|Representative Directors of Foreign Company Subsidiaries
In general, labor law does not apply to a representative director because he has a delegated contractual relationship with his employer. This means that he is not entitled to retirement benefits, compensation for industrial accidents, unemployment benefits, legal protection from unfair dismissal, or other things that ordinary employees enjoy. A representative director does not have employee status because he is an ultimate decision maker who represents the company externally and has the right to decide personnel, operations and funding. However, if a representative director is employed by an actual employer and registered on the corporate register, even if simply for the sake of formality, as a representative for external activities, and if his work is performed under considerable supervision from the employer, he is recognized as an employee under the Labor Standards Act.
When a multinational corporation establishes a company in Korea, a local person is commonly hired as the representative director for efficiency and effectiveness. In this case, regardless of his legal status as a registered director, the representative director or the head of the company in Korea often does not have the authority of an employer. In this regard, I would like to examine specifically the distinction between employee and employer, some characteristics of foreign company subsidiaries, and the criteria for determining whether a representative director is also an employee.
II. The Distinction between Employee and Employer
1. The concept of employer
The term “employer” means a business owner, or a person responsible for management of a business or a person who works on behalf of a business owner with respect to matters relating to employees (Article 2(1-2) of the Labor Standards Act, or LSA). Here, the term “employer” means a person who operates a business through employees (Article 2 of the Wage Claim Guarantee Act). The person responsible for management of a business means a person who is responsible for general business management and is entrusted with comprehensive delegation authority from the employer for management of all or part of the business and is able to represent or delegate the business externally. This includes representative directors, registered directors and others. Regardless of whether the position includes “representative” or “director” in the name, the person who actually exercises the management rights of the company is the manager.
The representative director or director is a person with rights to represent the company, holds executive power according to the company's articles of incorporation, is entrusted with certain administrative powers by the company, and is not an employee under the Labor Standards Act. However, if a representative director is employed by an actual employer and registered on the corporate register, even if simply for the sake of formality, as a representative for external activities, and if his work is performed under considerable supervision from the employer, he may be the employee stipulated by the Labor Standards Act.
2. The concept of employee
The term “employee” means a person who offers work to a business or workplace to earn wages, regardless of the kind of job he/she is engaged in (Article 2 (1-1) of the LSA). Whether or not a person has employee status depends on whether or not that person has provided work to an employer, in a subordinate relationship, that is performed to earn a wage, regardless of the type of contract. Because of his authority to represent the company externally and enforce the business of the company internally, a representative director has employer status. However, if the representative director position is only formal or nominal, if his management is considerably under the direction and supervision of the actual employer, and if he is paid wages in return for the work, the person in that representative director position is an employee according to the Labor Standards Act.
III. Characteristics of a Representative Director of a Foreign Company Subsidiary
1. Representative directors of foreign company subsidiaries
If a domestic foreign office established by a multinational corporation manages its business independently with a certain authority and the representative director is delegated with the right to independently manage the local business within a certain scope, that representative director retains employer status.
In this regard, a judicial ruling states that, "Generally, multinational corporations are a group of several corporations of different nationalities, and legally separated. A multinational corporation as a business group is not comparable to a group of constituent companies but to a parent company which is the ruling supervisory head and is at the top of its subsidiaries, collectively deciding all matters concerning the multinational corporation. Subsidiaries are under the control of the parent company, and there is a controlling subsidiary relationship between the parent company and its subsidiaries. Accordingly, there is a certain supervisory relationship between the parent company’s executives and the subsidiary company’s executives due to the business connections between the parent and subsidiary. This is similar to the subordinate relationship between an employer and company employees, but differs in that it is a subordinate relationship that occurs only in the interindustry relationship between a parent and a subsidiary. As a result, as there is a certain directive and supervisory relationship between executives of a controlling parent company and executives of a subsidiary company, directors with executive powers in the subsidiary cannot be regarded as employees of the subsidiary.” Nevertheless, if the representative director of a subsidiary of a foreign company receives directions and is supervised by the parent country during the carrying out of his duties, and is essentially an intermediate manager with almost no independence, he is not an employer but an employee.
2. Determining employee status of a representative director
Whether or not the person is an "employee under the Labor Standards Act" shall be determined by whether he has provided work to the employer in a business or workplace for the purpose of earning wage, and not on whether the representative director is registered as such on the corporate register. In actuality, a representative director is not an employee because he represents the company externally and has the authority to execute the affairs of the company internally. However, if he is registered as a representative director of the corporation, but does not have the right to execute the internal affairs of the company or handle its external affairs, his title is simply formal and nominal while there is another manager who actually makes the decisions, and if he is provided wages not for his performance in management or work, but according to the nature of the work itself, he is an employee in actuality.
Therefore, the two most important factors affecting the determination of whether a representative director of a foreign company subsidiary is an employee or not are: (i) the existence of significant supervision over the representative director, and (ii) whether the person has been registered as the representative director on the corporate register.
(1) Existence of significant supervision over the representative director
"In the course of job performance, whether the employee has been supervised and controlled by the employer substantially and individually or not" was quoted in a lawsuit in 1996 regarding a part-time instructor’s employee status at a private institute. However, in a lawsuit in 2006 regarding the employee status of a full-time instructor , the above supervision was reduced to “considerably supervised and controlled by the employer”. For a representative director, whether he is an employee or not depends on whether his work has been considerably supervised and controlled by the employer. This change is due to the diversification of occupations, from the simple structure of production and office employees to the complex service industry.
