Whether Retention Bonus (or Signing Bonus) is deemed as Wages Jung, Bongsoo, “Legal Effect of a Retention bonus”, 「Labor Law」, Jungang, May 2018.

1. Introduction

A company can use several methods to retain highly-skilled workers for a long time, with two representative examples. One is through a non-compete clause A non-compete clause means that the employee promises not to transfer to a competitor company, and if the employee subsequently violates the clause, the company whose non-compete clause they violated may claim compensation from the employee.
in the employment contract or rules of employment, whereby the employer prevents capable workers from transferring to competing companies, and the other is through a signing bonus, A signing bonus is a special bonus where a company pays a lump sum to an employee when signing an employment contract, in an effort to recruit talented people.
where the employer tries to restrict the transfer of workers through financial incentives. A non-compete clause is hard to validate as it restricts the freedom of a worker’s occupation. The Supreme Court has argued that "even if there is a non-compete agreement between the employer and the employee, if such an arrangement excessively restricts the constitutionally-guaranteed freedom of occupation, or the right to work or free competition, an action contrary to good social order, such as good customs as set forth in Article 103 of the Civil Act, it is invalid.” Supreme Court ruling on Mar. 11, 2010: case number 2009da82244.
For this reason, many companies prefer signing bonuses, which directly reduce the turnover of good manpower.
I recently received an inquiry from a company about the effectiveness of a retention bonus clause If an employee fails to work for the mandatory tenure, the employee will return some or all of the amount paid in advance, which is called a signing bonus or a retention bonus.
. For this company, 30% of the annual salary is set as bonus, with 50% paid with the 1st year's salary in January, and the remaining 50% paid in January of the following year. In return, the worker must work for three years. The employer wants to include the following clause: "If the employee resigns prior to the agreed three years, the retention bonus shall be returned." The company asked for a legal review of the validity of this. In this case, I concluded that for the retention bonus to be set for three years would be no problem, considering related matters such as the nature of the related wage, the prohibition of forced labor, the prohibition of predetermination of nonobservance, etc.
The following is a review of (ii) the characteristics of a special bonus and violation of the Labor Standards Act; (iii) the legal effect of a signing bonus; and (iv) the criteria for a signing bonus.

2. Characteristics of a Special Bonus and Determining Whether it Violates the Labor Standards Act

(1) Characteristics of a special bonus
The term "wages", as defined in Article 2 of the Labor Standards Act, refers to “wages, salary and any other money and valuable goods an employer pays to a worker for their work, regardless of how such payments are termed." Regarding the wage status of bonuses, they can be regarded as wage if payment conditions and payment timing are set in a collective agreement or rules of employment, etc. and if the payment of such bonus is customary for all employees. If the above conditions are satisfied, such special bonus can be recognized as having the characteristics of wages. Concerning the legal characteristics of a retention bonus, the Ministry of Employment and Labor judged that this bonus could not be considered as wages under the Labor Standards Act if payment was not stipulated in a collective agreement or rules of employment, etc., and if the employer temporarily or voluntarily paid it on condition of securing longer employment. MOEL Guidelines on Apr. 27, 2010: Labor Standards-883
Therefore, it is not included in the average wage for calculation of severance pay.

(2) Determining whether a special bonus violates the Labor Standards Act
“Prohibition of forced labor” as stipulated in Article 7 of the Labor Standards Act means that “No employer shall force a worker to work against his own free will through the use of violence, intimidation, confinement or any other means which unlawfully restricts mental or physical freedom.” It is forced labor to cause workers to carry out unwanted work. However, it is not forced labor for an employer to direct, supervise or legally sanction workers to fulfill their obligation to provide work under an employment contract. Lim Jong-yul, 「Labor Law」, 14th ed., Park-young-sa, Feb. 2016, p. 378.
The penal provisions of Article 7 (Prohibition of Forced Labor) impose a penalty of imprisonment of not more than 5 years or a fine of not more than KRW 30 million, while the penalty for violation of Article 20 (Prohibition of Predetermination of Nonobservance) is a fine of less than KRW 10 million. Therefore, in application of the signing bonus case, Article 20 of the LSA, which includes the voluntary intentions of the employees, is more appropriate than Article 7, which governs only direct physical and mental restraint, such as assault, intimidation and confinement. Kwon Oh-Sung, "A Study on the Effectiveness of Signing Retention Bonus Agreements", 「Sungshin Law」, Sungshin Women's University Law Research Institute, Feb. 2013, p. 136.

