Case of Unpaid Severance Pay due to Promotion to Director
By Bongsoo Jung, Korean labor attorney at Kangnam Labor Law Firm

I. Summary
Company XX introduced an annual salary system for its all directors in January 2010 and paid interim severance pay for their service provided until that time. Thereafter, the company did not pay any severance pay in accordance with the annual salary contract which clearly includes severance pay for each year of service. When three retired directors of the company recently heard concerning a related judicial ruling that severance pay shall not be paid together with monthly wages, they visited our Kangnam Labor Law Firm and commissioned us to file a legal claim for the severance pay not paid to them.

II. Company XX’s claim
When the employees became directors, the company implemented the interim adjustment of severance pay as a formality to confirm that they are no longer holding the status of an employee. Employees up the Bujang (department head’s level) are subordinated to the employer’s direction and supervision, but when an employee becomes a director, he/she receives assignment from the company within a certain work scope and takes initiative and leadership in handling such work scope. In addition, a director also carries the name card of a “director” and, in the capacity as a person in-charge of “business development”, represents the company in external associations or organizations. In particular, the director can attend the executive meetings while Bujang or lower positions are not allowed to attend such meetings. Even in the aspect of welfare, directors are different from employees, as the directors are in accordance with director’s welfare systems with subsidies for comprehensive medical examination and with car maintenance allowances. Directors can also use the corporate card for their expenses. Therefore, as company directors cannot be regarded as employees, the company has no obligation to pay severance pay to its directors.

III. Employees’ claim
When Employees A and B were working as directors around Jan 2010, the company, on its own accord, instructed for the implementation of the interim severance pay and also drawn up the annual salary contract with severance pay included therein. For employee A, although he was working as a director of the research institute, which is equivalent to a company executive director, he was actually working in subordination to the company president’s direction and supervision. He resigned on notification by the Vice President of the cancellation of the employment contract in June 2016. As for employee B, while he was working as a General Manager of Company XX, he was registered as a Vice President of the company’s subsidiary under the direction of company XX, and he received salary paid by the subsidiary. However, in actual fact, he had been working under the direction and supervision of Company XX until his resignation in March 2016.
In the case of employee C, he was holding the position of a Bujang in Company XX before being promoted to Senior Director in April 2014. At the request of the company, he then accepted the implementation of the interim severance pay and went on to conclude the severance pay included annual salary contract. Employee C resigned in January 2017.

IV. Related Judicial Rulings
Person who provides specific service under the direction and supervision of others such as directors and who receives a fixed pay as a remuneration can be regarded as an employee defined by the Labor Standards Act. (Supreme Court, 2002 da 64681)
Whether it is appropriate to regard a director as an employee defined by the Labor Standards Act has nothing to do with the manner in which the contract is made but it should be judged based on whether the director was paid to provide a service that requires him to be in subordination. Regardless of whether he/she is holding the position or title of a company director or auditor, in the real sense or just in name, as long as he/she receives a remuneration as a compensation for providing a specific labor service under the direction and supervision of the employer or he/she receives a remuneration as a compensation for taking charge of specific labor service under the direction and supervision of persons such as the representative director in addition to the duties assigned to him/her by the company, such director can be regarded as employee defined by the Labor Standards Act.

Even if the company pays, as part of the employment contract, a severance pay in advance with annual salary, such payment does not have the same effect as the lawful severance pay stipulated in Article 34 of the Labor Standards Act. (Daegu district court, 2006 kadan 2947)

V. Conclusion
The labor inspector investigated the company and the employees who filed for the appeal. It was concluded that employees A and C were employees. However, employee B was judged as not an employee because he was a registered director of a subsidiary and received salaries from the subsidiary. Following this, it was concluded that the company shall pay severance pay to employees A and C.