On August 4, 2017, the Ministry of Employment and Labor (the “MOEL”) announced the minimum wage for 2018 as 7,530 Won (about US$6.60) per hour. This represents a 16.4 percent increase from this year’s 6,470 Won, the biggest jump since 2001. To meet President Moon’s goal of raising the minimum wage to at least 10,000 Won by 2020, the minimum wage will need to keep increasing by about 15 percent every year on average.

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 should 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 in intervals of more than one month; and it includes fringe-benefit-type allowances such as family allowances, meal allowances, housing allowances, and commute 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 purposes 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 8 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 en banc, 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. Due to 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 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 purposes of the minimum wage (like bi-monthly bonuses, OT allowances, and other fringe-benefit-type allowances). There was one media report which stated that even a company which pays 54 million Won (about US$47,500) annually may face a minimum wage violation due to its wage structure including many items excluded from the minimum wage calculation. Compliance may also be affected simply due to the company treating certain off-duty hours as paid vs. unpaid hours.

With the minimum wage rapidly increasing and the proper calculation somewhat complex and unsettled, employers may suddenly, and inadvertently, find themselves in a position where they are found to be in violation. Consequently, it is highly recommended for companies to review their current wage schemes and assess whether they are at risk in terms of the minimum-wage requirement. Measures like simplifying the compensation system to reduce the number of components (i.e. by consolidating fringe-benefit-type allowances 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 a change of collective terms and conditions. Moreover, an employer’s collective bargaining agreement may require prior union consent from the union for any change to wage terms. Therefore, a company considering revamping its wage structure should examine all the relevant issues including any procedural requirements.