🚨 Wage Claim Guarantee Fund: A Social Safety Net Protecting Workers from Unpaid Wages

Today Korean Social News | 2025.04.21

📌 Government Pursues Expansion of Wage Claim Payments Amid Surge in Wage Defaults... Concerns About Fund Depletion

💬 As wage defaults are rapidly increasing due to economic recession, the government is pushing to expand the coverage and upper limit of substitute payments. Plans under consideration include extending the current guarantee from 3 months to a maximum of 3 years, and increasing the maximum payment from 21 million won. However, cases of employers abusing the system or evading responsibility are increasing, and the Wage Claim Guarantee Fund, which finances these payments, is facing depletion. The government is also considering supplementary budget allocations along with differential contribution rates as countermeasures.

Summary

• The Wage Claim Guarantee Fund is a system where the government first pays workers their unpaid wages when companies go bankrupt.
• As the economic recession deepens, demands for expanding substitute payment amounts are increasing.
• Fund depletion concerns and system abuse issues have intensified, necessitating system improvements.

1️⃣ Definition

The Wage Claim Guarantee Fund is a fund established to operate a system where the government pays workers their unpaid wages when companies go bankrupt or face management difficulties, and then exercises the right to indemnity against employers. In simple terms, it's like a "wage insurance" system for workers who cannot receive their wages because their company has failed.

The Wage Claim Guarantee Fund is an important system that ensures workers' minimum livelihood and strengthens the social safety net.

💡 Why is it important?

• It guarantees minimum livelihood for workers who cannot receive wages through no fault of their own.
• Although workers' wages take priority in bankruptcy proceedings, it takes a long time to actually receive payment.
• It serves as a social safety net that mitigates economic shock during economic crises.

2️⃣ Structure and Characteristics of the Wage Claim Guarantee Fund

📕 How the Fund Operates

• The Wage Claim Guarantee Fund is financed by contributions from businesses. The fund is primarily sourced from contributions paid by employers. All employers must contribute a certain percentage (currently 0.06%) of their total wage payments. This fund is managed by the Ministry of Employment and Labor and is used to make substitute payments for unpaid wages. The contribution rate can be adjusted according to economic conditions and the fund's operational status. An important aspect of the fund is its social insurance character, where all companies share the burden collectively. This means that even companies that don't default on wages contribute to prepare for the risk of wage defaults.

• The substitute payment process follows a specific procedure. The general procedure for receiving substitute payments for unpaid wages is as follows: First, when an employer cannot pay wages due to bankruptcy or business failure, workers file claims with the local labor office of the Ministry of Employment and Labor. Second, the labor office examines the company's bankruptcy status and the legitimacy of the claims. Third, if payment requirements are met, substitute payments are made to the workers. Fourth, the government exercises its right to indemnity against the employer, meaning it has the priority right to be reimbursed from the employer's assets. In this process, workers transfer their wage claims to the government.

📕 Characteristics and Limitations of the Current System

• The wage claim guarantee system operates under specific conditions and limits. The main characteristics of the current system are as follows: First, eligible recipients are limited. It applies only to workers who haven't received wages due to a company's bankruptcy, insolvency, or de facto bankruptcy. Second, payment coverage is limited. Currently, it covers the final 3 months of wages, the final 3 years of severance pay, and the final 3 months of suspension allowances. Third, there are maximum payment limits. These vary by age, with the current maximum payment around 21 million won. Fourth, there is a limited application period. Claims must be filed within 2 years from the date of bankruptcy or other qualifying events.

• The wage claim guarantee system faces several limitations and problems. The main limitations of the current system are as follows: First, the coverage is limited. Only the final 3 months of wages are guaranteed, which means inadequate protection for long-term unpaid wages. Second, the maximum payment amount is low. High-wage workers receive only a small portion of their actual unpaid wages. Third, the application process is complicated. Complex procedures, such as bankruptcy verification, often result in delayed payments. Fourth, there are fund stability issues. During economic crises, the surge in default cases risks depleting the fund. Fifth, there's an increase in abuse cases. Some employers deliberately default on wages to induce government substitute payments.

