|Preventing Unpaid Wages and the Small Amount Insolvency Payment Claim System
Providing work not meant to be on a voluntary basis and not receiving wages is slave labor. Thus, delaying payment of wages is a serious offense and subject to imprisonment for up to three years or a fine of up to 30 million won. Delayed payment of wages is punishable for each violation towards individual workers, so if the employer delays payment of wages to a large number of workers, that employer will face heavy penalties. Despite these strong penalties, it is not easy to settle problems related to unpaid wages. Even if a worker who was not paid complains to the local Employment Labor Office (hereinafter referred to as “Labor Office”), and the Labor Office confirms that the wages remain unpaid and the employer is punished, the worker still has to take separate legal action to receive the unpaid wages. If the employer does not have any property, the employer can receive a certain amount of money for the most preferential wages from the Wage Bond Guarantee Fund. Receiving unpaid wages through civil litigation and the Insolvency Payment Claim System is a complex process and takes a long time, which is not helpful in practical terms.
To resolve these problems, a new payment solution has been proposed in addition to legal preventive measures. A high rate of 20% interest is placed on employers to facilitate their payment of delayed wages. This is to preclude employers avoiding punishment if they do not pay the unpaid wages until they are prosecuted. In addition, the unpaid workers, regardless of their employer's ability to pay their wages, can receive up to 10 million won in unpaid wages from the Wage Claim Guarantee Fund, after the Labor Office confirms that wages were not paid and a court has determined they are owed wages (for which they can receive assistance from the Legal Aid Corporation if they are eligible). This is called the Small Amount Insolvency Claim System. The maximum payout was increased from 4 million won to 10 million won on July 1, 2019, which will assist greatly with resolving financial problems related to unpaid wages. Herein, I will examine the related legal preventive systems for unpaid wages and the Small Amount Insolvency Claim System in detail.
II. Preventive Measures for Delayed Payment of Wages
1. High interest levied
The Labor Standards Act: Article 37 (Late Payment Interest on Unpaid Wages)
(1) An employer who fails to pay all or part of the wages or benefits (only those paid in a lump sum) pursuant to Article 36 or subparagraph 5 of Article 2 of the Employee Retirement Benefit Security Act, respectively, within fourteen days from the day when the cause for payment occurs, shall pay late payment interest for the number of days from the date following expiry of the fourteen day period until the payment is made, at a rate up to 40/100 and as prescribed by Presidential Decree in consideration of financial conditions, including the late payment interest rate applicable among banks under the Banking Act.
(2) If an employer delays payment of wages due to a natural disaster, armed conflicts or other reasons prescribed by Presidential Decree, the provisions of paragraph (1) shall not apply to the period during which such reasons continue to exist.
In order to prevent delayed payment of wages and early liquidation of unpaid wages, the Labor Standards Act was amended in 2005 to create a "Late Payment Interest System for unpaid wages." If an employer fails to pay all or part of wages and retirement benefits owed within 14 days of the required date of payment, the employer shall pay the late payment interest rate prescribed by Presidential Decree (currently 20% per year) for the number of days payment was delayed, starting from the day following the required date of payment. This high interest rate helps to prevent an employer from intentionally paying back wages only when he/she is forced to, and without consequences. If an employer delays payment of wages due to a natural disaster, armed conflict or other reasons such as legal or actual bankruptcy, this provision shall not apply to the period during which such reasons continue to exist.
The late payment interest system levies a much higher rate of interest (20% annually) than the statutory interest of 6% a year, as a way to induce quick payment. However, if the employers do not have any money or assets to effect payment, there is no way to protect the affected workers’ rights, no matter how high the interest rate. The reasons why 20% annual interest payment is not used well on unpaid wages is as follows. First, there is no penalty for failing to pay the late payment interest, unless the worker takes the employer to civil court. Second, workers tend to agree to withdraw their complaints if they simply receive their unpaid wages. Third, the Labor Inspector only considers whether the unpaid wages have been paid when determining punishment, and not the interest for delaying payment, since there are no items related to delayed payment interest in the “Official Document on Details of Unpaid Wages”. Delayed payment interest is only considered in civil lawsuits for unpaid wages, meaning there is very limited effectiveness in preventing wage payment delays.