The prohibition of predetermination of nonobservance prescribed in Article 20 of the Labor Standards Act stipulates that "No employer shall enter into a contract by which a penalty or indemnity for possible damages incurred from breach of a labor contract is predetermined.” This is to prevent an employee from being forced to continue to work against their will by previously agreeing to pay a certain amount of money without determining the type and degree of the actual damage to the employer because of non-fulfillment of the employee’s employment contract. Supreme Court ruling on Apr. 28, 2004: 2001da53875.
In order to guarantee performance in a contractual relationship, the Civil Act may apply penalties or damages for default in advance at the conclusion of a contract (Article 398 of the Civil Code ‘Liquidated Damages’). However, while a penalty for non-fulfillment of work is a means of securing long-term employment of good manpower for the employer, it does prohibit employees from resigning, because of the burden of paying the penalty. Lim Jong-yul, 「Labor Law」, 14th ed., Park-young-sa, Feb. 2016, p. 388.
As concerns provisions for the prohibition of ‘liquidated damages’, labor contracts in the form of penalties for existing wages are not allowed, but reimbursement of training costs and bonuses with reasonable and valid content is permitted, because it does not unduly limit the freedom of resignation. Supreme Court ruling on Oct. 23, 2008: 2006da37274.


3. Legal consideration of a signing bonus
(1) Situations where the return commitment of a signing bonus is valid
1) Suwon Regional Court ruling on May 13, 2013: 2002gahap12355: An employee agreed that he would receive KRW 150 million as a retention bonus for 3 years’ compulsory stay, which he would repay if he left the company before the three year period. After 7 months of service, he moved to a competing company. The court ruled, “The retention bonus does not belong to the wage and can be excluded from application of Article 20 of the LSA (Prohibition of Predetermination of Nonobservance), but the company paid the bonus for the purpose of retaining the employee for 3 years. Therefore, the employee should repay the retention bonus.”
2) Seoul Regional Court ruling April 29, 2013: 2013kahap231: An employee received a signing bonus of KRW 50 million, which he agreed to repay if he left the company before two years after receiving the money. He then left the company after 7 months. The court ruled, “This signing bonus to retain the employee for a certain period of service cannot be translated as forced labor, nor does it violate Article 20 of the LSA (Prohibition of Predetermination of Nonobservance).”
3) Changwon District Court ruling on November 17, 2007: 2007na9102: According to an agreement between a company and employee, the company was to pay a special bonus to the employee in accordance with the length of service, ranging from 12 months to 41 months of the normal wage, in return for which the employee would stay for two years from the date on which the employee was hired. The agreement stipulated that in the event that the employee resigned from the company, the special bonus would be returned to the company for a period not exceeding two years. The employee who received the bonus from the company submitted a resignation letter and resigned the day after receipt of that bonus. In this case, returning a bonus that is given with the understanding there will be two years of obligatory work does not restrict the freedom of choice of workplace or freedom to resign. The court upheld the agreement the special bonus shall be returned.

(2) Instances where the return commitment of a signing bonus is invalid
1) Supreme Court ruling on Oct. 23, 2008: 2006da37274: When an employee joined a company, he signed a retention bonus agreement whereby he would receive KRW 500 million and serve the company for 10 years. If he resigned before 10 years, he would repay a penalty of KRW 1 billion. In this case, the court ruled that this retention agreement violated Article 20 of the LSA (Prohibition of Predetermination of Nonobservance) and became null and void.
2) Incheon Regional Court ruling on April 29, 2013: 2013gahap3994: An employee promised to stay with a company for at least 5 years, and received KRW 50 million as a retention bonus. In the agreement, the employee agreed to repay 3 times the value of the retention bonus received if he did not fulfill the agreement. After 5 months of service, the employee resigned. The company claimed KRW 150 million, three times the amount of the retention bonus. In this case, the court rejected the employer’s claim.

