I. Summary (Store managers’ claim for severance pay, etc. )

Two store managers whose contracts were unsatisfactorily terminated at the Korean branch of a luxury brand company in July 2012 filed a petition with the Labor Office in October 2012 for non-payment of severance pay, annual paid leave allowance, etc. In this labor case of unpaid wages, the company claimed that the store managers were not entitled to severance pay in accordance with the Labor Standards Act as they were independent sales service contractors, while the store managers claimed that they were employees providing labor for wages under the employer’s supervision and receiving fixed basic pay and incentives, and requested about 80 million won for severance pay and other legal allowances. The labor inspector in charge of this case recommended the company accept an adjusted settlement at the beginning of this investigation, seeming to suggest the store managers’ claim was reasonable. However, the company would not accept any settlement with the two store managers, as 16 other store managers may then have made similar claims against the company. Labor cases are usually handled within two months by the Labor Office, but this case took 7 months, finally concluding in April 2013. In the end, the labor inspector rejected the store managers’ claim, determining the store managers were not employees but independent contractors. I would like to look into the details of this case: factual grounds, points of dispute, the claims of both parties, related Supreme Court ruling, and the labor inspector’s decision.

II. Factual Grounds and Point of Dispute

1. Factual grounds
○ The company entered into an outsourcing contract for sales service with store managers who preferred a sales service contract to an employment contract. Many other similar luxury brand companies have used store managers as independent contractors.
○ Store manager A began working as the manager of the Chungdam branch under a service contract in September 2008. When ordered to work as manager of another store due to renewal construction at her store, store manager A terminated the service contract. Store manager B was hired as an employee in September 2010 and worked as a store manager. When offered a commission-based contract, store manager B terminated the employment contract and signed a sales service contract to work as an independent selling contractor. The company later chose not to renew the service contract with this store manager due to her poor sales performance.
○ The store managers’ monthly pay was 2 million won plus 4% of normal total sales and 2% of total sales during discount sales periods. The contract period was 6 months and could be renewed if there was no termination notice one month in advance.
○ There were no particular rules of employment or other regulations applicable to the store managers.
○ The store managers attended a sales meeting once a month, but there were no daily or weekly reports. An employee at each store reported sales on a daily basis through the computer system.
○ Each store has one store manager and two to four employees. Employees (excluding the store manager) received management and supervision from the head office, and their annual paid leave was controlled.
○ The store managers’ workplace was fixed, but their working hours were discretionary, with their arrival and departure not controlled by the company.
○ The store managers did not own the equipment, products, uniforms, etc., necessary to sell the products, and used the items provided by the company. However, the store managers bore the expenses necessary in the store such as telephone bills, clothing repair costs, etc. It was not possible for the company to replace the store manager’s position with a third person.
○ The store manager could hire part-timers as they wished, with their wages paid by the company.
○ The store manager treated VIP customers to meals, entertained them with golf, and distributed leaflets at his/her own cost. Sometimes the store managers further discounted the standard discounts of the company to increase sales.
○ The company has never punished or disciplined its store managers. The company could only refuse to renew their service contracts.
○ Store managers paid corporate income tax instead of labor income tax, and were not registered for social security insurances.

2. Points of dispute
A major point of dispute was that although the store manager was an independent contractor with the sales service outsourcing contract, he/she claimed severance pay under the Labor Standards Act, and so whether there was a relation of supervision between the company and the store manager needed to be determined. According to the sales service outsourcing contract, the company didn’t outsource the entire store, but made an individual, independent contract only with the store manager while keeping employment relations with all other employees working at that store. Is it legal to consider the store manager alone as an individually contracted service provider?


III. The company’s claim

1. Judgment of whether the store managers had subordinate relations with the employer
The company claimed that the store managers were not employees under the Labor Standards Act, were not entitled to severance pay, annual paid leave, or other legal allowances. Details can be found in the table.

Supreme Court Ruling
(9 items: details for judgment)
Factual Grounds Judgment
Employee Contractor
1) Employer’s
direction & supervision ① Rules of Employment Rules of Employment were not applied.
Ⅹ ●
② Employment contract Sales outsourcing contract was made. Ⅹ ●

③ Arrival/departure from work, annual leave, disciplinary action No control of arrival/departure time, or annual leave. No disciplinary action.
Ⅹ ●
④ Work instructions No work reports made or instructions given.
Ⅹ ●

2) Restricted
working hours and
work places ⑤ Working hours No control of working hours. Ⅹ ●

⑥ Work place Work place was restricted. ● Ⅹ

3 )Equipment, working tools, expenses
⑦ Ownership of equipment, working tools
The employer owns equipment, tools, etc.
● Ⅹ

⑧ Expenses The store manager bears cost of repairs and telephone bills.
Ⅹ ●

4) Replacement
⑨ Replacem ent with a 3rd party
As the work is assigned exclusively to the particular person, it is not possible to substitute the store manager with a 3rd party. ● Ⅹ
5) Earning through sales ⑩ Pursuit of profit Pursuit of profit-earning by individual effort is possible. Store managers entertained customers with golf during working hours. Ⅹ ●
⑪ Independent business Independent business possible. ●
⑫ Liabilities for damage Company, not store managers, responsible for losses. ● Ⅹ
6) Characteristics of wage ⑬ Reward of labor Income is decided by evaluation of total sales. Ⅹ ●