in the violation. This type of situation has occurred frequently in business, and deals directly with whether a company can recover claimed damages by deducting employee wages.
As the wages paid in return for work provided directly support the employee’s ability to sustain him or herself, deducting wages to pay for claims is strictly regulated. Article 43 (Payment of Wages) of the Labor Standards Act stipulates, “(1) Payment of wages shall be made in full to workers; however, if otherwise stipulated by special provisions of laws or decrees or a collective agreement, wages may be partially deducted or may be paid by other means than cash.” Other provisions that deal with this subject include Article 20 (Prohibition of Predetermination of Nonobservance) , Article 21 (Prohibition of Offsetting Wages against Advances) , Article 22 (Prohibition of Compulsory Saving) , and Article 95 (Limitation on Punitive Provisions) . Despite the principle of complete payment, there are a few exceptions. Some legitimate reasons for deductions include: ① deductions allowed by law or decrees (court rulings); ② deductions allowed by the collective agreement; ③ deductions made to correct miscalculation of wages. Also, even though an exception for wage claims has the employee’s consent, this needs to be handled in a strictly regulated manner. Here I would like to take a substantial look into exceptions to complete payment of wages.
II. The Principle of Complete Payment & Exceptions
1. The principle of complete payment
The purpose of complete payment of wages is designed to protect employees and provide stability in their earning of a living by means of prohibiting employers from unilaterally deducting wages and requiring the complete payment of wages. Some exceptions exist, but these are strictly regulated in special provisions of laws or decrees or in collective agreements. The courts have ruled, “In cases where an employer reduces personnel and at the same time unilaterally cuts bonuses, if the employees continue to work without any particular claims, this deduction of wages still amounts to a unilateral decision by the employer and the employees’ rights to claim these unilaterally-reduced bonuses shall not be considered waived.”
2. Exceptions
(1) Deductions allowed by law and decree
Laws and decrees which allow deductions are limited to income tax law, social security insurance laws, and other stipulated laws. In addition, a court decision to allow seizure of wages can be implemented by seizing one-half of wages exceeding the minimum cost of living (KRW 1.5 million)
A particularly remarkable judicial ruling was recently made which ruled that deductions can be made from monthly wages, but not from severance pay or retirement pension. “Since Article 7 (Protection of Right to Receive Benefits) of the Employee Retirement Benefit Security Act (ERBSA) stipulates that the right to receive benefits under a retirement pension plan shall neither be transferred to others nor offered as collateral, such provision prohibiting transferring the retirement benefits as collateral is part of statutory law. Accordingly, a court ruling to allow seizure of benefits under a retirement pension plan is null and void, and a third-party debtor can refuse the payment, by quoting the above, from an employee’s benefits, even if ordered by a court. On the other hand, Article 246 (Claims Subject to Prohibition of Seizure) of the Civil Execution Act (CEA) regulates that an amount equivalent to a maximum of 1/2 of wages, retirement pension or other wage claims of similar nature can be deducted. Since Article 7 (Protection of Right to Receive Benefits) of the ERBSA and Article 246 (Claims Subject to Prohibition of Seizure) of the CEA are affected by the relationship between general law and special law, it is translated that all benefits under retirement pensions shall not be transferred as collateral.” This means that because the ERBSA is a special law, it takes precedence over the CEA, which is a general law.
(2) Deductions allowed by a collective agreement
Deductions of union dues (or dues checkoff) are typical deductions allowed by a collective agreement. In cases where the labor union requests that the company deduct 10 times the usual monthly union dues (such as KRW 500,000 from each union member towards preparations for a strike), the company will need to decide whether to cooperate or not. For its part, the Ministry of Employment and Labor (MOEL) expressed its official opinion that if the labor union decides to raise funds to prepare for a strike by means of a legitimate decision-making process such as by resolution at a general meeting of all union members (or union representatives), the company shall cooperate by deducting the special union fees from employee monthly wages even though there is no individual consent to do so. This means that, according to MOEL, it would be considered unfair labor practice for an employer to refuse to deduct the amount requested by the labor union to prepare for a strike.