(3) Supreme Court ruling on signing bonuses Supreme Court ruling on Jun. 11, 2015: 2012da55518.

1) Case summary: A company that manufactures robot surgical appliances (ROBODOC) hired an experienced engineer in the field of fuel cells at S Company on January 13, 2009 for a period of four years. The company made a recruitment agreement to pay KRW 100 million as a signing bonus separate from the salary. The recruitment agreement contained a stipulation that the company guaranteed employment for seven years, and the employee would work for the company for seven years. The employee resigned on April 12, 2010 for personal reasons. The company sued for return of the signing bonus, but the district court dismissed the plaintiff’s (company’s) claim (Dongbu District Court, 2010kahap13266). The company appealed, and the Seoul High Court partially accepted the claim that the employee should pay a prorated amount of the signing bonus, stating that the signing bonus was: 1) a special incentive to join the company, 2) a full down payment for 7 years of future employment, and 3) a special bonus to expect 7 years’ service (Seoul High Court 2011na22827).
2) Decision: The Supreme Court dismissed the plaintiff's claim, saying, "As the company concluded labor contracts as a way of hiring experienced professional personnel, the so-called “signing bonus”, the following points should be taken into consideration: ① Whether or not they have the characteristics of compensation for job turnover or the conclusion of a labor contract; ② Whether to pay for the prohibition of resignation during the compulsory working period; ③ Whether or not there is a written statement concerning returning the bonus upon retirement or turnover in the middle of the period.” Based on the aforementioned premises, the signing bonus was judged to have the characteristics of a reward because there was no description of a specific method of payment or any return obligation. In other words, the signing bonus for this case is an instance in which the nature of the reward for employment is judged to be stronger than the nature of the mandatory working period of seven years.

4. Conclusion (Criteria for a Signing Bonus)

The judging criteria for a signing bonus must adhere to the following principles:
(i) If there is disagreement over the interpretation of a contract between the parties: ① The contents of the document, ② the motivation and the manner in which the agreement was made, ③ the purpose of achieving by agreement, and ④ the true intention of the parties should reasonably be interpreted according to logic and empirical rules. Supreme Court ruling on May 27, 2005: 2004da60065; Supreme Court ruling on Sep. 20, 2009: 2006da158166.

(ii) It is effective for the employer to stipulate a return of the employee's bonus, which is provided separately from the employee's wage, for the special purpose of preventing the employee from transferring to another company. In principle, these return arrangements are required to ① balance the amount of the signing bonus award and duration of the contract of employment, and the degree of the former restriction; ② not infringe on the essential condition of the employee's freedom to change jobs; ③not give the bonus the characteristics of a wage, and ④ have no reason related to the employer for the employee moving to another company. Seoul District Court ruling on Jan. 25, 2005: 2004kadan128716.

In other words, it must be clear that the signing bonus is awarded on the condition that it is paid for a period of mandatory service; the duration of such obligatory service should be as short as possible and; the returning amount should be the same or less than the amount that the employee received for the mandatory service period. In addition, a contract for returning the bonus award is valid only if the employee voluntarily resigns.



