Mr. Han, the managing director of company A, is in charge of management activities with the authority to recommend and appoint directors. Currently, Mr. Han is causing serious damage to the company through neglect of his duties and by his lack of ability and poor performance. Hence, company A has given notice to Mr. Han that their executive employment contract will be terminated. However, Mr. Han insists “his legal status is an employee who provides labor under the CEO’s instructions and supervision according to the Labor Standards Act (LSA), and termination of the contract amounts to dismissal without justifiable reason.” He is also demanding that company A pay his wages until the date of reinstatement.
When we first become employees, most of us dream of being promoted to executive director positions. According to the “Survey on Promotion Systems”, only 4.7 of every 1,000 workers can be promoted to such positions. After surviving such tough competition, those who become executive directors are allowed to have considerable discretionary authority and responsibility in terms of work and duties. This is the biggest difference in position and roles between executive directors and other employees. Despite such a difference, executive directors sometimes insist that they are also employees under the LSA because they receive instructions from and are under the supervision of their bosses. In this regard, can Mr. Han be regarded as an ordinary worker under the LSA?
Definition of “worker” under the LSA
Article 2.1.1 of the LSA stipulates that “the term ‘worker’ refers to a person who offers work to a business or workplace to earn wages, regardless of the kind of job he/she is engaged in.” If a person is regarded as a worker under the LSA, he/she can be protected by laws such as the restrictions against dismissal.
When determining whether a person is a worker or not under the LSA, the Supreme Court takes “the nature of the employment (i.e. subordinate) relationship” into consideration, not the type of contract. That is, if a person performs his/her duties as allocated by the company at the designated place and during the designated period and according to specific instructions from his/her boss, that person can be considered a worker.
Legal status of executive directors
Executive directors are individuals who belong to a certain organization and are in charge of dealing with important business affairs. However, as each company has different standards when defining “executive director”, it is difficult to apply one definition or scope. In general, those who are classified as directors or auditors according to internal rules can be seen as executive directors.
Sometimes, executive officers have dual status as both employer and employee at the same time. Given the fact that executive directors are given more discretionary authority and responsibility than other workers, they can be regarded as a kind of employer. However, executive directors are similar in nature to other workers as they receive remuneration for their work. As most of them are promoted from the ranks of “ordinary” workers, the boundaries between the two groups are blurred.
In principle, executive directors with authority are usually deemed as falling outside the scope of employees because they are entrusted to deal with a certain part of the business.
Given the fact that Mr. Han exercises authority over the board of directors as well as responsibility for overall business activities, he can be considered only as an executive director with the power to use his own discretion. In this regard, he was not dismissed without justifiable reason and it is more appropriate that his executive employment contract be considered terminated or cancelled.
Removing executives from their positions
An executive director can be removed from his/her office by a resolution adopted at a general shareholders’ meeting (Article 285 (1) of the Commercial Act) or through the termination of his/her contract by either party at any time (Article 689 (1) of Civil Act). As they are not ordinary employees, statutory procedures, such as 30 days’ prior notice for dismissal, are not needed. However, in cases where an executive director is removed from his/her position without justifiable grounds, the company shall compensate him/her for damages occasioned by the termination.
Unless there are additional conditions in the articles of association, rules for executive officer payment, the employment contract, etc., the company is not obligated to offer any retirement pay to executive directors when they resign or are removed. Some companies offer retirement pay to executive directors according to their internal regulations, but this is not a statutory requirement. Rather, it is considered a kind of wage for his/her work.
Exceptions
Despite the general principle that executive directors are not deemed employees, there are some exceptions in the following cases: 1) when a person was employed or promoted to executive director and he/she was appointed by the representative director without adopting a resolution at a general shareholders’ meeting or board of directors, 2) when the executive director provides his/her weekly report to the CEO and receives specific instructions from the CEO during officers’ meetings, 3) when the executive officer, who has been dispatched to another country, sends his/her weekly reports to the CEO via e-mail and receives specific instructions regarding product development and business trips, or 4) when the executive director is still in charge of his/her previous duties even after being promoted to the executive position, and receives wages and bonuses for his/her jobs on a monthly basis. In the above-mentioned cases, Korean courts have ruled that such executive directors are deemed employees as their positions or titles as executive director are nominal and simply matters of form.
In addition to these exceptions, there are precedents where some registered executive directors were deemed employees when they are executive directors in name only. If there is no evidence that an executive director is entrusted with a certain part of the business with authority over critical business issues, or the company has withheld income tax, residence tax and social insurance contributions (i.e. national pension, health insurance and employment insurance) from the executive directors’ paycheck, this means that he/she is actually working according to his/her employer’s instructions and under supervision in order to earn wages.
Guidelines for business
As mentioned above, it is difficult to generalize the legal status of executive officers as ordinary employees. Rather, it is important to take all surrounding facts into consideration when determining their legal status under Korean labor law. For this, companies need to clarify the following. First, review and modify the articles of association, internal rules and terms of contract regarding executive directors. For example, any regulations regarding retirement pay for executive directors which should not be offered should be amended. It is also advisable to clarify regulations about contract termination with executive directors in order to prevent unnecessary disputes in the future.
Second, when a company promotes a person to an executive director position, the executive director should resign first as an employee and sign an employment contract later as an executive director. For this, the company must pay his/her retirement pay clearly upon conclusion of the employee relationship. Such a measure would be important evidence that the employment relationship has ended.