Given the significant pace at which the minimum wage is expected to increase, it is more critical than ever that employers, and particularly HR practitioners, understand two very significant legal issues involved in evaluating compliance with the minimum wage.

First, one needs to understand what types of compensation are not included in calculating the minimum wage. Certain types of compensation do not count for minimum-wage purposes. This excluded compensation includes wages paid irregularly or at intervals of more than one month; and it includes fringe-benefit-type allowances such as family allowances, meal allowances, housing allowances, and commuting allowances. Moreover, according to the MOEL’s interpretation, an item of compensation with a calculation period of over one month—even if paid monthly—is also excluded when calculating the minimum wage.

Second, you should be aware of the number of working hours used to calculate the hourly minimum wage. The greater the number of working hours in a pay period, the lower an employee’s hourly wage will become for the purpose of minimum-wage compliance. The MOEL advises that the number of working hours used to calculate the minimum wage must include regular working hours plus paid off-duty hours, in the same manner as used to calculate the ‘ordinary wage’ from which overtime premium pay and certain other benefits are calculated. To illustrate, a monthly-paid employee who works eight hours per weekday, and for whom Sunday is designated a paid day off, will have 209 monthly working hours, calculated as follows: (40 weekly working hours + 8 hours of paid off-duty time (i.e. Sunday)) ÷ 7 days x 365 days ÷ 12 months = 209 hours per month.

If a company’s rules of employment or collective bargaining agreement provides that Saturday is also a paid day off, then the number of monthly working hours will become greater, either 226 or 243 hours. This would require a greater overall level of compensation to comply with the minimum wage.

However, the Supreme Court has taken a different position and held that those paid off-duty hours are not included in the working hours used to calculate the minimum wage. According to the Supreme Court’s decision (which was not decided by the full bench and therefore lacks full precedential authority), if an employee has 40 regular working hours per week, the employee’s monthly working hours will be 174. Because of these inconsistent interpretations, it is possible that a company which meets the minimum-wage requirement according to the Court’s standard may be found to have failed to comply with the minimum-wage requirement as per the MOEL’s interpretation. Considering that the MOEL has the power to issue a corrective order, and also to bring criminal charges against the company and its executives for violation of the minimum-wage law, it is prudent to comply with the MOEL’s guidelines, at least for now.

Under these circumstances, it is possible for a company that pays a decent salary overall to fail to meet the minimum-wage requirement, if the company has significant items of compensation that do not count for the purposes of the minimum wage (such as bi-monthly bonuses, overtime allowances and other fringe benefits). There was one media report which stated that even a company that pays KRW 54 million (about EUR 40,180) annually may face a minimum wage violation because its wage structure includes many items excluded from the minimum wage calculation. Compliance may also be affected simply because the company treats certain off-duty hours as paid, as opposed to unpaid hours.

With the minimum wage rapidly increasing and the proper calculation somewhat complex and unsettled, employers may suddenly and inadvertently find themselves in violation. Thus, it is highly recommended for companies to review their current wage schemes and assess whether they are at risk of this. Measures such as simplifying the compensation system to reduce the number of components (i.e. by consolidating fringe-benefits into the base salary), or changing payment intervals, may be used to resolve these issues. It should be noted, however, that changing the current wage structure may require workforce consultation or even the consent of the majority of employees, as it is a change to the collective terms and conditions. Moreover, an employer’s collective bargaining agreement may require prior union consent for any change to wage terms. Therefore, a company considering revamping its wage structure should examine all the relevant issues including any procedural requirements.