Can Unregistered Executives Be Considered Workers? Worker Status Criteria and Practical Response Guide | Atlas Legal

1. Why Are Worker Status Disputes for Unregistered Executives Increasing?

Recent Surge in Worker Status Disputes

There has been a recent surge in cases related to worker status determination in South Korea. In March 2024, the Supreme Court ruled that agency caregivers are employees under the Labor Standards Act. The Busan District Court ruled that professional soccer youth coaches are also employees. The Gyeongbuk Regional Labor Relations Commission determined that silver instructors are employees under the Labor Standards Act.

These worker status disputes apply equally to unregistered executives. Cases are increasing where unregistered executives claim unused annual leave allowances, severance pay, and relief from unfair dismissal upon resignation. While companies argue that executives are not employees, courts make determinations based on the substance of the relationship.

Atlas Legal’s Advisory Experience

Atlas Legal has successfully advised on various unregistered executive contracts, including research directors at small and medium-sized manufacturing companies, business division managing directors at large corporations, and CFOs at startups. Based on this experience, we provide detailed guidance on criteria for determining worker status of unregistered executives and practical response strategies.

Core Issues in Disputes

The most important issue in worker status disputes for unregistered executives is whether the executive has business execution authority as an employer under the Commercial Act, or is an employee subject to the CEO’s direction and supervision. This determination decides whether all provisions of the Labor Standards Act apply.

2. What Are the Basic Principles for Determining Worker Status?

Supreme Court’s Employment Subordination Relationship Criteria

Article 2, Paragraph 1 of the Labor Standards Act defines an employee as “a person who provides labor to a business or workplace for the purpose of wages, regardless of the type of occupation.” The Supreme Court established the concept of employment subordination in its 2006 cram school instructor decision (Supreme Court Decision 2004Da29736, decided December 7, 2006).

This precedent organized the core criteria for determining worker status into three categories. First, the actual relationship must be examined rather than the form of the contract. Second, it presented 10 criteria for determining employment subordination. Third, factors arising from the employer’s superior economic position should not be given high weight in determining worker status.

The 10 Criteria

The employment subordination determination criteria presented by the Supreme Court are as follows:

Related to Personal Subordination:

• Whether the employer determines the work content
• Whether employment rules or service regulations apply
• Whether the employer exercises considerable direction and supervision during work performance
• Whether the employer designates working hours and workplace and the worker is bound by them
• Whether the service provider owns equipment, raw materials, or work tools or hires third parties to perform the work independently
• Whether they bear the risk of profit creation and loss occurrence through service provision

Related to Economic Subordination:

• Whether the compensation is remuneration for the labor itself
• Whether basic or fixed salary is determined
• Whether income tax is withheld at source
• The existence and degree of continuity in the service provision relationship and exclusivity to the employer
• Whether recognized as an employee under social security system laws

Principle of Substance Over Form

Courts determine someone as an employee if employment subordination is substantively recognized, even if the contract states “mandate contract” or “service contract.” Conversely, even if an “employment contract” is executed, if independent work performance and management participation are substantively recognized, the person may not be an employee.

3. Legal Status Differences Between Registered and Unregistered Executives

Legal Status of Registered Executives

Registered executives have authority and responsibilities defined by the Commercial Act. As they are entrusted with certain affairs from the company, worker status is generally denied unless there are special circumstances. They are not viewed as employees who provide labor under the employer’s direction and supervision and receive wages. Since they are legally granted authority to participate in the company’s major decision-making body, the board of directors, and participate in company management with commensurate authority and responsibility, they are not seen as employees in an employment subordination relationship.

Legal Status of Unregistered Executives

Unregistered executives are not granted authority and responsibility under the Commercial Act and perform roles similar to middle managers. In such cases, they are likely to be determined as employees who actually engage in labor under the direction and supervision of those with business execution authority.

Seoul Southern District Court Decision 2003Gahap6980 (decided April 22, 2004) stated: “An unregistered director whose position as director is formal and nominal, who continues to handle work in their assigned department under the CEO’s direction and supervision, and who receives fixed monthly salary and bonuses as compensation, constitutes an employee under the Labor Standards Act.”

