Compandben’s Partners in South Korea, as with most of our International ‘Payroll Partners’, are qualified accountants who interact with us to provide detailed advice and a full range of Employment Services for companies undertaking business and employment in their country. The information which follows has been provided by our Korean Partner with whom we have been associated for over 8 years.
EMPLOYMENT IN KOREA
1. If a company has 10 or more employees in Korea its working conditions need to be documented in a “Rule of Employment” and this has to be filed with the Labor Authority as per the “Labor Standard Act”. Either one “Rule of Employment” or different “Rules of Employment” by working type or occupation type are allowed. The Employer can prepare its own “Rule of Employment” but is obliged to hear opinion from half the employees at least or get consent in the case where an amendment will lead to worse working conditions.
2. Established companies need to pay a Retirement allowance of 30 days average wage in Korea which is set by the Labor Standards act. This mandatory retirement allowance should be paid in cash when employment is terminated no matter what the reason is for termination. If employer and employee agree to pay more than this basic amount, the multiplier must be stipulated in the internal bylaw.
3. Again for established companies, for directors, a separate internal bylaw is needed, and is subject to a resolution of the General Meeting of Shareholders because the Labor Standard Act is not applied.
4. The South Korean government is encouraging companies to switch from retirement allowances to retirement pension because retirement allowances are typically spent before employee’s later years. Defined benefit (DB) or defined contribution (DC) are two types offered in retirement pension.
5. Newly formed companies (mergers or spinoffs are excluded) after July 25, 2012 are obliged to establish a Defined Benefit Retirement Pension Plan or Defined Contribution Retirement Pension Plan within one year after formation of the business. The old “Retirement allowances” are henceforth excluded.
6. For the state National Pension – social security – 4.5% of salary is borne by employee and another 4.5% of salary is borne by the company as contribution to National Pension. There is a ceiling to NP contributions. Maximum salary is KRW 3,750,000 in calculation of NP and maximum NP contribution is now KRW 168,750 for both employee and employer (maximum salary KRW 3,750,000 * 4.5% each).
7. Apart from the National Pension the MANDATORY “add on” for employer social charges is around 5.7% of gross salary. This will include National Health Insurance, Long-term Recuperation Insurance, Worker’s compensation Insurance and Employment Insurance. So by the time private pensions are added, the total EMPLOYER “add on” for social charges is about 18% of gross salary but actual amount is less than this as there is a “ceiling” of KRW 168,750 per month above which pension contributions are not required.
8. Additional medical coverage is not common in local companies because Korea’s social security scheme covers medical treatment. Additional medical coverage using private insurance is commonly provided for foreign companies in Korea because local worker’s compensation insurance doesn’t cover accidents not related with job. When private insurance is provided to employees, any insurance premium over KRW 700,000 per year, paid by employer, is taxable income.
9. Taxes and social security charges are deducted through the monthly payroll. Payment of individual income tax and social security charges withheld is due by 10th day of following month.
10. Employment contract can be in English.
11. Payroll administration companies normally do the calculation of taxes and social security charges and net pay and produce a pay slip. Payment of salary by the employer is common but the payroll administration company can assist in payments of the employee/tax authorities/social security authorities through their company bank account.
12. Payment of salary is normally monthly. Semi monthly payments, common in USA, are almost unheard of and 25th is commonly chosen as payday, which will cause 5 or 6 days advance payment.
13. Non-taxable income is an area most employees want to know about. Meal allowances, Child upbringing allowance and Car allowances are commonly referred as non-taxable income. In order for non taxable elements to be paid as such, the allowances must be shown separately.
14. Some allowances that are paid to compensate expense incurred like car allowance may be excluded from the wage, which will cause their exclusion from calculation for the mandatory retirement allowance too. The Employer should inform employee of this problem when separation of allowances is requested.
15. To avoid cash payment for untaken annual paid leaves, no carry-over of unused annual paid leaves must be permitted, To ensure this the Employer must take action as follows;
a) Employer must urge employee to request annual paid leave using the official form by noting to employees the no of days of the unused annual paid leaves six months before the last day of annual leave period.
b) If and when there is no reply from the employee within 10 days, employer must notify the time schedule for the use of annual paid leaves decided by employer two months before the end of leave period.
16. As in most countries if a company is carrying on a profit making business there should be at least a Branch of the company opened in Korea. When first starting up in a country however many foreign employers prefer to just register for Social Security as a foreign entity, with the employee being responsible for the good conduct of the company in Korea. As long as the employee does not have power to conclude business and sign deals, then his work may be represented as being merely market prospecting and establishment of Liaison (Representative) Office may be considered. Obviously if the company expands then it becomes more necessary to open a Branch to permit normal operations. A Branch will be subject to corporate profits tax- a way to minimize this is to reward the branch on a commission or “cost plus” basis so that the Branch revenue just covers the Branch costs. Again usually the “Payroll Partners” -who are also qualified accountants – will be happy to give advice on this aspect.
TERMS AND CONDITIONS OF EMPLOYMENT – SOUTH KOREA
30 days’ advance notice of dismissal is required for employer by Labor Standard Act. However, advance notice is not required for employee. If there is a dispute and the employee claims that the termination is unreasonable, ex gratia payments of 2-4 months’ salary are found.
1) Basic is 15 days for employee who completes service more than 80%. Maximum is 25 days. For every 2 years’ service, not counting the first year, it increases by one day.
2) For employee who is in first year’s service or for an employee who doesn’t complete service more than 80%, one day for completion of one month service is given.
IMPLEMENTATION OF A PAYROLL IN SOUTH KOREA
Under the relevant Korean Law, wage income which is received or accrued in a foreign currency from a foreign employer outside Korea for services rendered in Korea is classified as Class B earned income. The employer is not required to withhold Korean taxes on Class B income at the time of payment. Instead, the individual is required to declare this income annually by filing the global income tax return by May 31 of each year and pay income taxes thereon on a voluntary basis. Alternatively, the individual may elect to pay Class B income taxes through a voluntary Class B taxpayers’ association, which collects and remits such taxes on a monthly basis for and on behalf of the individual.
Taxpayers, who join the Class B taxpayers’ association and meet the monthly payment obligations, receive a 10% reduction in the amount of income tax payable.
Assuming that the Korean employees will report their income through the Class B taxpayers’ association, the Compandben Korea Partner (or any other professional accounting firm) may provide the following services relating to the monthly reporting of his personal employment income through the Class B taxpayers’ association.
1. Initial setup service
• Prepare necessary documents and arrange participation of the employees in the Class B taxpayers’ association.
2. Monthly service
• Liaise with the Class B taxpayers’ association for and on behalf of the
• Korean employee for arranging monthly payroll tax withholding and tax payment.
Contact Compandben or visit Compandben Main Website – Payroll/ Employment – South Korea for more information.