Employee wages when winding up a company: the 2026 substitute payment scope has widened

What weighs most heavily on a CEO winding up a company is usually the salaries left unpaid to employees. Many people considering corporate bankruptcy or rehabilitation put off the decision because of their employees. From the employees' point of view, however, the company entering court proceedings sometimes actually opens the way to receiving their unpaid wages.

Wages stand ahead of other debts

In bankruptcy proceedings, employees' wages, severance pay and accident compensation are estate claims (재단채권), paid from the bankruptcy estate from time to time and ahead of ordinary bankruptcy claims (Article 473, item 10 of the Debtor Rehabilitation and Bankruptcy Act (채무자 회생 및 파산에 관한 법률)). In rehabilitation proceedings, they are common-benefit claims (공익채권) and must be paid first, from time to time, regardless of the rehabilitation plan (Article 179(1)10). If any company assets remain, the employees' share comes first.

Substitute payments when the company has no money

Even if the company's assets fall short, there is a way. If a decision to commence rehabilitation proceedings or a declaration of bankruptcy has been made against the employer, or the Minister of Employment and Labor has recognized the fact of insolvency, employees who have left can claim substitute payments (대지급금) from the Ministry of Employment and Labor for unpaid wages and the like (Article 7(1) of the Wage Claim Guarantee Act (임금채권보장법)).

This scope widened this year. The Wage Claim Guarantee Act, amended on February 19, 2026 and in force from August 20, 2026, sets substitute payments through this route at the final six months of wages, the final three years of retirement benefits, and the final six months of leave allowances and maternity leave pay (Article 7(2)1). For wages, this is up from the final three months previously. Article 2 of the Addenda provides that it applies to cases where the decision to commence rehabilitation proceedings, the declaration of bankruptcy or the recognition of insolvency is made after it takes effect, so the reference point is not the day the employee left but the day the decision concerning the company was made.

However, substitute payments are subject to a cap set by Presidential Decree, so they may not cover the full amount in arrears. You also need to distinguish this from the other route, through a judgment or a confirmation of unpaid wages, whose scope is set separately. When explaining to employees, mentioning this difference as well reduces misunderstandings.

The provision covers employees who have left. If the company is saved through rehabilitation, the back wages of employees who continue working are common-benefit claims that the company must pay off, and if the company is being wound up, employees are informed of both the timing of their departure and how to claim substitute payments. Either way, a calculation table for each employee must come first.

What the CEO also needs to consider

Wage arrears can lead to criminal issues for the CEO personally. Criminal proceedings over wage arrears do not stop automatically because the corporation is wound up, so the schedule for winding up the corporation and the plan for settling with employees must be drawn up together. If each employee's period of service and unpaid amounts are organized in advance, claims for substitute payments and the filing of claims after the application move faster, and conflict during the winding-up process is reduced.

If the company's assets are scattered through seizures while the decision is put off, the share that goes to employees shrinks too. If you are thinking of your employees, there are cases where you should actually consider bringing forward the timing of the wind-up.