2. No-punishment offenses against one’s intention
The Labor Standards Act: Article 109 (Penal Provisions)
(1) Any person who violates the provisions of Article 36, 43 (Payment of Wages), 44 (Payment of Wages in Subcontract Businesses), 44-2 (Joint Responsibility for Paying Wages in the Construction Industry), 46 (Allowances during Business Suspension), or 56 (Extended Work, Night Work and Holiday Work) shall be punished by imprisonment of up to three years or by a fine not exceeding thirty million won.
(2) Prosecution against a person who violates the provisions of Article 36, 43, 44, 44-2, 46 or 56 shall not take place against the clearly expressed wishes of the victim.
No-punishment offenses against one’s intention is a system where imprisonment of up to three years or a fine of up to 30 million won is imposed on employers who have delayed payment of wages in principle, but the Ministry of Employment and Labor (MOEL) does not prosecute if it is against the clearly expressed wishes of the related worker(s). Employers were forced to solve voluntary liquidation of unpaid wages through agreement with workers by paying unpaid wages instead of suffering criminal penalties. However, if a large number of workers whose wages remain unpaid, the employer shall be deemed to have committed the same offense against each unpaid worker. Accordingly, in order to avoid penalties according to the no-punishment offenses system, written consent from all unpaid workers must be obtained.
III. The Small Amount Insolvency Payment Claim (IPC)
1. Purpose for introduction
The existing insolvency payment claim system is limited to those who were employed by companies declared legally bankrupt, but does not apply to employees who have not received their wages from a company that is still operating. To better implement the basic purpose of the Wage Claim Guarantee System and improve the livelihoods of unpaid workers, the Small Amount Insolvency Payment Claim System (Small Amount IPC System) was introduced on January 20, 2015. For those unpaid workers whose employment ended with companies still in operation, a certain amount of the insolvency payment can be paid when the court order to secure the execution rights such as the final judgment and payment order was secured. The Small Amount IPC System is simpler than the existing general IPC System, which helps to protect, in actual terms, the rights of unpaid workers. While the general IPC system requires that the company has gone bankrupt, compensation through the Small Amount IPC System only requires confirmation from the court that a worker’s wages remain unpaid.
2. Requirements for Small Amount IPC payments
According to the Wage Claim Guarantee Act (WCGA), payment of compensation through the Small Amount IPC requires the following.
1) Requirement regarding the employer: The workplace where the unpaid worker was employed must have been in operation for at least six months at the time the worker’s employment ended, and have employed at least one permanent worker.
2) Requirement regarding the worker(s) whose wages remain unpaid: The unpaid worker must file a lawsuit or an order for payment within two years from the date his/her employment ended with the related employer.
3) Requirement to obtain legal authority: Workers should receive a judgment, payment order, or recommendation for implementation through the Legal Aid Corporation or a separate civil lawsuit.
Unpaid workers who meet the above requirements may be enter a Small Amount IPC for up to 10 million won of the total unpaid amount of their last three months' wages or suspension allowances and retirement allowances for the last three years.
3. Process of making a Small Amount IPC
(1) Petition for unpaid wages to the Labor Office
When a worker complains to the Labor Office about failing to receive wages owed, an investigation begins. The labor inspector begins by requesting attendance of the relevant parties to a hearing. If a settlement agreement is concluded between the parties or the unpaid wages are paid, the case is closed. If the unpaid wages are not paid, despite an order to do so from the labor inspector, the criminal punishment process begins. The worker can also sue the employer for the unpaid wages and therefore obtain the authority to receive the claimed wages if he/she wins the lawsuit.
