Hello, this is Law Firm Cheongchul, Attorney Choi Jong-ha.

The Labor Standards Act guarantees the right to use annual leave for workers in businesses with five or more employees. This system is essential for employees to take a break from work-related fatigue; however, from the employer's perspective, it's often the case that the problem arises when employees do not take their annual leave. If annual leave is not taken, the employer must pay compensation equivalent to one day of regular wages for each unused annual leave day, which can amount to a significant sum, especially if multiple workers claim compensation worth about 10 days annually.

As a result, many small businesses focus on the fact that using the 'annual leave utilization promotion system' means they do not incur compensation obligations, and thus are utilizing this system. However, the annual leave utilization promotion system is very complicated in practice, as it requires the employer to follow three procedures: notifying the number of unused leave days for each individual worker, written urging, and notification of specified leave timing. Ultimately, it must result in the refusal of labor acceptance (i.e., the employer must prevent the employee from working even if they wish to), for it to be effective. Our courts strictly judge compliance with these procedures, making it quite rare for a legal dispute over the payment of annual leave compensation to conclude with the judgment that 'there was an annual leave utilization promotion, so the obligation to pay annual leave compensation does not exist.'

Therefore, the most appropriate method is instead the comprehensive wage system. The comprehensive wage system is generally used in many businesses; however, it is typically limited to overtime pay for extended hours, night work pay, holiday work pay, and other hourly overtime compensations. The comprehensive wage system is actually quite difficult to apply legally to overtime compensations, but can be applied more easily to annual leave compensation.

The Supreme Court ruled that “even if annual compensation arises only when working for the period specified in the Labor Standards Act, it is not impossible for the parties to agree in advance to include annual leave compensation in daily wages or a fixed monthly amount, and the comprehensive wage system concerns the payment method for various compensations and does not affect the exercise of the employee's right to annual leave, thus the comprehensive wage system cannot be said to deprive employees of their annual leave rights.” This clearly states that annual leave compensation can be included in the monthly salary (Supreme Court Decision 2019da29778, ruling on November 30, 2023).

To implement this annual leave compensation comprehensive wage system, it is necessary to (1) specify the amount of annual leave compensation included in the salary in the contract and (2) explicitly state the annual leave compensation in the payslip provided to the employee. For an employee with a total monthly salary of about 3 million KRW, it is required to specify the base salary and annual leave compensation in both the employment contract and the payslip, as shown in the following example.

Monthly Salary: 3,000,480 KRW

Base Salary: 2,889,864 KRW (based on 209 hours per month)

Annual Leave Compensation: 110,616 KRW [(Base Salary / 209 hours) x 8 hours]

A more convenient method would be to determine the regular hourly wage for each worker and then back-calculate the base salary and other amounts. For example, if a worker's regular hourly wage is 12,000 KRW, their salary would be calculated as follows.

Base Salary: 2,508,000 KRW (Regular Hourly Wage 12,000 KRW x 209 hours)

Annual Leave Compensation: 96,000 KRW (Regular Hourly Wage 12,000 KRW x 8 hours)

Monthly Salary: 2,604,000 KRW

On the other hand, it is also possible to include annual leave compensation in the comprehensive wage and grant separate leave to employees. By introducing this system and granting 'unpaid summer leave' through internal regulations, it allows employees to take vacations during specific times, securing both business efficiency and worker rest while simultaneously preventing excessive accidental annual leave compensation liabilities.

Law Firm Cheongchul has extensive experience and expertise in various human resources and labor issues such as labor relations, personnel management, wages, and dismissals. If you need assistance, please feel free to contact us, and we will be a reliable ally.