The 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. The inclusive wage system is a salary payment system where the employer determines the total wages, which include statutory allowances such as overtime, night, and holiday work allowances in consideration of job characteristics and convenience in calculating wages, 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 wages 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.
When the Labor Standards Act (LSA) is revised, related rulings also change. A representative example is the change of the Supreme Court ruling in relation to the inclusive wage system as contractual working hours are introduced as mandatory items in employment contracts. Prior to July 1, 2007, the LSA stipulated wages, working hours and other working conditions acceptable for employment contracts, but since that date, it now stipulates wages, contractual working hours, statutory holidays, statutory leave and other working conditions. This means that a previous employment contract that specifies only "working hours" remains unclear in content, but the revised law stipulates that it should include "contractual working hours". Contractual working hours refer to the time set by the employer that the employee is to work, within the allowable total working time (40 hours per week, 8 hours per day) (Article 2, paragraph 8 of the LSA). Therefore, since the revision, the wage in accordance with the contractual working hours has to be specified, which in effect limits the inclusive wage system. Lim, Jongyul, 「Labor Law」 17th Ed., Park-young-sa, 2019, p. 470.

In order to understand the content of such changes, it is necessary to examine specifically the meaning of the contractual working hours introduced with revision of the Labor Standards Act in 2007. In this regard, The following will discuss the judicial precedents introduced due to the revised law, and then look into the types of suitable employment contract where an inclusive wage system is justifiable.

1. Contractual Working Hours

(1) Regulations on contractual working hours
The contractual working hours shall be determined between the worker and employer in the range of working hours pursuant to Article 50 (Legal Working Hours) of the Labor Standards Act, Article 69 (Working Hours for Minors) or Article 46 (Hazardous and Dangerous Work) of the Industrial Safety and Health Act. This means that the contractual working hours must be set within the statutory working hours. Article 17 of the Labor Standards Act requires wages, contractual working hours and other working conditions to be specified in the process of making an employment contract. Therefore, wages defined in the employment contract are limited to 40 hours a week, and in principle, inclusive wages are a violation of the Labor Standards Act. Article 58 of that Act stipulates that if a worker fails to calculate working time by working all or part of the working hours outside the workplace due to business trips or other reasons, they shall be deemed to have worked the contractual working hours. Even for part-time workers, "the employer shall obtain the consent of the employee concerned if they have a part-time worker work beyond the contractual working hours prescribed in Article 2 of the Labor Standards Act. In this case, they cannot work more than an additional 12 hours a week. The employer shall pay the part-time worker an additional 50% or more of the ordinary wage for the overtime exceeding the contractual working hours" (Article 6 of the Fixed and Part-time Employment Act). In the past, overtime pay was introduced only for working hours exceeding legal standard working hours. However, for part-time workers, the overtime pay shall be paid if working hours exceed contractual working hours (introduced on March 18, 2014). This means that if the part-time worker has 20 contractual working hours per week, an additional wage shall be paid for the hours exceeding those 20 contractual working hours.

(2) Reasons for limiting work hours
Contractual working hours refer to the time that the worker has to work within the legal standard working hours. Here, legal standard working hours generally refer to 40 hours per week and 8 hours per day. The limitation on extended work is up to 12 hours in excess of statutory working hours (Article 53 of the LSA). Overtime work for part-time workers is also recognized within a limit of 12 hours by adding to the weekly contractual working hours of part-time workers. That is, extended hours for part-time workers are judged based on contractual working hours rather than legal standard working hours (Article 6 of the Fixed-Term and Part-time Employment Act). In Article 17 of the LSA, stipulating the contractual working hours in the employment contract is mandatory, and then based upon this, wages and contractual working hours are determined. This limits the maximum working hours and ensures the right of employees to protect their health and pursue happiness.
The inclusive wage system refers to a wage system that does not calculate basic wages in advance for a given working time, but rather stipulates that daily or monthly wages shall include the total amount of statutory working hours plus additional working hours. Lee, Seunggil, “A Study on Judicial Principles and Benefits of the Inclusive Wage System”, 「Labor Law Studies Collection」 29th Ed., Korean Comparative Labor Law Study Association, December 2012, p. 575.
Since the LSA stipulates that basic wages and contractual working hours shall be defined in the employment contract, the inclusive wage system is in effect in violation of that Act.

2. Changes in Court Rulings Regarding the Inclusive Wage System

(1) Court rulings – details of changes
Amendment of the Labor Standards Act resulted in the following changes in rulings on inclusive wages.

Related rulings can be divided into those before and those after July 2007. Before July 2007, the courts did not specifically determine contractual working hours because employment contracts were not required to stipulate wage, working time or other conditions. In other words, even if the basic wage was not calculated in advance, but the inclusive wage equaled the sum of applicable allowances plus the monthly wage in a way that was not disadvantageous to the employee, it was considered valid. As a result, it was possible to accept the inclusive wage system for both jobs where the working hours were difficult to calculate, and jobs where the working hours were not difficult to calculate, but the system was conducive to convenient management.
In 2010, however, the Supreme Court ruled that the difficulty of calculating working hours would determine whether an inclusive wage system was justified and that such a system was not acceptable if the working hours could be calculated. Lim, Dongchae, Cho, Younggil, Kim, Junkeun, “A Study on the Court Ruling of the Navy Welfare Corporation regarding the Effect of the Inclusive Wage System”, 「Kangwon Law Study」 25th Ed., February 2019, Gangwon University Comparative Law Study Center, p. 453.
This case is considered to set a related precedent because the employment contract specifies contractual working hours in accordance with Article 17 of the LSA. In other words, the basic wage shall be determined on the basis of the contractual working hours when concluding an employment contract, and in principle, an inclusive wage system cannot be introduced when working time can be calculated. Thus, an inclusive wage system is acceptable for workers with supervisory and intermittent duties that make it difficult to calculate working time, but not very suitable for workers whose working time can be calculated.
        
