7/04/2011

Korean Independent Contractor Risks under LSA

The Korean Court System has been less reluctant, in recent years, to deem an independent contractor an “employee” under the Labor Standards Act (LSA). This fact remains true even when an employer establishes that the independent contractor is aware that he/she was contracted as an independent contractor, thus, not a regular employee of the company.

Upon the establishment of the status as “employee,” the individual is entitled to all of the benefits of an employee including, inter alia, severance and employment security, thus, increasing the compliance, tax, payroll and other risks to the company.

Obligations to Employees under the LSA
The obligations to employees under the LSA are extensive and beyond the scope of this short article. The more significant and obvious are the legal requirement to provide severance benefits and employment security.

With regard to severance benefits, a company must pay, in most cases, one month’s severance to an employee for each year of service to the company upon the retirement or dismissal of the employee.

For dismissal of an employee, the employer has the burden to establish “cause directly attributable to the employee” or “urgent managerial necessity.” These standards are easier for an employer to establish than in the not so distant past, but still are standards that employers must establish through substantial evidence and, often, a not so simply nor pain free court procedure.

The Risks at Work
This LSA risk often arises when a company retains an independent contractor to perform essential functions for the company. These functions often include delivery, repair, special engineering services and sales services. The risks increase when the independent contractor’s main source of income is from this one company, the independent contractor is “dependent” on the company and the company imposes substantial control over the independent contractor.

The risk, often, becomes realized when, suddenly, the independent contractor’s contract with the company is terminated for malfeasance or neglect, when the independent contract is considering retiring or when contentious labour negotiations occur between the company and the union and the union directly solicits the assistance of the independent contractor in the negotiations.

We have seen, in recent years that the more elderly of independent contractors, since they are increasingly cash strapped, are more willing to assert that they have a right to severance. We have also seen a few aggressive labor agents (quasi-lawyers with the right to take cases to the Labor Commission) file to the Labor Commission and aggressively promote the law and their services to independent contractors and others through blogs.

Limiting the Independent Contractors Risks
Understanding these factors by the Korean Supreme Court in determining if one is an “employee” under the Korean Labor Standards Act and related acts is essential for limiting the risk.

A careful drafting and structuring of these relationships with independent contractors will minimize the compliance, tax, payroll and other risks to the company.

Please note that courts do not weigh these factors equally and not all factors are required to be met for an independent contractor to be deemed an employee under the LSA. An answer in the affirmative to anyone one of the factors increases the risk to the employer, but does not preclude the worker to be classified as an independent contractor by a court.  
  • Does the company have decision power over the content of work of the individual?
  • Are company work rules applied to the individual?
  • Does the company have considerable control over the work processes of the individual?
  • Does the company set the time and date and other specifics of work?
  • Does the company own the work assets?
  • Can individual use a third party to replace the work of the individual?
  • Does individual have business risks associated with work with company?
  • Are earning based on work and, thus, not success?
  • Does individual near exclusively depend on payment from the company?
  • Is the work with the company continuous and, thus, not temporary?
  • Is the individual an employee under the Korean Social Security System?
The courts may also consider the relevant social and economic situation between the employer and the employee.  NMKSFU6Z4JWP


As always, deep understanding, creativity, and experienced and proactive guides will get most companies over the unique challenges apparent in doing business in Korea.
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SeanHayes@ipglegal.com