1. Concept

When a company goes bankrupt, its employees cannot receive wages or severance pay in cases where the employer is not able to make such payments. In cases where the employer is able to pay, there are some institutional mechanisms such as “preferential reimbursement” or “most preferential reimbursement” by which employees can receive their overdue wages and severance pay through lawsuits and auction. Because this process requires considerable time and expense, it is necessary for society to assist these employees and their dependents with living expenses during this period. Accordingly, the government introduced the Wage Claim Guarantee (WCG) on July 1, 1998. The WCG is a system that guarantees basic financial security for employees by paying unpaid wages and severance pay on behalf of an employer if employees cannot receive them due to bankruptcy of the company.


2. Eligibility for Insolvency Payment and Amount

(1) Reasons for insolvency payment
Insolvency payment is money that the government pays on behalf of the employer for overdue wages, etc. of employees whose employment has ended due to company bankruptcy on the condition that the government is reimbursed later by the employer.
1)‘Declaration of bankruptcy’ and ‘decision on the commencement of rehabilitation procedures’ under the Debtor Rehabilitation and Bankruptcy Act: This is judicial bankruptcy determined by court ruling.
2)‘Recognition of facts such as bankruptcy’ by the Minister of Labor under Article 5 of the Presidential Decree of the WCG Act: In cases where an employer becomes bankrupt due to deterioration of business or for other reasons, upon request by an employee the head of the regional Labor Office will recognize the employer as being bankrupt. The criteria for a declaration of being deemed bankrupt are 1) the business has been closed in reality, 2) there is no prospect of resuming business, and 3) the employer is incapable of paying wages or severance pay. As most bankruptcies in small and medium companies occur without judicial procedures, recognition of facts such as bankruptcy becomes reason for insolvency payment. Accordingly, it is stipulated that companies ordinarily employing up to 300 persons can be recognized as actually bankrupt by the head of the regional Labor Office because judicial bankruptcy for such small companies is not easy to obtain.

(2) Eligibility for claim
1) Criteria for employer
An employer who wishes for insolvency payment to be made on his behalf shall satisfy the following conditions:
① The employer shall be an employer of a company recognized as a business to which Industrial Accident Compensation Insurance applies. (A business or workplace that ordinarily employs one employee or more. For agriculture, forestry, fisheries, and hunting, companies that employ five employees or more; and construction projects whose contract fees are 20 million won or more);
② The employer to which this law applies shall carry out business for six months or more; and
③ The company shall be legally declared bankrupt by a court or recognized as bankrupt by a regional Labor Office.
2) Employees entitled to insolvency payment
Criteria for employees to be entitled to insolvency payment: 1) At the time of termination of employment, the employer satisfies the above “employer criteria,” and 2) employees shall cease working for the business or workplace concerned one year prior to three years after the declaration of bankruptcy or the recognition of facts such as bankruptcy, etc.

(3) Amount of insolvency payment
Insolvency payment shall constitute unpaid wages or allowances for suspension of business for the final three months of employment and unpaid severance pay for the final three years of employment.
The Wage Claim Guarantee system is designed to provide a minimum level of financial security for employees of bankrupt companies, and so the amount paid by the government is not equal to the total normal wages but within limited maximums. Even within the wage claim to be guaranteed, individual employee wage level is not completely covered but is limited according to age.

※Note: Amounts in the table above are for each month’s wage or suspension allowance, and severance pay for each year of service.
※How much is the insolvency payment? Employee A’s salary was 4 million won and he was 45 at the time of employment termination. Wages were not paid for his final five months, and neither was severance pay for his five service years.
-Wages for final three months: 3 million won x 3 months = 9 million won
-Severance pay for final three years: 3 million won (one month’s average wage) x 3 years = 9 million won
The total insolvency payment amount is 18 million won.


3. Request Procedures for Insolvency Payment

(1) Judicial Bankruptcy
-Request for confirmation and insolvency payment amount (employee→Labor Office)
Applicants for insolvency payment shall submit a request for the insolvency payment amount and confirmation of causes for insolvency payment to the head of the regional Labor Office. The period of effective application is within two years from the date of judicial bankruptcy (date of bankruptcy, commencement date of rehabilitation procedures). The request for payment and application for confirmation shall be submitted to the head of the regional Labor Office with jurisdiction over the workplace at the time of employment termination. As each retired employee shall confirm his/her unpaid wages, all employees shall submit their own requests for payment and application for confirmation.
-Report of occurrence of judicial bankruptcy (employee→Labor Office)
-Notification of confirmation of facts (Labor Office→employee)
-Forwarding of application for payment (Labor Office→Employee Welfare Corporation [EWC])
-Remittance of insolvency payment (EWC→bank→employee)
-Exercise of subrogation right (EWC→employer)

(2) Recognition of facts such as bankruptcy
-Request for confirmation and application for payment (employee→Labor Office)Employees who wish to receive recognition of facts such as bankruptcy shall submit an application for such recognition of facts to the head of the regional Labor Office. The period for application shall be within one year from the termination date. Applications for recognition shall be submitted to the head of the regional Labor Office with jurisdiction over the workplace. In cases where there are two employees or more terminated due to closure of the identified business or workplace, it is acceptable for only one to submit the application for recognition.
-Notification of the decision on confirmation (Labor Office→employee)The criterion for recognition of facts such as bankruptcy is that the employer is incapable of paying wages or has remarkable difficulty in paying. “Employer incapable of paying wages or having remarkable difficulty paying” refers to conditions where the employer does not have any property to reimburse wages, where it is impossible to change the property into cash within three months, and where it is impossible for the employer to pay wages by borrowing or other means.
-Application for confirmation of causes for insolvency payment (employee→Labor Office)
-Notification of decision on the confirmation of facts (Labor Office→ employee)
-Forwarding of the application for insolvency payment and remittance of insolvency payment (Labor Office→EWC→employee)
-Exercise of subrogation right (EWC→employer)


4. Charges Imposed on Employer and Exercise of Subrogation Right

(1) Charges imposed on employer
The Minister of Labor shall impose on an employer charges equivalent to “an amount less than 2/1000ths of the total