Criteria for Determining Whether a Person is an Employee or a Freelancer

Bongsoo Jung (Labor Attorney)/ KangNam Labor Law Firm
I. Introduction
Nowadays, there are many kinds of jobs becoming available and people working under service or freelance contracts, but those who are engaged in such jobs are not recognized as employees to whom labor laws apply. In one particular case , a large private institute (hagwon) hired instructors under contracts for ‘teaching services’, and treated them as independent business owners with freelancer status, a determination which led to serious labor disputes later on. In cases where an instructor works as an independent business owner and not as an employee, he is ineligible for various protections under labor law such as regulations regarding wages and annual leave, protection from unfair dismissal, and compensation from social security insurances for work-related accidents. However, in cases where an instructor has been determined as an employee, all labor law protections apply. Therefore, instructors look for coverage under labor law, while institute owners seek to avoid employee status for their instructors, due to the additional expenses and the risk of collective action by those instructors.
For these reasons, a clear determination of employee status can resolve labor disputes, and so hereby I would like to review the criteria for determining employee status in terms of legal provisions, expert opinions, and judicial rulings.

II. Judgment of Employee Status

1. Concept
Article 2 (1) of the Labor Standards Act stipulates that the term “worker” in this Act refers to a person who offers work to a business or workplace to earn wages, regardless of the kind(s) of job he/she is engaged in. The concept of “employee” includes the following factors: 1) it is not determined by the kind(s) of job he/she is engaged in; 2) the person works at a business or workplace; 3) the person offers work to earn wages. In understanding this concept, wage is put at the center, while the key point to be considered is whether a subordinate relationship exists between the work provider and the work user. That is, “employee” means “a person who offers work to earn money through a subordinate relationship”.
A subordinate relationship is one where a person hired by the employer provides work to the employer, and under the employer’s direction and orders, carries out the tasks the employer wants done. So, an employee who offers work to earn wages can be translated as “a person offering work under a subordinate relationship with an employer.” The views of “subordinate relationship” by scholars can be classified into two groups: 1) interpretational and 2) law-based.

2. Scholarly views
(1) Interpretational
This view claims that the current judicial ruling regarding the criteria for determination of employee status has some difficulty in understanding because its criteria are enumerated with factual evidence in parallel order. To overcome this problem, the criteria should be categorized into substantial signs and formal signs from which employee status can be determined as existing or not. Such substantial signs include whether there is command and control, the relationship between the work offered and the current business, and the work provider’s situation. The formal signs refer to items whose existence depends on the employer’s decisions, which include whether income tax and social security insurance premiums are paid, whether personnel evaluations for the person are performed, and whether the person has a contractual duty to receive permission before getting a second job. That is, this view holds that employee status can be determined through the substantial signs, and formal signs can be excluded from the factors that determine a subordinate relationship.
(2) Law-based
This view holds that the concept of ‘employee’ should be interpreted in accordance with the related legal provisions. Korean labor law has the definition of employee in Article 2(1) of the Labor Standards Act (“the LSA”), and any judgment of employee status should begin with the interpretation of this provision. The LSA definition of ‘employee’ contains four determining factors; ① the status can be determined “regardless of the kind of job”; ② the person offers work “to earn wages”; ③ the person offers work “at a business or workplace”; and ④ “the person offers work”. Of these four factors, “status can be determined regardless of the kind of job” is not directly related to establishing employee status, and so will not be included for consideration. First, the employee provides work to earn wages. “The term ‘wages’ in the Labor Standards Act means wages, salaries and any other money and valuable goods an employer pays to a worker for his/her work, regardless of how such payments are termed.” (Article 2(5) of the LSA) Therefore, it is sufficient to prove that wages are paid in return for work, but there is no limit on how such payments are termed. Therefore, even though wages were paid per unit of work performance, without considering the unit for the number of working hours, as long as they are paid in return for labor service, such payment can be regarded as wages. Second, “at a business or workplace” means that the employee provides work on the employer’s business premises or workplace. Even though there are no particular instructions regarding working hours, place, and method of work, the person is assigned to the labor area with tangible work duties. Third, “the person offers work” means that the employee provides work to the employer, which is known to be a subordinate position. The employer’s instructions can include instructions regarding time, place, and type of work provided. In determining employee status, all three of these factors do not have to be present, but whether the employee was supervised and under the employer’s instructions or not must consider all of them.

3. Judicial ruling
(1) Criteria of the judicial ruling
The Supreme Court gave clear criteria for determination of employee status in a lawsuit case involving a full-time instructor at a private institute: first, employee status may exist regardless of the type of contract; second, the criteria for determination of a subordinate relationship are enumerated to 12 items; third, the conditions suggested as signs of employee status shall be determined as decisive or not by considering whether the employer can unilaterally decide whether those conditions exist. These criteria are used to determine employee status, and they are stipulated in the following paragraph.
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; ② whether that person’s duties are decided by the employer, and ③ whether the person has been significantly supervised or directed during his/her work performance by the employer; ④ whether his/her working hours and workplaces were designated and restricted by the employer; ⑤ who owns the equipment, raw materials or working tools; ⑥ whether the person can be substituted by a third party hired by the person; ⑦ whether the person’s service is directly related to business profit or loss as is the case in one’s own business; ⑧ whether payment is remuneration for work performed or ⑨ whether a basic or fixed wage is determined in advance; ⑩ whether income tax is deducted for withholding purposes; ⑪ whether work provision is continuous and exclusive to the employer; ⑫ whether the person is registered as an employee by the Social Security Insurance Act or other laws, 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, it should be determined after reviewing whether these facts were decided by the employer’s superior position or required naturally by such job characteristics.”

(2) Understanding the judicial judgment
In reviewing the court’s criteria for determining employee status, three key items need to be explained. First, when determining whether employee status exists, the judicial ruling is decided by the definition provision of Article 2 (Paragraph 1) of the Labor Standards Act. “In determining employee status under the Labor Standards Act, this shall be determined by whether the person has provided work to the employer through a subordinate relationship for the purpose of earning wages at the employer’s business or workplace.” This judicial ruling includes a definition of the term, ‘employee’, which means a person providing work in return for wages through a subordinate relationship with the employer.
Second, the 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.” This judicial ruling shows that employee status shall be recognized not based upon the formal type of contract made between two parties, but by the substantial relationship in actual practice.
Third, the judicial ruling shows that status as an employee under the Labor Standards Act shall be determined by whether the person provides work through a subordinate relationship or not, and in order to confirm such subordinate relations, several signs are listed and estimated collectively. In particular, these signs can be divided into 12 items, which can be compared and analyzed for similarity to employee characteristics and for similarity to employer characteristics. After reviewing which characteristics are more evident in the relationship in question, determination of whether employee status exists shall be made.

III. Conclusion
The scholarly view and judicial view are consistent in the following criteria: 1) In employment relations, employee status shall be determined by whether there is a subordinate relationship between the parties or not (judgment by subordinate relations); 2) whether there is a subordinate relationship between the parties or not shall not be determined by the type of contract or title, but by actual facts of the labor provision relations (judgment based upon actual relations); and 3) the actual facts of the labor provision relations shall be determined in consideration of an overall collective evaluation of all items (overall consideration). Accordingly, employee status according to subordinate relations shall be determined after considering practical facts of the employment and reviewing them overall. Judicial ruling states that the criteria for ruling on employee status shall not be determined by the format of employment relations, and shall not consider as important in judgment whether the person paid corporate tax or was registered for the social security insurances, which can easily be decided by the employer due to his/her superior position. These points emphasize that employee status shall be determined by employment relations in actuality.