Representative Directors of Foreign Company Subsidiaries

I. Introduction

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 i