Ⅲ. Inclusive Wage Systems

When designing a labor contract, the employer determines the base pay for the employee. Then, the employer generally calculates wage and added allowances with the base pay for overtime, off-days, and night work. However, in order to consider working structure and job characteristics, efficiency of calculation, or to encourage a strong work ethic, an employer can include general allowances such as overtime allowance, etc. in the base pay and also pay a certain amount of allowance every month under the inclusive wage system. In this case, as long as the conditions are not deemed disadvantageous to the employee, it does not violate the law.
An inclusive wage system where an employer pays a fixed monthly salary is convenient for management, but can only be applied in some situations, as it can easily violate the Labor Standards Act. An inclusive wage system is a salary payment system where the employer determines the total wage, which include statutory allowances such as overtime, night, and holiday work allowances in consideration of job characteristics and convenience in calculating wage, and then pays a fixed wage every month. This system is often designed for use at workplaces where it is hard to measure working hours due to the job characteristics or for the convenience of calculating working hours even though those working hours are measurable. However, this inclusive wage system is also commonly used to avoid paying various allowances required under the Labor Standards Act. Originally, statutory allowances under the Labor Standards Act were meant to be paid for actual work provided. If an employer pays wage that include statutory allowances in advance, this could violate the Labor Standards Act, but is allowed, albeit with strict limitations as determined in judicial rulings and administrative guidelines.
There are two generally-accepted types of inclusive wage systems. The first is for special work where it is difficult to measure working hours. The second is for convenience of calculation.

1. Inclusive Wage Systems and related Judicial Principles

Article 17 of the Labor Standards Act stipulates that an employer shall clearly state wages, contractual working hours, and other working conditions in the employment contract. Other matters such as constituent items of wages and the calculation and payment methods of wages shall be specified in writing. Article 56 of the LSA regulates that an employer shall pay an additional 50% or more of the ordinary wage for extended work, night work, or holiday work. Based on these regulations and the rules stipulated concerning ordinary wage, in making an employment contract, the employer shall first determine basic pay, and then from this basic pay, shall calculate the statutory allowances such as overtime, night work, and holiday work allowances according to actual working hours.
In principle, the payment of wage is according to the number of working hours. There are exceptional cases where working hours cannot be measured when considering actual hours worked, employment types and job characteristics like surveillance and intermittent work. In this case, the employer can make a wage payment contract that follows an inclusive wage system where the employer and employee can determine a monthly or daily wage that reflects all allowances, including statutory allowances, without deciding the basic pay in advance, or the employer can make an employment contract with fixed amounts inclusive of all statutory allowances, based only on the previously determined basic pay, without considering the actual number of hours worked. This inclusive wage system is permissible when there is no disadvantage to the related workers or as a justifiable method in view of special situations related to those jobs.
However, if working hours of a specific job are measurable, the principle is to pay wage according to working hours as reflected in the Labor Standards Act, unless a special situation exists where the LSA requirements do not apply. Therefore, for an employer to create a wage payment contract that uses an inclusive wage system(paying a fixed amount for statutory allowances) regardless of the number of working hours, is to violate the Labor Standards Act in principle and is not allowable by law.

2. Inclusive Wage System by Job Characteristics

(1) Requirements

1) Job characteristics and working structure
The inclusive wage system can be adopted when working structures, working hours, or rest hours in the working area are irregular, and when overtime and night work are naturally included in the working structure, even though the employee can decide on the working hours at their own discretion.
Examples of an inclusive wage system by job characteristics are as follows:
① Irregular work due to climate, supply of raw materials, etc.
② Transportation time that cannot be translated into working hours
③ Surveillance and intermittent work
④ Special working structures

2) Employee consent
Under circumstances in which the inclusive wage system is accepted as an exception to the payment structure for added wage in the Labor Standards Act, the system shall be specified concretely in a labor contract or rules of employment, or at least by a clear verbal agreement in principle. However, the inclusive wage can be admitted by two parties if it has already been habitually used in wage calculation for work such as surveillance, work that is intermittent, work that is every other day, and shift work, or if the employees have complied without disagreement to the work that requires regular overtime work and night work at measurable working hours.


(2) Effect

In cases where the inclusive wage system is introduced legally and properly through mutual agreement due to the difficulty of measuring working hours, the employee cannot request additional wage for overtime or night hours. Thus, even if the inclusive wage is less than the wage calculated by actual working hours, the employer does not have to pay the difference.

(3) Related cases

1) Judicial rulings allow inclusive wage systems due to the special nature of work for cargo truck drivers whose working hours are difficult to measure, guards engaged in surveillance and intermittent work, workers contracted on a daily basis, part-timers with remarkably short contractual working hours, shift workers on 24-hour shifts, and other similar jobs. As for other jobs where the working hours cannot be measured in reality, if the employer and employees agree to fixed overtime and holiday work allowances for a certain number of working hours each month, and if the employees have received those fixed allowances without complaint for a certain period of time, this inclusive wage system is allowed unless there is disadvantage to the employees when considering all circumstances.

2) In cases where an inclusive wage payment system has been agreed upon in the employment contract, the inclusive wage that the employee receives for overtime work allowance and other allowances equivalent to overtime, night, and holiday allowances(in accordance with the Labor Standards Act) is an acceptable inclusion of overtime allowance, night work allowance and holiday work allowance. In cases where the inclusive wage payment system has been agreed upon at a workplace, the employer does not pay the difference in allowances for overtime.

