Global businesses have long had their eyes on Korea. According to the latest World Bank annual ratings, the country is now ranked number 4 among global economies for ease of doing business.Business-friendly policies, leading technological and digital infrastructure and unparalleled education system investments highlight its emergence as a top target for global expansion and investment.
For businesses targeting Korea and potential peripheral opportunities in this fast-growing Asian markets, this article gives insight into a key expansion consideration. Namely, understanding the workforce and associated labor issues around employing local staff.
Based on statistics from Korea’s Ministry of Employment and Labor (MOEL), there are approximately 27.2 million economically active people, with an employment rate of 66.1% based on the Organization for Economic Cooperation and Development (OECD) standard. The overall unemployment rate per OECD was 3.7% as of December 2016.
Labor and business policies have established the minimum wage for 2017 at 6,470 Korean Won (KRW) per hour, or approximately $5.92 USD per hour, a 7.3% increase from the previous year. The Labor Standards Act also provides for a 50% wage premium for overtime.
Korea is taking measures to address its growing labor shortage
As an employer in Korea, one of your biggest challenges will be ensuring you have an adequate supply of manpower. The market’s attractiveness is not lost on the global business community. And with the rapid rise of innovative electronic, superconductor and auto manufacturing companies – plus a still-strong presence of family-run businesses, competition is high for talent. Practically, Korea’s fertility rate was 4.5 children per woman in 1970, which plummeted to 1.21 by 2014, the lowest of any OECD country. Sheer worker availability is compressed further by an aging population; 14% of Koreans will reach age 65 by 2019, and 20% between 2026 and 2030. These factors combine to heighten the country’s demand for workers. Promising, however, is that Korea is gradually introducing policies to relax its strict controls on immigration to attract foreign workers.
According to a recent article, 960,000 foreigners currently working in Korea. This includes 480,000 nonprofessional workers. Among that number, Korea granted regular work permits to 260,000 unskilled from Vietnam, Thailand, Cambodia, the Philippines, Indonesia and other Asian nations. These unskilled laborers generally work in agriculture and at small to midsized manufacturers. The promising Employment Permit System has accelerated the influx of foreign workers and, proportionally, Korea outpaces Japan in terms of welcoming foreign talent.
Korea has enacted legislation to attract foreign nationals of Korean ancestry to work there. The Special Case EPS allows designated businesses or workplaces to hire those who qualify under H-2 visas after their entry into Korea. After they complete a required multi-day training course on living and working in Korea, they may freely search for employment.
Korea’s Act of Foreign Workers Employment
Eligibility and processes for employing foreign employees in Korea are outlined in Korea’s Act of Foreign Workers Employment (Act). According to the official Act (translated in English), “The purpose of this Act is to achieve the smooth supply and demand of manpower and the balanced development of the national economy by systematically introducing and managing foreign workers.” The Act shall apply to foreign workers and businesses or workplaces which employ or intend to employ foreign workers (excludes seamen who work on board any ship).
According to the Act, the Foreign Workforce Policy Committee (FWPC) provides oversight and enforces provisions in the act. The FWPC oversees matters concerning the types and size of businesses eligible for the introduction of foreign workers as well as matters concerning the designation and cancellation of a country entitled to send foreign workers (sending country).
For global businesses considering expansion and employment of foreigners, the following Procedures outlined in the Act are worth noting:
- An employer who intends to hire a foreign worker shall first submit an employment announcement seeking native workers to an Employment Security Center.
- The Minister of Labor prepares a roster of foreign job seekers in consultation with the head of the government agency in charge of labor administration in a sending country.
- A Korean Language Proficiency Test is administered to determine who is eligible for the roster of foreign job seekers. Additionally, the Minister of Labor may assess eligibility requirements which conform to manpower demand, such as level of skills, if necessary to be used as criteria for selecting qualified foreign job seekers.
- Eligible foreign workers may apply for a work permit (the application is valid for 3 months).
- Employers who have been approved to employ a foreign worker must execute an employment contract with the foreign employee. The initial term of the employment contract is not more than one year.
- Once an employment contract is signed, the employer needs to obtain the appropriate visa for the worker. There are 36 types of visas, including 4 types of business visas. These include Temporary business visas (C-3 visas), intra-company transfer visas (D-7 visas), corporate investments visas (D-8 visas) and trade management visas (D-9 visas). The D-7 visa is the most common visa for a foreign national.
- Employment training of foreign workers is required as prescribed by the Act.
Employment Management of Foreign Workers under the Act
If you employ foreign workers in Korea (employer) you are subject to several requirements under the act. All employers must adhere to the following regulations.
- Departure guarantee insurance: employers shall take out insurance or trust with the foreign workers as the insured or beneficiaries in order to provide severance pay to foreign workers due to causes such as the departure, etc. of the foreign worker. Such insurance is deemed a severance pay system pursuant to Article 8 of the Employee Retirement Benefit Security Act.
- The employer must provide health insurance to all employees.
- A foreign worker shall take out return cost insurance or trust in order to finance the costs of returning to his/her home country once the employment contract has ended.
- An employer shall take necessary measures, such as paying wages owed if foreign workers return to their home country due to the termination of employment.
- Employers shall report the termination of all foreigner employment contracts to the head of an Employment Security Agency.
- Under normal circumstances, the employment contract may be extended not to exceed 3 years of continuous employment. At the conclusion of the 3-year period, the foreigner must leave Korea for 6 months or longer before being eligible for further employment.
- Work visas may be canceled due to any of the following circumstances
- an employer received employment permit or special employment certificate in false or other fraudulent ways
- an employer has violated wages or other labor conditions promised in a contract
- Minimum leave and observance of public holidays must be provided to employees.
Payroll Tax Considerations
Determining the resident status is not based on an individual’s nationality or permanent residency. An individual who does not fall under the definition of Resident is deemed a “Non-Resident of Korea”. This is an important designation as, generally, a non-resident is taxed on his/her income derived from sources within Korea. Whereby for residents, the tax is imposed on the sum of all Korean-sourced and outside income. The tax rate for Non-Residents is the same as that for Korean Residents. Income tax rates range from 6% to 22% on a graduated basis.
Employers must withhold and pay income taxes at an amount as shown on the “Simplified Tax Withholding Table”, according to the Tax Guide for Foreign Taxpayers in Korea on Korea’s National Tax Service website. A year-end tax settlement should be completed for each employee by the withholding agent by the end of February.
Even foreign employers are required to ensure all employees for five social insurance programs.
- National pension (9% total) – 4.5% from employer; 4.5% from employee *
- Health insurance (5.8% total) – 2.9% from employer; 2.9% from employee *
- Long-term care insurance – 6.55% of health insurance premium amount
- Employment insurance – 1.35% to 1.95% paid in full by employer **
- Industrial accident insurance – rate varies depending on industry **
* tax basis is earned income (excluding non-taxable income)
** tax basis is total income
Employment considerations and the Blueback advantage
Korea will continue to introduce growth measures that improve its global attractiveness. Considering its economic vibrancy and trajectory, companies are wise to plan toward integrating and expanding operations to this market. But while opportunities abound and a friendly business climate exist, this does not mean that expansion or hiring initiatives lack complexity. The team at Blueback Global stays at the leading edge of legal, regulatory and employment-related developments. Our advisory practice takes the challenge out of your internal management of employment, compensation, benefits, disputes and HR policy.
Connect today and find how our depth of knowledge and proven, the in-market experience can elevate your results in the Korean market.