Labor Inspection over Unpaid Wages for Temporary Workers

1. Introduction

I would like to introduce a recent case regarding claims for unpaid wages against a local council and how it was handled. Since 2016, the local council has been hiring 30 audit assistants for 40 days each year to assist with administrative audits. These assistants worked for KRW 100,000 per day, 5 days a week and 8 hours a day.
An audit assistant sought to claim the weekly holiday allowance and annual paid leave, neither of which had been given, but the local council explained that the assistant would not be regarded as a worker because he was hired for a commissioned position only during the administrative audit period. In response, the audit assistant filed a complaint with the Labor Office on December 9, 2022, stating that the local council owed him unpaid wages. During investigation by the Labor Office on December 28, the local council argued that audit assistants were not workers because they were used for commissioned work only during the administrative audit period in accordance with local ordinances. However, the Labor Office ordered the local council to pay KRW 800,000 in unpaid weekly holiday allowance and unused annual paid leave allowance since the complainant was a worker. The local council paid the amount ordered by the Labor Office. However, the complainant requested criminal punishment whether the delayed wages were paid or not. On February 17, 2023, the labor inspector visited the local council and conducted a labor inspection. The labor inspector pointed out 6 violations of the Labor Standards Act during the inspection, and ordered the payment of unpaid wages amounting to KRW 96 million, by March 7, 2023.
Herein, I would like to review the six violations pointed out by the labor inspectors during the inspection, and look carefully into three major disputed issues that came up: (1) the details on unpaid wages, (2) the retroactive scope of unpaid wages, and (3) criminal penalties against the local council.
2. Details of the Corrective Orders from the Labor Inspection

On February 17, 2023, the labor inspector visited the local council and conducted a labor inspection on the tasks of administrative assistants, and issued corrective orders for six items.

(1) Violation of the Labor Standards Act, Article 17, Paragraph 2 (Duty to Create a Written Employment Contract)
1) Corrective order: Labor contracts shall be issued to workers and include specifications on major working conditions such as wages, contractual working hours, weekly holidays, and annual paid leave. However, since the working conditions of 133 audit assistants, including the complainant, were not specified in writing and issued to the assistants, evidence (copies of employment contracts, etc.) that this has been done must be submitted.
2) Follow-up actions and basis: The local council acknowledged its failure to create and issue appropriate labor contracts and agreed to do so in the future. The assistants were, in fact, temporary workers to assist during specific periods of administrative audit, but, notwithstanding this, the employer shall preserve a register of workers and important documents concerning labor contracts for three years, as prescribed by Presidential Decree. These important documents related to labor contracts are: 1. Labor contracts, 2. Wage ledgers, 3. Documents on wage determination, payment method and basis for wage calculation, 4. Documents on employment, dismissal and termination of employment relations, 6. Documents about leaves, etc. The three-year retention period for these important documents begins with the date of termination of the employment relationship. If the labor contract is not made in writing, the employer is subject to a fine of up to KRW 5 million. Labor Standards Act, Article 42 (Retention of Contract Documents) and the Enforcement Decree, Article 22 (Subsidized Documents, etc.) and Article 114 (Penalty)
In addition, if an employee requests a certificate verifying the period of employment, type of work, position and wages, and other necessary matters even after the worker resigns, the employer shall immediately provide such certificate with the actual facts thereon. Persons who can claim a certificate of employment shall be workers who have continuously worked for 30 days or more. Requests for such certificates can be made by the worker up to 3 years after resignation. Labor Standards Act, Article 39 (Certificate of Use) and the Enforcement Decree, Article 19 (Requests for Certificate of Employment)

(2) Violation of the Labor Standards Act, Article 36 (Settlement of Payment)
1) Corrective order: The employer shall pay all money and valuables including wages within 14 days from the date of the termination of employment relations, unless there is an agreement otherwise between the parties regarding an extension of the payment period. However, the local council failed to pay a total of KRW 96.1 million to its audit assistants: weekly holiday allowances of KRW 82.2 million (132 persons) and annual paid leave allowance of KRW 10.9 million (109 persons). Proof of payment must be submitted to the Labor Office (e.g. receipt of deposit or payment confirmation).
2) Follow-up actions and basis: Considering the statute of limitations for overdue wages, the local council paid weekly holiday allowances and annual paid leave allowances to audit assistants who had worked during the past five years. If a worker dies or employment relations are terminated, the employer shall pay wages, compensation, and all other money and goods within 14 days from the occurrence of the reason for payment. However, it is specified that in special circumstances, the period may be extended by agreement between the parties. If money and other valuables are not paid within 14 days after the termination of employment relations, the employer will be subject to imprisonment for up to 3 years or a fine of up to KRW 30 million. Labor Standards Act, Article 36 of the (Settlement of Payment) and Article 109 (Punishment)


