Hire in South Korea with Confidence

Businesses hiring in South Korea should understand the legal distinction between independent contractors and employees. Businesses hiring independent contractors under the guise of employment conditions risk facing court proceedings. Ambiguities in South Korean legislation make companies prone to miscalculations. It is crucial to work with a partner like Worksuite when engaging contractors abroad, in order to establish a compliant and legal hiring framework. 

In the Republic of Korea, whether a worker is considered an independent contractor (독립 계약자, doglib gyeyagja), a dispatched worker (파견 노동자, pagyeon nodongja) or an employee (직원, jig-won), is determined by two aspects:

• Type of agreement
• Court decisions

Disputes concerning the character of work agreements are resolved by Korean labor courts irrespective of an employment agreement type. A court can determine the character of an agreement, taking into account the actual working conditions.

Korean labor laws follow the principles laid down in various international conventions, the country’s Labor and Civil codes. However, they are constantly subject to revision and policy changes. It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors.

Self-employment as an independent contractor is a popular income model for many individuals in the Republic of Korea. According to the OECD, South Korea has the most educated youth in the world – measured by the percentage of people aged between 25 and 34 with a completed tertiary education degree. A significant proportion of the country’s educated youth is involved in manufacturing, consultancy, and IT sectors. Comparatively low costs of labor, combined with a distinctive corporate culture have prompted many Korean professionals to seek opportunities as independent contractors.

In South Korea, independent contractors are protected by the Korean Civil Code. However, disputes between independent contractors and employers are resolved by competent local labor courts. A court decision can be a primary factor determining the essence and character of relations between workers and organizations. As such, labor courts can oblige companies to grant benefits to independent contractors that are not usually granted to them under Korean law.

• Who is an Independent Contractor?

Whether or not an individual can be considered an independent contractor depends on the essence of the relationship between a worker and an organization. According to Korean civil and labor legislation, a worker is considered an independent contractor if they:

• Possess their own equipment, raw materials or tools needed to perform the work
• Can engage third parties to perform the work
• Can manage the business independently;
• Undertake the risk related to profit and loss;
• Withhold personal income tax on their own
• Are not subject to company’s internal guidelines and work schedule
• Do not near exclusively depend on payment from the company, i.e. have other sources of income
• Can provide services to several companies simultaneously

Any individual who carries out an economic activity independently and directly under the provisions of a written freelance contract, is considered an independent contractor. Korean labor legislation does not define different types of independent contractor agreements.

There are two primary engagement models for working with independent contractors in the Republic of Korea.

A. Direct engagement of the worker as self-employed or registered via their own limited company. Under this model, the hiring company engages directly with the independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.

B. Umbrella company. Firms listed as Employers of Record (EOR) in South Korea are often split into two categories, but both are essentially designed to vet and engage freelancers compliantly as either contract employees, or independent contractors on your behalf.

• Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Independent contractors typically get paid upon issuing an invoice on net 30-day terms to the employer at the end of each month unless otherwise stipulated in the contract. Payments are made through direct deposits to their bank accounts or another preferred method stipulated in the contractor agreement. 

Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors. 

Terms, conditions, and frequency of payments can be settled between the contractor and the employer. Currencies other than the South Korean won (KRW) can be used, and they are subject to fluctuating exchange rates, which may have an impact on the contractor’s paycheck.

If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire contractors legally and pay them quickly, accurately, and in a way that complies with South Korean regulations.

Independent contractors in South Korea are responsible for reporting and paying gross personal income tax and mandatory health insurance contributions. Tax filing procedures are handled by the contractors themselves. Tax reports must be submitted online through the HomeTax portal. The following documents are needed for each submission:

• Invoices issued to companies
• Payment receipts
• Receipts for medical expenses, education expenses, insurance payments, donations (whichever is applicable)
• Report of exemption and deduction from wage and salary income (근로소득 공제 및 공제 신고, geunlosodeug gongje mich gongje singo), which can be obtained through the same platform

Gross personal income tax

The Republic of Korea has a progressive taxation system, i.e., a greater tax rate is applied on higher earnings.

In South Korea, independent contractors are also subject to a local income tax, which is 10% of the annual gross income tax. It is automatically deducted from the annual gross income tax and does not have to be filed separately.

Value-added tax

The current VAT rate in South Korea is 10%. Independent contractors who are hired directly by a company from abroad (i.e., not through an employer of record or a staffing agency) are exempt from this tax.

Mandatory health insurance

All Korean residents must have health insurance. 3.495% of a contractor’s monthly income is automatically deducted and charged by the National Health Insurance Foundation at the end of each month from a contractor’s bank account. Private insurance companies apply different payment rates and procedures.