3) The labor service that the employees provided to Construction Company S was to guard and patrol workplaces for 24 hours straight every second day: surveillance work with lower mental and physical stress. This work naturally included overtime, night, and holiday work exceeding standard working hours under the Labor Standards Act. The employment contract made between the employees and the company was not one with an ordinary type of wage payment(basic pay plus various allowances), but an inclusive wage system that paid a fixed amount monthly that included various allowances, as it is difficult to measure the employees’ working hours in terms of overtime, night, and holiday work due to the specific job characteristics. When they were initially hired, the employees agreed on such an inclusive wage system in consideration of the specific type of work, and had never complained about the validity of this system until their employment at Apartment G was terminated. Considering the aforementioned items, the inclusive wage system in this case shall not be determined null and void.

4) The basic labor fees included in service expenses that KBS paid to its workers, in accordance with its broadcasting production expense regulations, is remuneration for work from 9 am to 9 pm. On the other hand, KBS has paid a fixed daily wage, in accordance with its payment criteria for temporary workers, regardless of the quantity or quality of their working hours in cases where workers have worked from 9 am to 9 pm. KBS workers, including the workers in this case, agreed to this fixed payment and have received it without complaint. Furthermore, as this fixed daily wage could not have been regarded as disadvantageous in view of the rules of employment applying to them, the inclusive wage system(which includes overtime) for work from 9 am to 9 pm between KBS and its workers is acceptable. Therefore, the related workers are not eligible for overtime allowances for work between 6 pm and 9 pm.

3. Inclusive Wage System for Convenient Calculation

(1) Requirement

When working hours are measurable, but overtime and night hours are not included in the working conditions, job description or job characteristics, the inclusive wage system does not apply to the job. However, it is valid to pay a fixed amount for overtime as an added allowance according to the rules of employment, labor contract, or mutual agreement to make calculation convenient and encourage people to work those hours.
For example, employees who work more than a certain number of working days can be paid a fixed allowance previously described as per the position, while those who work less than a fixed number of working days can be paid the fixed working allowance deducted in proportion to the days missed. A typical example is a fixed overtime allowance. In this case, if an employee works more overtime than previously determined for the fixed overtime allowance, the employer shall pay an extra statutory allowance. However, if the employee has worked less overtime than previously determined for the fixed overtime allowance, the employer shall still pay the fixed overtime allowance. For an example, if the inclusive wage incorporates overtime allowance for 10 hours per week, the employment contract shall specify basic pay and the fixed overtime allowance in the salary details. The payroll data should have a separate item for fixed overtime allowance in the constituent items of wage.

(2) Effect

Even though an employer designs a contract that includes a fixed allowance for overtime, to make calculation convenient, the employee can request the difference if the number of actual working hours served is more than the fixed number specified in advance, provided, however, that an employer shall not be required to pay the difference for jobs such as security, where it is difficult to measure actual working hours.

(3) Related cases

1) An employment contract designed around an inclusive wage system was agreed upon, and incorporated a lower annual leave allowance than the allowance stipulated in the Labor Standards Act, and an annual leave allowance had not been agreed upon between the employer and employees. As these working conditions could be estimated as disadvantageous, an employment contract with such an inclusive wage system is null and void in terms of the sections on annual leave allowances.

2) When it has been agreed that the employment contract would include compensation in the monthly wage for unused annual leave, this is only valid in cases where the employer allows the employees receiving those allowances to take annual leave. In cases where the use of annual or monthly leave is not allowed, such a contract is not valid because the right to use annual leave is restricted.

3) In cases where an inclusive wage contract includes a fixed overtime allowance due to the unreasonable difficulty in calculating working hours, the employer shall pay the fixed overtime allowance even though the employee has not worked overtime.

4) Even though an inclusive wage system was agreed upon, such agreement is not valid in cases where the fixed overtime allowance is significantly lower than the amount calculated in accordance with the Labor Standards Act. In reviewing employment type and job characteristics, this wage structure was designed as an inclusive wage system that paid a certain fixed amount for overtime allowance, even though measuring the number of hours worked is not difficult in this case. After a service allowance ceased to be paid(since May 1, 2004), the fixed overtime allowance became noticeably lower than the overtime allowance calculated in accordance with the Labor Standards Act. Accordingly, the agreement to pay a lower amount under the inclusive wage system is null and void, and the company shall pay back a suitable amount that was not paid.

4. Comments

The inclusive wage system is applicable to such employees as cargo truck drivers, guards, shift workers, daily workers, etc., where it is difficult to measure working hours due to the job characteristics. Applying this inclusive wage system to these types of jobs can provide reasonable and suitable wage, motivate employees, and make calculation of wage simpler. In cases where working hours are measurable, some companies have introduced inclusive wage systems that include all statutory allowances, as well as annual and monthly leave allowances and severance pay. This creates a high risk that the Labor Standards Act will be violated and can lead to labor disputes with the related employees. Therefore, employers need to well understand the inclusive wage system and its purposes, and refrain from abusing it, ensuring their employees receive appropriate wage that include statutory allowances, so as to avoid discouraging them.