(3) Violation of the Labor Standards Act, Article 48, Paragraph 2 (Pay Slips)
1) Corrective order: When paying wages, the employer shall issue to the worker a wage statement in writing with matters as prescribed by Presidential Decree, such as the composition of wages, method of calculation, details of deductions, etc. and submit proof (copy of pay slips) to the Labor Office.
2) Follow-up actions and basis: The local council acknowledged that it had failed to issue pay slips and agreed to correct the situation. The employer must issue wage statements to workers when paying them. This regulation applies even to workplaces with fewer than 5 employees, even if only one part-time worker is employed. In addition to a statement of the total amount, information related to the method of calculating wages must be written so that workers can confirm that they have been paid fairly in accordance with the amount of time they worked and the conditions given in the initial contract with the employer. If the employer fails to issue such a wage statement, an administrative fine of up to KRW 5 million won shall be imposed. Labor Standards Act, Article 48, paragraph 2 (Pay Slips) and Article 116 (Administrative Fines)

(4) Violation of the Labor Standards Act, Article 60, Paragraph 2 (Annual Paid Leave)
1) Corrective order: The employer did not grant annual paid leave to 109 audit assistants, despite the requirement that it grant one day of paid leave for every one month of work to workers who have worked continuously for less than one year. Verification materials must be submitted to the Labor Office.
2) Follow-up actions and basis: The local council paid annual paid leave allowances to audit assistants who had worked during the past five years in accordance with the statute of limitations for unpaid wages. An employer shall grant one day of paid leave for every month of work to a worker who has worked continuously for less than one year. If such annual paid leave is not granted, the unused leave shall be compensated in money. If the annual paid leave allowance is not paid, the employer shall be subject to imprisonment for up to two years or a fine of up to KRW 20 million. Labor Standards Act, Article 2 and 5 (Annual Paid Leave) and Article 110 (Punishment)


(5) Violation of the Labor Standards Act, Article 70, Paragraph 1 (Restrictions on Night Work and Holiday Work)
1) Corrective order: When a female worker aged 18 or older is required to work at night or on holidays, worker consent shall be obtained, but this was not done. Evidence needs to be submitted to the Labor Office that such consent was obtained.
2) Follow-up actions and basis: The local council promised to thoroughly implement this requirement with employment of new workers. Female workers aged 18 or older may be allowed to work at night and on holidays with their prior consent. Violation of this is punishable with imprisonment for up to two years or a fine of up to KRW 20 million. Labor Standards Act, Article 70 (Restrictions on Night and Holiday Work) and Article 110 (Punishment)


(6) Violation of the Minimum Wage Act, Article 11 (Duty to Inform)
1) Corrective order: The employer shall post the minimum wage in a place where the workers of the business can easily see it, or widely publicize it to workers in other appropriate ways, as prescribed by Presidential Decree. Since the minimum wage notice obligation has been violated, correct the matter and submit verification evidence (posted photos, etc.).
2) Follow-up actions and basis: The local council posted the required information in a notice on its website. Employers have a duty to notify workers of the minimum wage by posting it in a place where workers can easily see it or by other appropriate means. Matters to be posted include (i) the minimum wage of workers subject to application, (ii) wages that are not included in the minimum wage, (iii) scope of workers excluded from application of the minimum wage in the business in accordance with the law, (iv) the effective period of the minimum wage. Violation of this duty to inform is punishable with a fine of not more than KRW 1 million. Minimum Wage Act, Article 11 (Duty to Inform) and Article 31 (Administrative Fine)


