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Independent Contractors, Employees, and Risk of Recharacterization

Independent contractor or employee? Risks of changing status in China, Japan, and Korea 

Around the world, companies are increasingly turning to independent contractors – as the on-demand sharing economy grows in importance and scope. This growth, however, is not without risk, and where independent contractors are “re-characterized” as employees, litigation can increase where companies aren’t careful to comply with all local regulatory requirements. Notably, there are many similarities between countries when defining what an employee and independent contractor is. In this article, we seek to explain how re-characterizations can take place in China, Japan, and Korea. 

The differences between Independent Contractors and Employees 

Employment contracts are agreements whereby one person works, for pay, for another, under their supervision. Whereas an independent contractor organizes their own workload and is not subject to the authority of another. Actions and not contractual provisions primarily determine whether a person is subject to the authority of another. 

When changing status of a person from employee to contractor, or vice-versa – legal implications result in, for example, a change in tax status, social security benefits and work rules, among other things. 

Recharacterization risks in Japan, China, and Korea 

China 

In China, no specific regulations distinguish between independent contractors and employees.  

Re-characterization of independent contractors as employees is subject to a national regulatory criterion and developed by local courts. People with established employment relationships with an employer are protected by labor laws as an employee, but service relationships with companies are reflective of a contractor relationship. 

Some people seek employee status via the filing of labor arbitration requests requesting confirmation of the relationship. Where a re-characterization takes place, labor protections then inure to that person.  Contractor relationships, however, are bound by civil laws. 

Companies, therefore, must ensure they carefully structure independent contractor agreements.  To avoid re-characterizations of independent contractors to employees, agreements must reflect different work requirements than those contained in employment contracts. Contracts should, therefore, reflect that the company does not have much management or control of independent contractors to avoid formation of a subordinate relationship characteristic of employer-employee relationships. 

Employers should act in good faith and not willfully evade their liabilities to employees by creating false contracts for service. Should they do so, it’s likely those individuals subject to the contracts with be re-characterized as employees by labor arbitrators and judges in the event of a dispute – subjecting companies to liability. 

Japan 

Japan actively seeks to promote a stable, permanent employment economy via legal and administrative intervention. Employees in Japan are, therefore, the beneficiaries of strong protections against dismissal and employers must ensure they avoid inadvertently become bound by an employment relationship by complying with laws and ordinances designed to help avoid such a circumstance. 

To avoid inadvertently creating an employment relationship, ensure you have a clear agreement detailing the purpose and content of the service to be provided. Any instructions or requirements of the role must avoid daily contact between employers and independent contractors about work requirements. 

Contracts should clearly indicate how responsibilities are divided between the parties. All work communication should be conducted in writing to avoid daily communication – which is difficult to distinguish from a supervisory role characteristic of employment relationships. 

When independent contractors work at the same site as the company – someone must oversee their work and divide workspace and clarify division and the independence of the contractor. 

Workers can seek confirmation of their status through judicial means including lawsuit, labor tribunal action or arbitration. 

Korea 

Companies face risks in Korea under the Labor Standards Act (LSA) when essential functions are performed by independent contractors. This risk increases when an independent contractor’s primary source of income is generated from one company and where significant control over the contractor’s work is imposed. 

It is imperative, therefore, that companies understand and comply with the LSA in making determinations about whether a worker is an employee or contractor – and the structure being utilized to create each status.   

Carefully drafted agreements will minimize risks to the company in the areas of tax, compliance, and payroll, among others. These factors are variously interpreted by Korean Courts in a manner which requires employers to exercise caution to avoid adverse judgements under the LSA which may result in recharacterization. 

GoGlobal Asia can help you navigate recharacterizations 

Each case of employee or independent contractor recharacterization requires a careful assessment prior to acting. GoGlobal Asia can help make quick and accurate determinations of the most suitable employment conditions for any circumstance. With our deep understanding of relevant local regulations and practices, we can ensure your organization is safely navigating any local regulatory environment. 

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