Cases Where Worker Status Is Recognized Even After Registration

Supreme Court Decision 2002Da64681 (decided September 26, 2003) ruled: “Even after being appointed as a registered director from an unregistered director, if they continued the work they had been handling in an employment subordination relationship with the CEO in addition to director mandate duties under the Commercial Act, they constitute an employee under the Labor Standards Act.” This shows that the substance of the work relationship is more important than whether someone is registered.

4. Does Having Executive Authority Mean Someone Is Not an Employee?

Meaning of Business Execution Authority

Supreme Court Decision 92Da28228 (decided December 22, 1992) ruled: “Directors and other executives with business execution authority are entrusted with handling certain affairs from the company, so unless there are special circumstances, they are not in an employment relationship where they provide fixed labor under the employer’s direction and supervision and receive predetermined wages, and thus cannot be considered employees under the Labor Standards Act.”

Business execution authority means the power to make important decisions regarding the company’s management or business operations and to implement those decisions. This goes beyond simply giving instructions or supervision and means authority to substantially influence the company’s decision-making process or to be ultimately responsible for and carry out those decisions.

Specific Scope of Business Execution Authority

Even unregistered executives may have their worker status denied if they substantially exercise the following business execution authority:

• Budget Execution Authority: Authority to independently execute and approve company budgets
• Personnel Authority: Authority to decide on hiring, promotion, and discipline of subordinate employees
• Approval Authority: Authority to finally approve contracts or expenditures of considerable scale
• External Representation Authority: Authority to represent the company externally and conclude contracts

Case Recognizing Worker Status of Plant Manager

Supreme Court Decision 2000Da22591 (decided September 8, 2000) ruled that when a Pyeongtaek plant manager was promoted to director but continued to go to the plant daily to perform the plant manager duties they had been doing before, receiving fixed compensation, they constituted an employee under the Labor Standards Act.

This decision shows that even if the title is “director,” if they actually provided fixed labor under the direction and supervision of the CEO or employer with business execution authority, they can be recognized as an employee.

Atlas Legal’s Advisory Points

When advising on unregistered executive contracts, Atlas Legal clearly defines the scope of business execution authority. We specifically examine: (i) position in the organizational chart and reporting system, (ii) scope of approval authority in the delegation of authority regulations, (iii) whether personnel authority and budget execution authority are actually exercised, and (iv) whether they participate in and exercise voting rights at board meetings or management meetings, to prevent worker status disputes.

5. How Does Preferential Compensation and Treatment Affect the Determination?

Significantly Preferential Compensation

Generally, working conditions are strictly distinguished between regular employees and directors, and such distinguished working conditions carry significant weight in determining worker status.

Seoul High Court Decision 2014Na2035394 (decided May 27, 2015) and multiple other precedents state: “According to employment rules and executive personnel regulations, the status of executives and other employees is strictly distinguished. When appointed as an unregistered executive from a regular employee, they are considered to have retired as an employee and are paid retirement benefits. Unregistered executives receive much higher executive compensation and retirement benefits than employees, and all treatment including welfare benefits is provided equivalent to registered executives,” thereby denying worker status.

Korea Aerospace Industries (KAI) Managing Director Case

Seoul Central District Court Decision 2023Gahap72217 (decided November 1, 2024) denied worker status for KAI’s overseas sales unregistered executive (managing director). The court stated: “The service years allowance payment rate under the executive retirement benefit payment regulations is at least three times higher than regular retirement benefits, and the annual salary of 300 million won is two to three times that of other employees,” citing this as an important basis for denying worker status.

Differentiated Treatment

Precedents consider the following differentiated treatment as important factors in determining worker status:

• Monetary Treatment: Annual salary 2-3 times higher than regular employees
• Vehicle Support: Dedicated vehicle and driver provided
• Work Space: Private office and secretary support
• Welfare Benefits: Golf memberships, premium health checkups, high corporate card limits
• Business Promotion Expenses: Considerable entertainment and travel expenses
• Retirement Benefits: Executive retirement benefit regulations applied (2-5 times higher than regular employees)

Important Considerations

However, Supreme Court Decision 2004Da29736 (decided December 7, 2006) ruled: “Circumstances such as whether basic or fixed salary is determined, whether income tax is withheld, and whether recognized as an employee under social security system laws can be arbitrarily decided by the employer using their economically superior position, so worker status should not be easily denied solely because such circumstances are not recognized.”