3. Major Issues Disputed on during the Labor Inspection

(1) Details on unpaid wages
1) Related details: An audit assistant who worked from October 11, 2022 to December 2 (39 days) submitted a claim to the Labor Office for unpaid weekly holiday allowance and annual paid leave allowance. The local council attended an investigation hearing of the Labor Office on December 28, 2022 and submitted to an investigation, and agreed the day after the investigation to pay KRW 800,000 for weekly holiday and annual paid leave allowances. On February 17, 2023, the labor inspector visited the local council and conducted a labor inspection on the employment relationship with audit assistants. The labor inspector found that the local council had not paid weekly holiday allowance or unused annual paid leave allowance during employment of its audit assistants. The Labor Office directed the local council to retroactively pay unpaid wages to all audit assistants employed during the last five years.
2) Judgment: If a worker hired for hourly or daily wage continues to work, an additional weekly holiday allowance shall be paid. If wages are calculated on a monthly basis, the weekly holiday allowance shall be included in the monthly wage. A related precedent states that the hourly or daily wage system does not include weekly holiday pay, which is a statutory allowance under Article 55 of the Labor Standards Act (LSA), paid even if the employees do not actually work on such paid holidays. Therefore, if a worker on the hourly or daily wage system receives a fixed allowance paid for a certain period of time exceeding one month, he or she can claim the difference between the weekly holiday pay calculated based on the newly calculated hourly wage and the previously paid fixed allowance, and this is not a duplicated pay for the weekly holiday pay." Supreme Court ruling on Jan. 28, 2010, 2009da74144; see also Supreme Court ruling on Aug. 20, 2014, 2014da6275

(2) Retroactive payment of unpaid wages
1) Related details: The labor inspector conducted an on-site audit on February 17, and on February 21, 2023, directed the local council to pay an amount equivalent to KRW 96.1 million, calculated as unpaid weekly holiday allowances of KRW 85.2 million (for 132 persons) and unused annual paid leave allowances of KRW 10.9 million (for 109 persons over the past 5 years between 2018 and 2022.
2) Judgment: Extinctive prescription refers to expiration of the period during which an employee with the right to receive compensation may exercise a claim against the employer in the event of a delay in the payment of wages or severance pay. The extinctive prescription for prosecution refers to expiration of the period when prosecution can occur for violating labor law, such as delaying the payment of wages, and begins either on the date the violation occurred or the date a continuing violation ends.
The period before the extinctive prescription kicks in for prosecution of violation of labor-related acts in terms of delayed payment of wages was extended from 3 years to 5 years in 2007. The period before the extinctive prescription for prosecution kicks in shall be deemed to have started 14 days from the date the wages should have been paid or the date the violations terminate. Criminal Procedure Act, Article 249, Paragraph 1, Item 5 (Duration of Criminal Prescription) and Article 252 (Starting Time for Statute of Limitations)
According to Article 49 of the LSA, the extinctive prescription for a wage bond kicks in after 3 years. However, since the extinctive prescription for prosecution is now 5 years, prosecution for delayed payment of wages will continue to be possible. MOEL Guide, Guide on Handling Unpaid Wages, 2016, pp. 31-32.
Thus, an employee may file a claim for unpaid wages for a period of 5 years.

(3) Criminal punishment for late payment of wages
1) Related content: On December 9, 2022, one audit assistant filed a complaint with the Labor Office that wages were overdue. On December 28, the local council was investigated by the Labor Office, and the next day, it paid KRW 800,000 in unpaid weekly holiday pay and unused annual paid leave. However, the petitioner requested criminal punishment for violation of the LSA, regardless of whether the unpaid wages were paid.
2) Judgment: Late payment of wages is subject to criminal punishment. Workers who have received unpaid wage want their employer to be punished. However, prosecutors did not prosecute the local council as the employer responsible for the late payment of wages. The reason for this is that the local council's violation of the obligation to pay weekly holiday allowance and unused annual leave allowance was not intentional. A related precedent states, If there are grounds to dispute the existence of the obligation to pay wages and severance pay, it should be seen that there is a considerable reason why the employer did not pay the wages and severance pay. It is difficult to reason that the employer intentionally committed the crime of violating Article 36 of the Labor Standards Act (Settlement of Payment). Whether there are grounds for dispute regarding the existence and scope of the obligation to pay wages and severance pay depends on the reason for the employer's refusal to pay and the basis for the payment obligation, and the organization and scale of the company operated by the employer. Also, all matters such as business purpose, and the existence and scope of payment obligations, such as other wages, should be judged in light of the general circumstances at the time of the dispute. Even if the employer's civil liability for payment is recognized retroactively, it should not be immediately concluded that the employer's violation of Article 36 of the Labor Standards Act is recognized intentionally. Supreme Court ruling on June 28, 2007, 2007do1539.