(2) Whether the person has been registered as the representative director on the corporate register
An executive director’s status as employee is often recognized by whether he was registered as a director on the corporate register. In general, registered directors are denied employee status, but this is not the case if his duties are performed under considerable supervision and control. On the other hand, an unregistered director is recognized as an employee in principle, but denied employee status if his own decision-making authority or exclusive right to execute the work is clear.
IV. Criteria for Judicial Ruling and Application
1. Criteria for determining employee status
The Supreme Court issued clear criteria for determining employee status in a lawsuit involving a full-time instructor at a private institute in 2006. These criteria can also be used to determine employee status for the representative director of a foreign company: first, employee status may exist regardless of the type of contract; second, the criteria for determination of a subordinate relationship are enumerated as the 9 items in the paragraph below; third, the existence of conditions suggested as signs of employee status shall be determined by considering whether the employer can unilaterally decide whether these conditions exist.
In this case, the Supreme Court ruled, “Whether a person is considered an employee under the Labor Standards Act shall be determined by whether, in actual practice, that person offers work to the employer as a subordinate of the employer in a business or workplace to earn wages, regardless of the contract type, such as an employment contract or a service contract. Whether or not a subordinate relationship with the employer exists shall be determined by collectively considering: ① whether the rules of employment or other service regulations apply to a person; whether that person’s duties are decided by the employer, and whether the person has been significantly supervised or directed during his/her work performance by the employer; ② whether his/her working hours and workplaces were designated and restricted by the employer; ③ who owns the equipment, raw materials or working tools; ④ whether the person can be substituted by a third party hired by the person; ⑤ whether the person’s service is directly related to business profit or loss as is the case in one’s own business; ⑥ whether payment is remuneration for work performed or ⑦ whether a basic or fixed wage is determined in advance; ⑧ whether income tax is deducted for withholding purposes; whether the person is registered as an employee by the Social Security Insurance Act or other laws; ⑨ whether work provision is continuous and exclusive to the employer; and the economic and social conditions of both sides. Provided, that as whether basic wage or fixed wage is determined, whether income tax is deducted for withholding, and whether the person is registered for social security insurances could be determined at the employer’s discretion by taking advantage of his/her superior position, the characteristics of employee cannot be denied because of the absence of these mentioned items.”
“The above criteria are not applied formally or uniformly, but in the event facts equivalent to the above items exist, Employment status should be determined after reviewing whether these facts were decided by the employer’s superior position or required naturally by such job characteristics.”
2. Determining Employee Status
Supreme Court Ruling
(9 items: details for judgment) Factual Grounds for the Representative Director Judgment
direction & supervision ① Application of Rules of Employment; type of contract Whether the Rules of Employment were applied; type of contract (Employment contract or service contract) Ⅹ ●
② Right to manage personnel Rights to hire, dismiss, and discipline employees ● Ⅹ
③ Arrival/departure from work, annual leave No control over arrival/departure time, no annual leave granted
④ Exclusive right to execute work and financial authority Exclusive work performance, considerable supervision during work performance; right to determine how corporate money is spent
work places ⑤ Working hours Whether working hours are controlled
⑥ Work place Whether the workplace is mandated
3 ) Equipment, working tools, expenses ⑦ Ownership of equipment, working tools Who owns equipment, tools, etc.; whether damage claims are possible or not
⑧ Expenses Whether operating costs are subsidized, expenses reimbursed, corporate credit card, etc.
4) Substitution ⑨ Substitution with a 3rd party Whether work is exclusive or person can be substituted in the event of absence
5) Earning ⑩ Pursuit of profit Whether pursuit of profit through individual effort is possible
⑪ Independent business Whether independent business is possible
⑫ Liabilities for damage Whether the director is responsible for losses
6) Characteristics of wage ⑬ Remuneration for labor Whether wage is decided by evaluation of total sales, or paid at a fixed amount in return for work provided
⑭ Independent business Whether the individual can create his own profit
7) Basic pay ⑮ Whether basic pay is fixed Majority of pay is based on basic wage or incentive pay
8) Income tax, etc. ⑯ Income tax and social security insurances Whether corporate tax or income tax is deducted whether premiums for social security insurances are deducted
9) Continuous service, etc. ⑰ Continuous work Work is continuous
⑱ Exclusive work Whether the director can work for another company during employment
Review/Evaluation total total
* In the review, weighting is divided into two stages: employee status and employer status. The more checkup signs are calculated in the total sums, the stronger status is considered.
In judging the employment status of a representative director of a foreign company subsidiary, there is a tendency to simply decide by considering whether he has been registered as a director, whether the executive has written a commission contract, and whether he has been given the title of “representative director”. It is common for multinational corporations to have a controlling and dominant relationship with their foreign subsidiaries, which means the directors of those subsidiaries in Korea must report business details to their parent companies and receive instructions in turn. It can be difficult to distinguish between normal corporate relations and whether a director is an employee or not.
The representative director of a foreign company subsidiary is generally comprehensively instructed and supervised by the head office of the multinational company on company operations and does not have the right to manage personnel, has limited executive authority and limited decision-making powers on the use of funds. Even department managers should report their business practices to the department directors at the parent company. In such cases, the representative director of a foreign company subsidiary may be judged to be an employee. Therefore, when judging the employment status of a representative director of a foreign company subsidiary, it is necessary to look comprehensively at the director’s exclusive rights to execute work, the right to manage personnel, and the right to spend company money at his own discretion, not by whether he has formally been registered as a representative director, his Korean title, or has signed a service contract.