Key Issues of the Wage Claim Guarantee Fund

1. Coverage Scope: Need to expand beyond the current final 3 months of wage guarantee
2. Payment Limits: Need to adjust maximum amounts to reflect realistic wage levels
3. Fund Stability: Concerns about fund depletion during economic crises and securing funding sources
4. System Abuse: Moral hazard issues such as intentional defaults to induce government payments
5. Administrative Procedures: Complex application processes and payment delays
6. Blind Spots: Exclusion of some non-regular workers and special employment types from protection
7. Indemnity Recovery: Fund losses due to low recovery rates from employers
8. Contribution Equity: Uniform contribution rates that don't reflect differences in default risk by industry or company size
9. Prompt Payment: Need for rapid payment systems in livelihood-threatening situations
10. Small Business Burden: Concerns about financial burden on small businesses if contribution rates increase

3️⃣ Key Issues and Improvement Tasks

✅ Problems and Limitations of the Current System

• Limited coverage scope and payment limits are highlighted as problems. The biggest issue with the current wage claim guarantee system is its limited coverage. Since only the final 3 months of wages are guaranteed, workers with long-term unpaid wages receive only a portion of what they're owed. Especially in small businesses where wages may be unpaid for months or years due to financial difficulties, the 3-month limit fails to provide realistic protection. Additionally, the maximum payment amount is differentiated by age group and limited to about 21 million won, creating a large gap between actual unpaid amounts and payments for high-wage workers or long-serving employees. These limitations reflect the financial constraints when the system was initially introduced, but critics argue they don't match current wage levels and default patterns.

• Fund depletion risks and system abuse problems are intensifying. With the recent economic downturn causing a surge in wage default cases, the risk of depleting the Wage Claim Guarantee Fund has increased. Since 2024, the number and amount of substitute payment claims have significantly increased, and analyses predict fund exhaustion if current trends continue. In this situation, some employers are increasingly abusing the system. Cases of moral hazard are occurring, such as deliberately defaulting on wages to induce government payments or transferring wage payment responsibilities to the government during corporate restructuring. Additionally, the recovery rate through the right to indemnity is very low (about 20% as of 2024), making stable fund operation even more difficult. These problems undermine the purpose of the system and threaten its long-term sustainability.

✅ System Improvement Measures and Tasks

• Coverage expansion and payment method improvements are being discussed. The following approaches are being considered to improve the wage claim guarantee system: First, expanding coverage is necessary. Extending the current final 3 months to a maximum of 3 years is under review. Second, increasing payment limits is needed. The maximum amounts should be increased to reflect realistic wage levels, and age-based differentials should be reduced. Third, introducing a rapid payment system is important. A system for quickly advancing minimum living expenses in emergencies before detailed reviews could be considered. Fourth, eliminating blind spots is necessary. Special employment types and other worker categories currently excluded from the system should be considered for inclusion. Fifth, simplifying application procedures is important. Online applications should be expanded and required documentation simplified to improve accessibility.

• Fund stability measures and abuse prevention strategies are needed. The following approaches are being considered to enhance the sustainability of the Wage Claim Guarantee Fund: First, contribution rate adjustments are necessary. Rates should be adjusted flexibly according to economic conditions and fund status. Second, introducing a differential contribution system could be effective. Rates could be applied differently based on industry and company size default risk. Third, strengthening indemnity recovery is important. Systems for tracking and recovering assets from defaulting employers should be enhanced, with stronger penalties for malicious defaults. Fourth, developing a default prevention system would be effective. A preventive approach that identifies and supports high-risk companies early is needed. Fifth, expanding financial support should be considered. During economic crises, temporary support from the government's general account could be considered.

4️⃣ Related Terminology

🔎 Substitute Payment (Che-dang-geum)

• Substitute payment refers to unpaid wages paid by the government on behalf of workers.
• Substitute payment (che-dang-geum) refers to money paid by the government to workers in place of unpaid wages when businesses cannot pay due to bankruptcy or financial difficulties. Substitute payments are broadly categorized into bankruptcy substitute payments and general substitute payments. Bankruptcy substitute payments are made when a business is legally bankrupt or de facto bankrupt, covering the final 3 months of wages, the final 3 years of severance pay, and the final 3 months of suspension allowances. General substitute payments are made when a business has defaulted on wages without being bankrupt and require a confirmed court judgment. Substitute payments have maximum limits that vary by worker age, with workers aged 50 and above currently eligible for up to 2.2 million won per month. The substitute payment system plays an important role as a social safety net by guaranteeing workers' minimum livelihood and alleviating social problems caused by wage defaults. However, the system's purpose is not to exempt employers from wage payment responsibilities, and the government exercises its right to indemnity against employers for amounts paid.