4. Conclusion

This case is a good example of the characteristics of labor law. Labor law violations do not end with correction of a single person's violation. Through this example of unpaid wages for daily wage workers, the following characteristics of labor law can be understood.
First, even if an administrative agency temporarily hires a commissioned worker, if that worker provides work under the management supervision of the employer and receives wages, employee status is recognized.
Second, a notice of violation of the LSA is applied to all workers in the same category, and unpaid wages can be claimed retroactively for 5 years, which is the statute of limitations for criminal punishment.
Thirdly, even if a violation regarding wages occurs, if there was no intentional violation of the law and there exists a legitimate reason for not paying the wages in question, criminal punishment may be avoided.



Case related to Hiring Academy Instructors as Freelancers Jung, Bongsoo, “Are C Language Institute’s Native English Instructors Employees or Freelancers?”, 「Labor Law」, Jungang, December 2013.


1. Summary of the case
The case of unpaid wages for C Language Institute started when 17 instructors submitted a petition to the Gangnam Labor Office for unpaid severance pay, weekly holiday allowance and annual paid leave allowance against C Language Institute on February 22, 2011. The Language Institute claimed that its native instructors were freelancers contracted with its “Agreement for Teaching Services’ and were not employees to which the Labor Standards Act applied. Upon receipt of the petition, the Gangnam Labor Office did a thorough investigation of the petition over 18 months, and concluded that the Language Institute’s 17 instructors were freelancers, not employees (Labor Improvement Team 4, September 28, 2012). Upon this conclusion, 24 instructors (the original 17 and 7 new applicants), began a civil action. On October 17, 2013, the Seoul Central District Court determined that C Language Institute’s native instructors were employees under the Labor Standards Act (2011gahap121413), and ruled that the Language Institute was obligated to pay severance pay, weekly holiday allowance, and annual paid leave allowance. After this, the Language Institute filed an appeal against the District Court’s decision.

2. Main dispute

The main point of this case was whether native instructors are employees or freelancers. The courts used the legal criteria for determining whether someone is an employee or not in their judgment. The Defendant claimed that the Plaintiffs 1) signed an ‘Agreement for Teaching Services’ voluntarily, not an employment agreement, and also paid a business tax; 2) that the Defendant paid remarkably high benefits in consideration of there being no severance pay; and 3) that, as the Plaintiffs agreed that this agreement would not include severance pay, if the Plaintiffs requested additional severance pay, it would be a violation of the good-faith principle.

3. Major Points in the Defendant’s View & the Supreme Court’s Judgment

On June 11, 2015, the Supreme Court ruled that native English instructors (hereinafter referred to as “the Plaintiff”) working for “C” Language Institute (hereinafter referred to as “the Defendant”) are employees rather than freelancers, and are entitled to severance pay, annual paid leave allowance, and weekly holiday allowance (Supreme Court ruling 2014da88161). This article discusses the Supreme Court Ruling (2014da88161, June 11, 2015) and the related Seoul High Court ruling (2013na68704, November 24, 2014).


