I. Conclusion
Many companies fail to accurately distinguish between executives and employees.
Despite being formally registered as an executive of a stock company, there are numerous cases where individuals claim to be "employees" and report the company's CEO for not paying their salary or file a lawsuit to invalidate their dismissal.
In companies, when it comes to issues like non-payment of compensation, the company's representative may not distinguish between executives and employees. As a result, cases of non-payment of executive salaries are often punished similarly to non-payment of employee wages.
It is crucial for company managers and those working at companies to know whether they are "executives" or "employees."
1. Executives
Executives have a delegated relationship with the company.
Registered executives (directors) are appointed by the general meeting of shareholders and can be dismissed without any particular reason by a special resolution of the general meeting of shareholders (however, registered executives can claim compensation for damages if they are dismissed without a valid reason before their term expires).
| Commercial Act Article 385 (Removal) (1) A director may be removed from office at any time by a resolution adopted at a general meeting of shareholders under Article 434: Provided, That where the term of office of a director has been determined and his/her removal is made without good cause before the expiration of his/her term of office, he/she may file a claim for damages caused thereby against the company. (2) If the removal of a director is rejected at a general meeting of shareholders, despite the director having engaged in inappropriate activities or any grave fact in violation of any statute or the articles of incorporation in relation to the performance of his/her duties, a shareholder who holds no less than three percent of the total number of issued and outstanding shares may request the court to remove the director, within one month from the date of adoption of the above resolution by the general meeting of shareholders. <Amended on Dec. 28, 1998> (3) The provisions of Article 186 shall apply mutatis mutandis in cases falling under the preceding paragraph. |
Registered executives can receive compensation only when there is a provision in the company's articles of incorporation or a resolution from the shareholders' general meeting.
| Commercial Act Article 388 (Remuneration for Directors) If the amount of remuneration to be received by directors has not been determined by the articles of incorporation, such amount shall be determined by a resolution of a general meeting of shareholders. |
Many companies mistakenly draft employment contracts and pay compensation to registered executives (including CEOs). If they create employment contracts and receive compensation, they may later have to return it to the company as unjust enrichment and be punished for embezzlement in the course of business.
Non-registered executives are appointed by a mandate contract. According to the Civil Act, a company can dismiss non-registered executives at any time (however, they may claim damages depending on the circumstances if the contract is terminated at an unfavorable time without a compelling reason).
| Civil Act Article 689 (Right to Terminate Mandate by either Party at Will) (1) Either party may at any time rescind a contract of a mandate for the future. (2) If one of the parties rescinds a mandate for the future without any inevitable reasons when it would be unfavorable to the other party, he shall compensate the other party for any damages occasioned by such rescission |
The majority opinion is that Article 388 of the Commercial Act does not apply to the compensation of non-registered executives. Therefore, the method for determining the compensation of non-registered executives can vary, including through the general meeting of shareholders, board of directors, and contracts with the company.
2. Employees
Employees are subject to strict dismissal procedures and criminal penalties if they do not receive wages or severance pay.
3. Criteria for distinguishing between executives and employees
The criteria for distinguishing between executives and employees depends on whether the person in question is subject to the company's command and supervision.
The Supreme Court has ruled as follows (refer to the Supreme Court's decision on November 9, 2017, case number 2012다10959):
Even if a person is an executive of a company, if the nature of their work is not merely about handling tasks delegated by the company and they actually perform specific duties under the command and supervision of an executive director with decision-making authority, receiving a fixed salary as compensation for their work, they can be considered an employee as defined by the Labor Standards Act.
However, if the overall nature of the tasks and the substance of the work performed by the executive do not merely involve providing a certain amount of labor under the user's command and supervision, it is difficult to regard them as an employee under the Labor Standards Act, as they hold a position to handle delegated tasks.
In particular, if an executive of a large company is specially appointed to manage tasks in a specialized field, takes overall responsibility for the tasks, operates independently, participates in decision-making for the company's management like a registered director, and receives differentiated treatment from general employees, it is necessary to thoroughly consider the specific circumstances of appointment, tasks, and treatment to determine whether they are handling tasks delegated by the company (refer to the Supreme Court's decision on November 9, 2017, case number 2012다10959).
