The Ministry of Employment and Labor has issued its first official standards stating that overtime pay differentials under lump-sum wage systems must be paid. The move aims to curb the practice of so-called "free labor," where workers receive less compensation than their actual working hours warrant. Business groups pushed back, arguing that effectively banning the fixed allowance system constitutes an excessive interpretation.
The ministry announced on January 8 that it had established "Guidelines for Preventing Misuse of Lump-Sum Wages to Eliminate Free Labor," effective from January 9. This marks the first official guidelines regarding lump-sum wages, coming nine years after related discussions fell through in 2017. The lump-sum wage system pays a predetermined amount without distinguishing between basic wages and overtime, night, and holiday work allowances, sparking ongoing controversy over "free labor" as wages are paid regardless of actual hours worked.
The core of the new guidelines lies in specifying standards for so-called "fixed OT." Fixed OT refers to paying overtime, night, and holiday work allowances as a fixed amount regardless of actual working hours. The government made clear that even with such agreements in place, employers must pay the difference if they paid less than the statutory allowances calculated based on actual working hours. Failure to comply will be treated as wage arrears and subject to penalties.
Employer responsibilities for working hour management have also been strengthened. Employers must separately record basic wages and various allowances in wage ledgers and pay statements, and must document and manage overtime, night, and holiday working hours for all employees. The guidelines also clarify that flat-rate systems that do not distinguish between basic wages and allowances, or fixed allowance systems that combine various allowances into lump-sum payments, are not permitted. The ministry plans to operate an anonymous reporting center and conduct planned inspections to examine workplaces misusing lump-sum wage systems.
Business groups countered that the guidelines ignore workplace realities. The Korea Employers Federation stated, "Prohibiting even the fixed allowance system in principle goes beyond the tripartite agreement," adding that "uniformly restricting industries where recording working hours is difficult will inevitably cause confusion and legal disputes."