Hello, this is Lawyer Choi Jong-ha from the law firm Cheongchul.

Businesses that introduce a comprehensive wage agreement can often be found. In particular, in the case of office workers, it is frequent to see the term "comprehensive wage system" added to the employment contract, with the basic salary including all additional work allowances, such as overtime pay, holiday work pay, and night work pay.

However, contrary to common belief, the comprehensive wage system is recognized in South Korea under very strict conditions. The Supreme Court stated that

"Employers, when entering into an employment contract, determine the basic salary and, based on this, if there are overtime, night, or holiday work hours actually worked by the employee, it should be the principle to calculate and pay the corresponding legal allowances for overtime, night work, and holiday work." It further stated, "If it is not a case where it is difficult to calculate working hours, unless there are special circumstances that can be regarded as fundamentally unable to apply the regulations regarding working hours under the Labor Standards Act, the principle of payment based on working hours under the Labor Standards Act, as mentioned above, should apply, and therefore, in such cases, entering into a wage payment contract that pays a fixed amount as legal allowances regardless of the number of working hours would be prohibited as it violates the regulations on working hours set by the Labor Standards Act." This clearly clarifies that the comprehensive wage system is generally invalid (Supreme Court Decision 2008Da6052, delivered on May 13, 2010).

In this regard, the exception recognized by the Supreme Court is the case where "it is difficult to calculate working hours". The Supreme Court ruled that "there may be cases where it is recognized that it is difficult to calculate working hours, such as in surveillance and monitoring jobs, considering the nature of the work and working conditions, and in such cases, even if a wage payment contract is entered into under the so-called comprehensive wage system without pre-estimating the basic salary of the employee and determining the amount including legal allowances as monthly salary or daily wage, it shall be valid if it does not disadvantage the worker and is deemed reasonable in light of various circumstances."

At this time, ‘surveillance and monitoring work’ refers to “work for which monitoring is the main task and where mental and physical fatigue is normally low” and “work for which work is sporadic and discontinuous, leading to many break and wait times,” namely surveillance work (Article 10(2) of the Implementation Regulations of the Labor Standards Act) and discontinuous work (Article 10(3) of the Implementation Regulations). In summary, it is considerably difficult to recognize the validity of the comprehensive wage system for ordinary office work.

Therefore, what should be strictly implemented in ordinary businesses is not, strictly speaking, the ‘comprehensive wage system,’ but the ‘fixed overtime pay system’. The fixed overtime pay system is a system in which the employer and the employee agree on extended working hours in advance and pay that allowance separately from the basic salary, which is separate from the comprehensive wage system where all allowances are included in the basic salary regardless of whether extended work occurs.

For instance, if daily work typically requires 10 hours of work (i.e., 2 hours of overtime per day), the employer can specify ‘10 hours per week’ of fixed overtime hours in the contract and include 10 hours worth of overtime allowance in the salary, thus alleviating the obligation to pay additional allowances.

If a monthly salary of ‘2,740,000 won under the comprehensive wage system’ is paid and the employee has worked 10 hours of overtime per week, (since the comprehensive wage system is invalid) they would need to pay an additional overtime allowance of over 680,000 won per month. However, if they pay a monthly ‘basic salary of 2,090,000 won and a fixed overtime allowance of 651,000 won’, they are free from the obligation to pay an additional overtime allowance. This difference may initially seem like a play on words, but it is a phenomenon that arises because legally, the ‘comprehensive wage system’ and ‘pre-agreement on overtime hours’ are fundamentally different.

However, to operate the fixed overtime pay system effectively, the following points must be strictly observed.

1.   Fix the fixed overtime allowances separately. The employment contract should clearly state the fixed overtime working hours and the legally calculated amount (e.g., hourly regular wage x 1.5 x fixed overtime hours) (amount and denomination), and it is advisable to specify the amount paid as fixed overtime pay on the payroll.

2.   If overtime work occurs beyond the fixed hours (e.g., if only 2 hours of overtime are specified, but holiday work occurs), the allowance for this must be paid separately. If an allowance is not paid in such cases, there is a risk that the fixed overtime system itself may be misunderstood as an illegal comprehensive wage system.

That is, even if the fixed overtime pay system is adopted, the working hours for employees’ overtime/night/holiday work must be continuously managed.

3.   Except in the case of the above point 2, no payment for overtime work outside of fixed overtime pay should be made. Some businesses habitually pay additional allowances of about 30,000 to 50,000 won to workers who worked overtime until 10 PM (often arising under the name of taxi fare), and the payment of such allowances separately may lead to misunderstandings that the fixed overtime payment is merely formal.

To operate the fixed overtime pay system appropriately, an assessment of the overall working hour management and payment systems in the workplace may need to be carried out.