4. Conclusion when deemed as a non-registered executive
In the case of non-registered executives, the company can terminate the delegation contract with A at any time, according to Article 689, Paragraph 1 of the Civil Law.
II. Description of the Case
(The following is an adaptation of the Seoul High Court's ruling on September 21, 2022, in case number 2021나2044662. There may be differences from the actual case.)
A is a person registered as an auditor for the Korean branch of a Taiwanese company, Corporation X.
A signed an employment contract with Corporation X. The employment contract states that the annual salary is 1% of the revenue, and the specific details follow the Korean Labor Standards Act.
The representative director of Corporation X, Y, is a Taiwanese national who resides in Taiwan and did not frequently visit Korea.
One day, Corporation X unilaterally notified A of their termination.
A filed a lawsuit against Corporation X claiming the termination was invalid, arguing that 1) they were an employee, and 2) the termination was invalid since the company did not follow the procedures under the Labor Standards Act.
The following facts were revealed in court:
① The Taiwanese corporation had local branches not only in Korea but also in Hong Kong, Singapore, Thailand, Malaysia, and Japan. Y appointed General Managers like A for each of these local branches. Since Y resided in Taiwan and had to oversee multiple local branches, it was necessary to delegate authority to the General Managers and operate the local branches through them, instead of exercising direct control and supervision over the daily management and administrative tasks. In fact, the Korean branch, Corporation X, operated in this manner.
② In particular, it can be said that areas such as production and supply contracts with Korean companies, promotions, and member management were difficult for Y to directly control and supervise due to the local circumstances, laws, and systems of the local branches. In these areas, A made independent business decisions suitable for the Korean market. Especially in the area of member management, which can be considered a core aspect of Corporation X's business, the changes in positions and disciplinary measures within the multi-level organization for general members, excluding some high-ranking members, were carried out with A's approval alone. It appears that A was granted extensive discretionary authority from Y in the area of member management. Of course, it is acknowledged that Y gave specific instructions regarding product selection and pricing decisions for Corporation X. However, as a multinational corporation, X needed to maintain a consistent brand image and pricing across its local branches, which led Y to be directly involved in the specifics of product selection and pricing decisions, unlike in daily management and administrative tasks.
③ Although A reported the progress of departmental tasks in Corporation X to Y via email every week, it is difficult to evaluate this as a significant indication of Y's control and supervision over A's work process beyond the level of reporting on delegated tasks. Furthermore, A visited Taiwan to obtain Y's approval on matters such as sales promotion plans, tax-saving measures, and building purchases; however, considering the importance and frequency of these matters, it is difficult to conclude that A was constantly subject to Y's control and supervision in other matters based solely on these circumstances.
④ As the General Manager of Corporation X, A independently exercised authority over employee recruitment, evaluation, promotion, dismissal, and attendance management, and it is difficult to find any evidence of additional approval or intervention by Y in these personnel-related matters. In particular, some employees of Corporation X did not object to A's dismissal directives, which suggests that A had the authority to dismiss employees without Y's approval.
⑤ In this case, the employment contract defines A's position as the 'General Manager (President)' and entrusts A with 'all authority to operate Corporation X's business and all tasks related to X's business in Korea.' As previously mentioned, the authority A received from Y regarding daily management and administrative tasks is consistent with A's position and authority as defined in the employment contract.
⑥ There are significant differences between A and other employees of Corporation X in terms of remuneration, contract content, and working hours. In particular, regarding remuneration, A receives a monthly bonus equivalent to 1% of X's monthly sales. Considering the calculation method and amount of the bonus, the nature of the bonus A receives is more strongly characterized as a compensation or benefit distributed based on management performance or job performance as an executive, rather than the objective nature of labor itself.
III. Court's Judgment
A is an executive who has been delegated daily management and administrative tasks of Corporation X and is not a worker subject to the Labor Standards Act. Therefore, even if the employment contract in this case stipulates the application of the Labor Standards Act, the Labor Standards Act regarding dismissal does not apply to A. Since the employment contract in this case does not specifically provide for termination reasons and procedures, Corporation X can terminate the delegation contract with A at any time according to Article 689, Paragraph 1 of the Civil Act.
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