1. Summary (Store managers’ claim for severance pay, etc. Labor Attorney Bongsoo Jung handled this case at Kangnam Labor Office from October 2012 to April 2013.
)
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.

2. 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 renovations 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?

3. 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.

(2) Summary of the company’s claims
As described in the above table, the store managers 1) entered into a sales service contract, not an employment contract, and worked as contractors on an equal footing with the company; 2) made efforts to increase their own sales-based income as independent contractors; and 3) worked without employer’s direction or supervision at work, but were engaged in sales activities using their own time and money. The company did not reimburse them for any expenses related to business or sales activities, but paid out commissions based upon the store’s total sales. Accordingly, there were no subordinate relations between the two store managers and the company.

4. Related Supreme Court Ruling and Labor Inspector’s Criteria for Judgment
(1) Related Supreme Court ruling
The Supreme Court explains the criteria for evaluating whether the person is an employee or not in 9 categories, compares and analyzes between the evidence of employee characteristics and evidence of employer characteristics in terms of those 9 categories, and determines whether the target person is an employee or not according to the results of comparison. The weight to determine the results can be assigned on the basis of: 1) whether the employer supervises or not; 2) whether income is remunerated in return for labor service; and 3) consideration of the character and content of the labor service. However, wages and registration for the four social security insurances, which are usually decided by the employer, cannot be an important factor in determining employee characteristics. Whether the store manager is considered an employee according to labor law shall follow the criteria of the Supreme Court ruling:
“Whether a person is considered an employee under the LSA 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 whether the type of contract is an employment contract or service agreement under the Civil Act. Whether a subordinate relationship with the employer exists or not shall be determined by collectively considering: 1) whether the rules of employment or service regulations apply to a person whose duties are decided by the employer, and whether the person has been supervised or directed during his/her work performance specifically and individually by the employer; 2) whether his/her working hours and workplaces were designated and restricted by the employer; 3) who owns the equipment, raw material, or working tools; 4) whether his/her position can be substituted by a third party hired by the person; 5) whether his/her service is related to creating profit or causing loss like one’s own damages; 6) whether payment is remuneration for work and whether basic wage or fixed wage is determined in advance; 7) whether income tax is deducted for withholding; 8) whether work provision is continuous and exclusive to the employer; 9) whether the person is registered as an employee by the social security insurance acts and other laws, and the economic and social conditions of both sides. Provided, that as whether basic wage or fixed wage is determined, whether income tax is deducted for withholding, and whether the person is registered for social security insurances could be determined at the employer’s discretion by taking advantage of his/her superior position, the characteristics of employee cannot be denied because of the absence of these mentioned items (Supreme Court ruling 2004 da 29736, Dec. 7, 2007).

(2) Labor inspector’s criteria for judgment
It was expressed during the proceedings that the labor inspector responsible for this case had a very difficult time determining whether the two store managers should be regarded as employees. Store manager B’s case was especially difficult, because although her status changed from employee to independent contractor, she continued to work a similar job at the same store, and could be interpreted as an employee. However, after looking at the criteria for employee characteristics, he judged that the characteristics as an independent contractor outweighed those for an employee.
“Those characteristics as non-employee include: 1) the store managers chose to sign a sales service contract because it had much better working conditions than the employment contract; 2) the store managers made efforts to increase their income through increased sales, and spent their own money to do so; and 3) the employer had not supervised the store’s business and so the store manager operated the store independently. In considering the aforementioned facts, it was found that there were no subordinate relations between the employer and the store managers.”

5. Conclusion: Company’s Measures
Store managers A and B were determined to be independent contractors by the Ministry of Employment and Labor in the process of investigation for unpaid wages, but as many employee characteristics were identified, it is necessary for employers to take action if they wish to prevent similar labor cases in the near future. Accordingly, companies need to: 1) make a clear decision on whether the store manager shall be treated as an employee or an independent contractor; 2) when entering into a sales service contract for store managers, increase sales commissions and abolish fixed wages to increase the independence of the store manager; 3) introduce a full-coverage outsourcing for branch stores so that the independent contractor has exclusive control of his/her store.