[Reporter’s Notebook] The Struggle of the Vulnerable: The Dilemma of Wage Arrears

"From the perspective of a small business owner, disguising a workplace as having fewer than five employees to avoid the application of the Labor Standards Act can reduce labor costs by 15 to 20 percent. In an economic downturn like this, it's hard to resist such temptation," said one labor consultant regarding the recent issue of splitting workplaces, which has become a hot topic in domestic wage arrears discussions. The consultant pointed out that, with over one million self-employed people having closed their businesses last year in the worst economic conditions, it is understandable that many would resort to such tricks to save 20 percent on labor costs.

The exemption of certain obligations under the Labor Standards Act, such as the payment of overtime wages, for workplaces with fewer than five employees was originally a lenient measure intended to support small business owners. However, as the economy has worsened, the practice of splitting workplaces has spread as a survival strategy. In fact, the number of workplaces suspected of disguising themselves as having fewer than five employees has increased 3.8 times since 2015.

To eradicate such tricks and punish unscrupulous employers, there must be legal battles between employers and affected workers. However, even if an employer who has split the workplace violates Article 43 of the Labor Standards Act, which requires full payment of wages, there is no law that allows authorities to monitor or punish employers based on the fact that more than five workers are actually employed. Conducting a full investigation of the more than 1.8 million small businesses across the country to uncover such practices would require enormous budgets and manpower.

Moreover, even if all such employers are identified and punished, there is no guarantee that workers will actually receive their unpaid wages. If an employer decides to close the business entirely and accept punishment, the affected workers gain little practical benefit. In disputes between economically vulnerable parties, labor inspectors often steer the situation toward "mediation," which minimizes losses for both sides. As a result, the issue of wage arrears tends to become even more entrenched.

Victimized workers also lack the resources to engage in legal battles to punish unscrupulous employers. Most workers at small businesses are on short-term contracts or are part-time employees. As a result, it is rare for the amount of unpaid wages to exceed the maximum advance payment limit of 10 million won. If a victimized worker chooses to engage in a long and difficult legal fight with the employer, their livelihood is at risk. It is more advantageous for them to apply to the Ministry of Employment and Labor for advance payment and then look for another job.

While it is difficult to monitor and protect workers at workplaces with fewer than five employees, a significant number of people work at such small businesses. In Korea, workers at workplaces with fewer than five employees account for 15.65 percent of the total economically active population, a higher proportion than those employed by large companies (13.9 percent). In contrast, the average proportion of large company employees in OECD countries is about 32.2 percent, with even higher rates in the United States (58 percent), the United Kingdom (46 percent), and Japan (40 percent).

If these structural problems are not addressed with long-term industrial restructuring measures, it will be difficult to eliminate the chronic issue of wage arrears, even if the number of labor inspectors is increased by several thousand and the Wage Claim Guarantee Fund for advance payments is expanded by several trillion won.