Preventing Delayed Wage Payments in Construction and Shipbuilding Subcontracts... Mandatory Prime Contractor Payment and Verification

Blocking Misuse of Subcontractor Wages
Applies to Multitier Contracts Over 30 Days

The government will implement the "Wage Separation Payment System" starting next year to prevent delayed wage payments in the construction and shipbuilding industries. Under this system, the prime contractor will pay the portion of the subcontracted payment earmarked for wages separately and must verify that workers are actually paid. The aim is to prevent project funds from being diverted for other purposes during subcontracting, shifting from a reactive approach—addressing responsibility after wage delays—to a preventive one.

The Ministry of Employment and Labor announced on August 19 that it will begin a 40-day legislative notice period for amendments to the Enforcement Decree and Enforcement Regulations of the Labor Standards Act, starting August 20 and running until September 29. Key elements of the proposed amendments include the scope of the Wage Separation Payment System, procedures for wage cost payment, and methods for the contractor to confirm wage payment.

The Wage Separation Payment System is designed to stop general contract or project payments supplied by prime contractors from being diverted to other purposes as they go through multitier subcontracts, resulting in delayed wages for workers. Going forward, contractors must separately allocate the portion of the subcontracted amount to be used for wages each month. Subcontractors are prohibited from using these funds for any other purpose and must pay wages directly to workers. Contractors may confirm wage payment by reviewing wage statements, social insurance payment records, or other relevant documents.

A skilled worker at work at the headquarters of Daewoo Shipbuilding & Marine Engineering in Geoje, Gyeongsangnam-do, one of the top three shipyards in Korea. Photo by Yonhap News Agency

The government launched this system as a follow-up to the "Measures to Eradicate Delayed Wage Payments" initiative announced in September last year. The system, which was previously applied only to public construction projects under the "Act on the Improvement of Employment, etc., of Construction Workers," will now be incorporated into the Labor Standards Act, thereby expanding its application scope to the private sector and the shipbuilding industry.

Initially, the system will apply to construction and shipbuilding contract businesses with contract periods exceeding 30 days, where multitier subcontracting exists. Notably, there is no distinction between public and private sector projects. However, specific application criteria will vary to account for industry characteristics. In construction, the system will align with the "Direct Payment System by Project Owners," set to begin next year. Under the Direct Payment System, project owners distribute construction funds directly to secondary subcontractors and construction workers through the electronic payment system, bypassing the contractor's accounts. Specific standards, such as minimum project value, will be defined by the Ministry of Land, Infrastructure and Transport regulation.

For the shipbuilding industry, the system will apply to contract businesses for the construction or repair of ships. Ultimately, it will cover projects with an initial order value of at least 12 billion won per ship. However, as this is the first time the Wage Separation Payment System is being adopted in the shipbuilding sector, implementation will be phased in consideration of private sector preparedness. At first, the threshold will be projects with an initial order value of 50 billion won or more; over the next three years, the threshold will be lowered to 24 billion won and then to 12 billion won. The Ministry of Employment and Labor explained that this phased approach takes into account the timetable for the public electronic payment system to open to the private sector.

There are also exceptions to lessen the verification burden for contractors. If a workplace uses an electronic payment system to pay workers, it will be deemed as meeting the wage separation requirements. In such cases, the purpose of the law is considered fulfilled even if contractors do not directly manage every aspect of wage payment, as payment and verification are handled by the electronic system.

The Ministry of Employment and Labor will gather feedback from workplaces during the legislative notice period and revise the detailed standards as needed. In addition, in the ongoing process to revise standard subcontract agreements for shipbuilding and related industries led by the Fair Trade Commission, the ministry will coordinate with other government agencies to ensure items concerning wage separation payment are included. Minister of Employment and Labor Kim Young-hoon said, "We will do our utmost to ensure that actual wage delays in the field are significantly reduced, including requiring contractors to confirm payment of wages to subcontractors' workers."

This content was produced with the assistance of AI translation services.