6. Why Is a Separate Executive System Important?

Independence of Executive System

Precedents importantly examine whether executives are classified and treated differently from employees within the company to determine worker status. Operating a personnel system where executives and employees are clearly distinguished serves as strong evidence for denying worker status.

Specific Distinguishing Factors

Distinguishing factors between executives and employees that courts consider important include:

Contract Form:

• Executing “executive contract” with term specified rather than employment contract
• Contract clauses specifying mandate relationship

Personnel Regulations:

• Excluding application of employment rules and service regulations applied to regular employees
• Operating separate regulations on executive appointment, dismissal, compensation and treatment

Working Conditions:

• Excluding payment of overtime allowances or annual leave allowances
• Granting different autonomy from employees regarding commuting times, workplace, vacation use

Retirement Processing:

• Processing as retirement when appointed as executive from regular employee and settling retirement benefits
• Applying separate executive retirement benefit regulations

7. What Do Comprehensive Authority and Independent Work Performance Mean?

Core Criteria for Unregistered Executives

Supreme Court Decision 2012Da10959 (decided November 9, 2017) ruled: “When an executive of a large company is specially appointed to manage business in a professional field, oversees and takes responsibility for that business, operates it independently, participates in management decision-making for the company like registered directors, and receives differentiated treatment from regular employees, whether they handle affairs entrusted by the company should be determined.”

This clarifies that the most important factors in determining worker status of unregistered executives are “whether they were comprehensively entrusted with and oversaw all business in a functionally separated specific professional field” and “whether they were in a position to handle business based on considerable independent authority and responsibility.”

8. Does Income Tax Withholding Alone Make Someone an Employee?

Limited Consideration of Social Security Systems

Supreme Court Decision 2004Da29736 (decided December 7, 2006) ruled: “Circumstances such as whether basic or fixed salary is determined, whether income tax is withheld, and whether recognized as an employee under social security system laws can be arbitrarily decided by the employer using their economically superior position, so worker status should not be easily denied solely because such circumstances are not recognized.”

Practice of Withholding in Practice

There exists a practice of withholding as earned income even for executives to facilitate income deductions and welfare benefits. Therefore, worker status cannot be recognized based solely on the fact of income tax withholding.

Seoul High Court Decision 2014Na2035394 (decided May 27, 2015) and Seoul Eastern District Court Decision 2015Gahap108602 (decided June 7, 2016) ruled to this effect.

9. Practical Considerations When Drafting Executive Contracts

Drafting Clear Executive Contracts

When advising on unregistered executive contracts, Atlas Legal clearly stipulates the following:

Nature of Contract:

• Specify as “mandate contract” or “executive contract”
• Clearly state it is not an employment contract
• Specify rights and obligations under civil mandate relationship

Term and Renewal:

• Set clear term (e.g., 2 years)
• Whether automatic renewal upon term expiration
• Grounds and procedures for mid-term dismissal

Duties and Authority:

• Specify organization or business division to oversee
• Specific scope of business execution authority (budget, personnel, contract conclusion, etc.)
• Specify approval authority in delegation of authority regulations
• Participation in and voting rights at management meetings or board of directors

Compensation and Treatment:

• Compensation system clearly distinguished from regular employees
• Specify application of executive retirement benefit regulations
• Welfare benefit items (vehicle, golf membership, etc.)
• Specify non-payment of overtime allowances, annual leave allowances, etc.

10. FAQ

Worker status for unregistered executives in South Korea is determined by the substance of the relationship rather than the form of the contract. Atlas Legal has successfully advised on unregistered executive contracts across various industries, helping companies prevent executive-related disputes and establish systematic personnel management systems.

When appointing executives, worker status disputes can be prevented through: (i) drafting clear executive contracts, (ii) establishing personnel regulations distinguishing from employees, (iii) maintaining consistency in actual operations, (iv) granting independent business execution authority, and (v) providing significantly preferential treatment.

Particularly when dismissing or disciplining executives, the executive’s worker status must be legally reviewed in advance. If determined to be an employee, dismissal may be invalidated as unfair dismissal, so lawful procedures should be followed with expert consultation.