(2) Trends in rulings on the current inclusive wage system
Since July 2007, consistent judicial precedents have been set, denying the existing inclusive wage system. A Supreme Court ruling in 2014 provides a clear explanation (Supreme Court Decision 2016.66, Decision 12114, 2011). “In cases where an inclusive wage system can be deemed justifiable, it is necessary to consider the type and nature of the work (such as whether it involves surveillance and intermittent work), and the difficulty of calculating the working hours when considering the working time. The amount of allowance included in the statutory allowance is set as a monthly benefit or daily wage, or the basic wage calculated in advance, but if the statutory allowance is not classified and a fixed amount is set as the statutory benefit allowance, it is valid when a wage contract under the inclusive wage system is concluded. However, it should not be disadvantageous to the workers. Therefore, it is justified in light of the various circumstances mentioned above.”
In addition, the rulings also reject the inclusive wage system if calculation of the working hours is not difficult, unless there is a special situation where the working hours regulation in the Labor Standards Act cannot be applied. In this case, if a contract is concluded in advance under the inclusive wage system, it is judged whether the inclusive wage contract is legal or not after reviewing if the statutory allowance included in the inclusive wage is correct. If the wages paid under the inclusive wage system fall short of the statutory allowance calculated according to the standards established by the LSA, and if it will be disadvantageous to the employees, it will be null and void. In such a case, the company shall compensate the employee(s) equal to the amount to be paid in legal standard allowances.

(3) When it is difficult to calculate working hours
If the calculation of working hours is difficult, an inclusive wage system can be introduced. The following types of work to which this system is applicable are presented in the Labor Standards Act.
1) Supervisory/intermittent work: The working hours, rest and holiday regulations in the Labor Standards Act shall not apply to workers engaged in supervisory/intermittent work once the employer has received approval from the Minister of Employment and Labor (Article 63 (3) of the LSA).
2) Work outside the workplace: If a worker is unable to calculate working time due to working all or part of the working time outside the workplace (or other reasons), they shall be deemed to have worked the contractual working hours (Article 58 (1)).
3) Discretionary work: The discretionary work in Article 58 (3) of the Labor Standards Act refers to tasks where it is difficult to calculate working time because of the characteristics or performance rather than the amount of work. Written consent is required from the employee representative in order to qualify the work as within the contractual working hours. Specific tasks include designing and analyzing research and development and information processing systems, organizing articles for newspapers and broadcasts, designing and designing-related job, and producing and supervising broadcasting and film production (Article 58, Clause 3).
3. Case Studies on Introducing an Inclusive Wage System

(1) Inclusive wage agreement for workers in a restaurant business
1) Inclusive wage system: Workers work for 6 days from Monday to Saturday, and 8 hours a day over the hours from 11 am to 10 pm (resting between 2 pm and 5 pm), and earn a monthly salary of 3 million won, including pay for overtime.
If the employment contract is written as above, 3 million won will be the basic wage, with an extra wage of 753,588 won per month for an additional 8 hours per week (35 hours per month) paid additionally.
2) Suggestions for correction: There are 40 contractual working hours per week and 8 hours per day. The monthly base rate for this is 2,401,560 won, with overtime of 598,437 won for 8 additional working hours per week. Therefore, the monthly total amount is 3 million won. This amount should be divided into two parts: 80 percent as basic pay and 20 percent for overtime pay. To be recognized as a justifiable inclusive wage contract, the monthly wage for the contractual working hours should be clarified, and the additional working hours and wages stipulated and paid.

(2) Inclusive salary for white-collar workers
1) Issue: For some white-collar workers, the monthly wage is set at 76% basic wage and 24% fixed overtime allowance. Under this standard, the inclusive wage-based employment contract includes 40 hours of work per week plus an additional 10 hours per week. The company pays inclusive wages every month to the workers regardless of whether they worked overtime or not. Therefore, it is not necessary for the company to pay an additional overtime allowance for up to 10 hours of extended work. Is this inclusive wage system for these white-collar workers possible under current law?
2) Judging whether the inclusive wage system violates the LSA: There have been two judicial precedents for determining whether an inclusive wage system is possible for white-collar workers. The first involved a white-collar worker employed by a foreign life insurance company. In this case, the court deemed it difficult to calculate working hours, unlike production workers, because the business culture common to this company centered on performance tasks due to the nature of the company’s insurance sales work. In such cases, the inclusive wage system is recognized. Seoul Central District Court ruling on Feb. 13, 2018
The second involved white-collar workers who concluded an inclusive wage contract by signing a collective agreement offering a fixed overtime allowance of 10 hours per week for 40 hours of work per week. Workers did not receive any extended allowance for up to 10 hours a week even if overtime was performed that week. The Supreme Court concluded that such a wage system cannot be regarded as monthly remuneration based on an hourly wage or as a legitimate inclusive wage system in light of the fact that workers can calculate their hours easily. Supreme Court ruling on Dec. 10, 2009

Judging from the principle in rulings on the inclusive wage system and the above two examples, the criteria for determining the justification for an inclusive wage system is whether the working hours of workers can be calculated or not.

4. Opinion

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 wages, motivate employees, and make calculation of wages 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 need to refrain from abusing it, ensuring their employees receive appropriate wages that include statutory allowances, so as to avoid discouraging them.