(2) Free legal service from the Legal Aid Corporation
Workers who intend to receive a Small Amount IPC may be eligible for free legal services from the Legal Aid Corporation after receiving a Confirmation Certificate of Unpaid Wages, and can take a legal action along with the LAC to get the court’s confirmation on unpaid wages. Workers who are not eligible for free legal aid (those who earn an average monthly wage of more than 4 million won in the last three months) must make a Small Amount IPC upon obtaining a court’s order to receive unpaid wages during a civil lawsuit. The employee shall submit the Small Amount IPC to the Korea Labor Welfare Corporation within one year from the date authority to receive was obtained.
(3) Applying for an insolvency payment claim
If a worker applies for a Small Amount IPC with a Confirmation Certificate of Unpaid Wages attached, the authority to receive unpaid wages, and a Confirmation Certificate issued by the Court, the Labor Welfare Corporation shall decide whether to pay the Small Amount IPC within 14 days of receiving the claim.
4. Differences from the existing Insolvency Payment Claim System
(1) Criterion for payment
The existing general IPC system allows payouts only after a bankruptcy decision or commencement of rehabilitation proceedings for the workplace involved, or if the Labor Office confirms the existence of de facto bankruptcy or rehabilitation, even though such bankruptcy or rehabilitation has not been legally determined by the court. However, the Small Amount IPC can be received regardless of insolvency.
A worker whose employment has ended must first obtain an order from the court to receive unpaid wages from the employer.
(2) Eligible workers
Workers eligible for the general IPC are those whose employment ended within three years from one year prior to the date of filing for bankruptcy or rehabilitation. However, workers eligible for the Small Amount IPC are those who filed a lawsuit within two years after their employment ended.
(3) Requirement for the employer
The general IPC requires that the company must be de facto or legally bankrupt after operating for at least six months before the worker’s employment ended, while the Small Amount IPC requires that it was operating for more than six months before the worker’s employment ended.
(4) Applicable period
The general IPC shall be submitted within two years of the date of a declaration of bankruptcy or of the determination of bankruptcy, while the Small Amount IPC shall be submitted within one year from the date of final judgment by the court.
(5) Scope of payment
Both general and Small Amount IPCs are paid on behalf of the employer for the final three months' wages (including suspension allowances) and the final three years' retirement allowances. However, 1.8 million won to 3 million won per month (up to 18 million won) can be paid out under the general IPC, depending on age. The Small Amount IPC is based on the criteria of the general IPC as well, but the maximum payout is 10 million won, while the maximum amount per wage item (including suspension allowance) and retirement benefits is separated and shall not exceed 7 million won each.
Claims under the existing Insolvency Payment Claim system are required to have de facto or actual bankruptcy legally recognized. Claims under the new Small Amount IPC are likely to be received even if the above requirements are not met, since the key requirement is whether or not the right to receive unpaid wages is given by the court. Administrative proceedings for the payment of a Small Amount IPC are easier than under the existing IPC. Nevertheless, the fact that workers have to go through two or three administrative agencies until they can receive money in this way, and having to submit separate documents for each agency, is an obstacle to effective utilization of the Small Amount IPC system. Therefore, a one-stop service for the new system is needed, and can be achieved through active linkage between the Labor Office, the Legal Aid Corporation, and the Korea Labor Welfare Corporation.
As a way to rectifying the problem for some workers of their wages remaining unpaid, there is a delayed payment interest system and no-punishment offenses against workers’ intention that can be used within the legal framework. The delayed payment interest system involves levying an additional 20% in annual interest to the amount of unpaid wages, which should be described with delayed payment interest at the Labor Office's issuance of an Unpaid Wage Confirmation Certificate. In cases of no-punishment offenses against workers’ intention, criminal penalties are imposed on employers in the form of fines (rather than imprisonment), which can equal up to 20% of the total unpaid wages. Korea should introduce punitive fines as is done in the United States, charging fines several times higher than the actual unpaid wages, and promote the perception that work without wages is slave labor. In addition, the expanded Small Amount Insolvency Payment Claim system is groundbreaking in that it guarantees workers' right to wages up to the general Insolvency Payment Claim’s payments . In the future, the maximum payout for the Small Amount IPC will need to be expanded again, and efforts made to improve its efficacy as a quick and convenient way for workers to receive wages they are owed.