(3) Deductions to correct miscalculation of wages
In cases where an employer overpaid an employee by mistake, equivalent deductions from wages would be to correct the miscalculation, making it possible to adjust wages or severance pay, regardless of the principle of complete payment of wages. Provided, even in this case, the courts have ruled that the amount of retirement benefits deducted to retrieve overpaid wages shall be a maximum of 1/2 of the retirement benefits.
III. Criteria for Judgment & Related Cases Regarding Other Deductions
1. Criteria for judgment
The principle of complete payment of wages strictly regulates, in accordance with Article 43 of the Labor Standards Act, related judicial rulings and MOEL Guidelines an employer from deducting an employee’s wages to cover damage claims against the employee. This is because such a deduction is determined unilaterally by the employer.
Regarding the justification for this, judicial ruling has stipulated the following criteria for judgment: “It is prohibited for an employer to unilaterally deduct an employee’s wages to cover claims against the employee by the employer, but in cases where the employer deducts or replaces the employee’s wages after obtaining the employee’s consent, as this consent can be regarded as the employee voluntarily agreeing to this deduction, this would not be a violation of Article 43 of the Labor Standards Act. Provided, in view of considering the purpose of the principle of complete payment of wages, determination of whether the employee actually voluntarily agreed to this deduction shall be strictly and carefully made.”
2. Related cases
(1) Reimbursement of training expenses
In cases where an employer assigns an employee overseas and subsidizes all training expenses for the employee to attend a training program, and that employee does not serve the compulsory employment period after completing the training, the employer can legitimately require the employee to reimburse part or all of the training expenses covered by the company. Accordingly, a training regulation that exempts an employee from the duty of reimbursement if that employee serves the compulsory employment period after completing the commissioned overseas training is not equivalent to a contract by which a penalty or indemnity is predetermined for damages incurred from a breach of the labor contract. Neither does such a training regulation violate Article 7 of the LSA (Prohibition of Forced Labor: No employer shall force a worker to work against his own free will through any means which unlawfully restrict mental or physical freedom) nor Article 21 (Prohibition of Offsetting Wages against Advances: No employer shall offset wages against an advance or other credits given in advance on the condition of a worker’s labor).
(2) Deductions from bonuses
Sometimes an employer reduces or does not pay bonuses, with labor union consent, in the process of coping with the company’s business difficulties. The MOEL has released guidelines for two different cases: bonuses already incurred and bonuses expected to be incurred. In cases where the employer intends to deduct from bonuses already incurred, which were paid in return for employee labor service, this is null and void even with labor union agreement or revision of company rules. In such cases, individual employee consent must be received. However, the employer reducing or deducting from bonuses expected in the near future is possible through revision of the collective agreement with labor union consent, or revision of the company rules after obtaining the consent from the labor union or the majority of employees. In such cases, receiving individual employee consent is not necessary.
The courts have made rulings that align with this guideline. The wages (including bonuses) or severance benefits already incurred are considered the employee’s private property, so unless the labor union receives individual employee agreement, it is not possible to deduct or delay those payments through a collective agreement. Accordingly, a collective agreement cannot require employees to reimburse payments already received, unless there is agreement from each individual employee.
(3) Housing loans from the company
In cases where an employee resigns before he/she has reimbursed the company for a housing loan received from the company, if the employer deducts all unpaid debt in a lump sum from the severance benefits, this may be considered a violation of the principle of complete payment of wages. However, the courts have ruled in favor of lump sum deductions from severance benefits for the following reason: “Since the collective agreement is the agreement to determine items occurring in labor and management relations, it can be a real expression of the intentions of both parties. It can also be admitted that the individual employee’s voluntary decision and agreement make it possible to deduct wages instead of entering a formal claim for repayment of debts owed to the company by that employee. In view of these points, if the collective agreement was made justifiably and contains items permitting the requirement to reimburse unpaid loans, such a collective agreement does not violate the principle of complete payment of wages.”
IV. Conclusion
As in the cases given above, companies frequently deduct or require reimbursement for claims of illegal acts or other damages. Strictly speaking, this is a violation of the principle of complete payment of wages, which by law prevents the reduction of wages for general claims (debts) that an employee owes to his or her employer. Accordingly, if an employer deducts wages unilaterally to cover these claims, this deduction is invalid and makes the employer subject to punishment for violating the Labor Standards Act.
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