(1) Type of contract
The Defendant called the contract for native English teachers an “Agreement for Teaching Services” and designated the Plaintiffs as “instructors”. In particular, the Defendant claimed, “the plaintiffs, mainly from famous colleges of advanced countries such as the United States, are people who will return to their home countries after working for a short time at a high level of remuneration while experiencing Korean culture and retaining their freedom at the same time as foreigners. Because of these special characteristics, their economic and social conditions are equal or superior in the relationship with the Defendant. In reference to this, the contracts with native English instructors were delegation contracts or lecture service contracts, which are similar to subcontracts.”
The court recognized as “employees” those who signed a contract entitled “Service Contract Regarding Instructions at the Institute & Instruction and Management of Students” or “Lesson Service Offer Contract” Supreme Court ruling 2004da29736 on Dec 7, 2006; SC ruling 2005doo8436 on Jan 25, 2007
. In addition, even though some plaintiffs working for the Defendant consider themselves freelancers, not employees, the essence of the relationship between the Plaintiffs and the Defendant does not change. Whether a person is considered an employee under the Labor Standards Act shall be decided by whether that person offers work to the employer as a subordinate of the employer in a business or workplace to earn wages in actual practice, regardless of the type of contract.

(2) Salary including severance pay & agreement excluding severance pay
The Defendant claimed ① “the possibility of recognizing the status of “employee” is slim because the Plaintiffs’ monthly salary, which was between 3,469,128 won and 3,979,976 won, is higher than the average Korean teacher’s monthly salary, which is 1,030,000 won, the salary of other regular employees of the Defendant, and the monthly salary of native English teaching assistants who work for the Education Office, which pays them 1,800,000 won to 2,700,000 won.” ② According to the Agreement for Teaching Services, “The Instructor agrees and understands that they shall not receive any benefits available to full-time employees including but not limited to severance pay, health insurance, and pension payments, all of which are the sole responsibility of the Instructor.”
As for this, the Court explained that “① The Defendant’s claims lack legal grounds because not only are the duties dissimilar to those of the Korean teachers, regular employees, and native English teaching assistants who work for the Education Office, the amount of salary does not determine whether or not they are employees.” ② The Court also stipulated that “Severance pay is the deferred remuneration to be paid in return for continuous employment to an employee who leaves employment after serving a certain period of time. The concrete right to request severance pay occurs on the condition of the fact of termination of continuous employment. It is null and void due to it being a violation of the Labor Standards Act compulsory regulations, if an employee previously signed a special contract that the employee would give up the right to request severance pay at the time of resigning from their job.” Supreme Court ruling 97da49732 on March 27, 1998


(3) Judgment on whether or not the requests are a violation against the principle of good faith
The Defendant claimed that the Plaintiffs’ claims were not acceptable because they violated the principle of Good Faith in light of justice and the principle of equity for the following reason: If the Plaintiff’s claims were validated, the Defendant would have no choice but to bear additional loss from the burden of paying severance pay, other legal allowances and social security insurance premiums, etc, while the Plaintiffs will enjoy unintended additional benefits. This would result in unexpected, excessive cost to the Defendant, and consequentially, have serious impact on the Defendant’s stock price, and seriously threaten the growth of the Defendant as an ongoing business.
As reviewed, the Court ruled that attempting to restrict the basic rights of an employee guaranteed by compulsory provisions such as the right to claim severance payment by applying the principle of good faith is to go against the constitutional value and the nature of compulsory provisions of the Labor Standards Act. Therefore, it is unacceptable, as long as there are no special circumstances that would affect the judgment, to give priority to the wrongful belief of the employer over the legitimate right of the employees by categorizing the Plaintiff’s claims as a violation of the principle of Good Faith even though the Labor Standards Act guarantees the employee’s definite rights as compulsory provisions. If the Defendant’s claims were accepted with only the evidence the Defendant had submitted, it is unlikely that it will lead to severe managerial difficulties for the Defendant or be a menace to the Defendant’s existence. In addition, it cannot be recognized that the Plaintiffs’ claims for severance payment, etc, is illegitimate and goes against the principle of Good Faith due only to the claims the Defendant has submitted. Supreme Court ruling 2012da89399 on December 18, 2013