🔎 Right to Indemnity

• The right to indemnity is the right of a person who has paid another's debt to claim reimbursement from the original debtor.
• The right to indemnity refers to the right of a person who has paid another's debt or incurred an obligation for another to claim the amount paid from that person. In the wage claim guarantee system, the right to indemnity means the government's right to claim from employers the amounts paid to workers as substitute payments for unpaid wages. The procedure for exercising the right to indemnity is as follows: First, after making substitute payments, the government sends payment notices to employers. Second, if employers don't pay within the designated period, demand notices are sent. Third, if payment is still not made, forced collection proceeds according to national tax collection procedures. This involves asset seizure, public auctions, and other methods. The right to indemnity legally has priority repayment rights, allowing the government to be repaid before general creditors when an employer's assets are liquidated. However, in reality, bankrupt companies often have few remaining assets, resulting in very low recovery rates. Efficient exercise of the right to indemnity is a key factor in enhancing the sustainability of the Wage Claim Guarantee Fund.

🔎 De Facto Bankruptcy

• De facto bankruptcy refers to a state where business activities have effectively ceased despite no legal bankruptcy proceedings.
• De facto bankruptcy refers to a situation where, although there is no official bankruptcy declaration or rehabilitation procedure by a court, business activities have effectively stopped and the ability to pay wages is lost. In the Wage Claim Guarantee Act, de facto bankruptcy is defined as "a case where ①it is recognized that it is impossible to continue business activities and ②there is no ability to pay wages to workers." Verification of de facto bankruptcy is handled by the head of the local labor office through the following procedure: First, workers submit applications for de facto bankruptcy verification. Second, the labor office confirms business cessation and wage payment ability through workplace visits and investigations. Third, de facto bankruptcy status is determined based on investigation results. While de facto bankruptcy verification is an important prerequisite for substitute payments, the verification process is often complicated and time-consuming, making prompt worker relief difficult. Additionally, when employers intentionally abandon companies or fail to file business closures, determining de facto bankruptcy becomes even more challenging. To address these limitations, there are continuous demands for simplifying and expediting the de facto bankruptcy verification process.

5️⃣ Frequently Asked Questions (FAQ)

Q: How do I apply for substitute payments when I haven't received my wages?

A: There are two main paths for applying for substitute payments. First, for bankruptcy substitute payments: If your company has gone bankrupt or is in de facto bankruptcy, you can visit the local Employment and Labor Office that has jurisdiction over your workplace location. You can also apply online through the Ministry of Employment and Labor website or the Workers' Welfare Net. Required documents include the substitute payment claim form, ID, bank account copy, and evidence of unpaid wages (wage records, employment contract, etc.). If the company has legally gone bankrupt, you'll need the court's bankruptcy decision document. If it's a de facto bankruptcy, you must first apply for "de facto bankruptcy verification." Second, for general substitute payments: If your company hasn't gone bankrupt but has defaulted on wages, you must first file a complaint with the local Labor Relations Commission and obtain an unpaid wage verification. After receiving a court judgment or settlement decision through litigation, if the employer still doesn't pay, you can apply for general substitute payments at the local Employment and Labor Office. The application deadline is within 2 years from the bankruptcy verification date for bankruptcy substitute payments, and within 1 year from the final judgment date for general substitute payments. For specific application methods and required documents, you can contact your local Employment and Labor Office or the Workers' Welfare Corporation for detailed guidance.

Q: Can all workers receive substitute payments?

A: Not all workers can automatically receive substitute payments. To receive substitute payments, the following conditions must be met: First, you must be a worker under the Labor Standards Act. While employment type doesn't matter (regular, non-regular, daily worker, etc.), special employment types (insurance planners, private tutors, etc.) or freelancers who aren't recognized as workers are excluded. Second, there must be unpaid wages from the employer. This includes unpaid regular wages, severance pay, suspension allowances, etc. Third, for bankruptcy substitute payments, the company must be bankrupt or in a de facto bankruptcy state. If the company is still operating normally, you must follow the general substitute payment procedure. Fourth, the default period must be within the eligible payment period. Currently, this covers the final 3 months of wages and the final 3 years of severance pay. Fifth, claims must be filed within the application deadline. Applications must be submitted within the specified period from the bankruptcy verification date or final judgment date. Additionally, substitute payments have maximum limits, so even if actual unpaid amounts exceed these limits, payments will only be made up to the maximum. Maximum amounts vary by age group, currently around 2.2 million won per month at most. Therefore, even with unpaid wages, you may not receive substitute payments if you don't meet these conditions or if the application deadline has passed. It's best to check your eligibility by contacting your local Employment and Labor Office.