Hello, this is Joong-hae Choi from Cheongchul Law Firm.

Wages are generally contracted based on pre-tax income. However, in some industries, including hospitals, it is more common to contract based on post-tax income, known as ‘net contracts’. In such contracts, the goal of both parties is to confirm the amount deposited into the employee's bank account, and it is quite common to include the severance pay in order to maximize that amount.

However, such contracts can lead to unexpected complex issues concerning severance pay, the four major insurances, and year-end tax settlements.

First of all, according to our country's laws, it is generally not permitted to include severance pay in wages. The Supreme Court has stated, “The claim for severance pay arises only upon the termination of the employment relationship, and as long as the employment contract remains in effect, there is no obligation to pay severance. Therefore, even if a certain amount has been paid as severance under the name of the monthly salary or daily wage, it does not have the effect of severance pay as defined in Article 34 of the Labor Standards Act, and any agreement to include severance pay in the monthly salary or daily wage is deemed to be a waiver of the right to claim severance pay that arises at the time of final retirement, which violates the mandatory provisions of Article 34 of the Labor Standards Act and is therefore null and void.” (Supreme Court Decision 2002. 7. 12, 2002Do2211, 2002. 7. 26, 2000Da27671, etc.). In other words, even if severance pay has already been paid in installments, it is difficult to claim that 'there is no longer an obligation to pay severance' based on that alone.

Of course, it is not impossible to recover previously paid severance pay. The Supreme Court has ruled, “If it is deemed not to have the effect of severance pay, the employer was not originally obliged to pay the amount under the name of severance, so the amount already paid under the agreement as severance cannot be considered as ‘wages paid as compensation for labor’ under the provisions of Article 18. Thus, if the employer has effectively paid the employee under the name of severance, and if the payment is not recognized as effective severance pay nor as valid wage payment under the provisions of Article 18, then the employer suffers a loss equivalent to that paid amount without legal grounds, while the employee receives a corresponding benefit. Therefore, from the perspective of fairness, it is reasonable to say that the employee must return the amount received as severance to the employer as unjust enrichment.” (Supreme Court Decision 2010. 5. 20, 2007Da90760). This indicates that severance pay paid in advance can be claimed as unjust enrichment. However, it should be noted that wage arrears may raise criminal liability issues.

So, is it okay to agree to pay severance separately? While it might seem so, there are often errors in calculating severance in the industry. Specifically, it is common for an employer who agrees to pay the employee a net amount of 20 million won per month to calculate severance based on that 20 million won. However, severance pay should be calculated based on pre-tax wages, and because of the nature of net contracts often predicated on high salaries, this can unexpectedly result in significant liabilities. The Supreme Court holds that if the employer pays for the four major insurances and income tax on behalf of the employee, those payments should also be included in the average wage (the basis for calculating pension). Therefore, one must keep in mind that severance should be calculated based on pre-tax wages regardless of the contract.

Another issue with net contracts arises in relation to the four major insurances and year-end tax settlements. Year-end tax refunds are typically paid based on the employee's consumption, so it is generally believed that they should belong to the employee, which is also the position of the Supreme Court (Supreme Court Decision 2011. 5. 26, 2009Do2357).

However, in the case of a net contract, since the employer bears all kinds of taxes and fees (not the employee), it seems quite unreasonable for the refund to belong to the employee. The Ministry of Employment and Labor has interpreted that in net contracts, the year-end tax refund belongs to the employer, stating, “In cases where a labor contract is explicitly concluded between the employee and the employer for a certain amount and the employer agrees to bear the social insurance premiums and various taxes imposed on the employee, then irrespective of the amount involved, the employer is undertaking the full payment. If a tax adjustment occurs, it is due to the employer's underpayment in accounting, so it seems that the refund may also arise from the employer's overpayment in accounting, thus it cannot be classified as other goods under Article 36 of the Act.” (Labor Standards Policy Division-1340, 2015. 4. 6.). In other words, if the employer has borne taxes, the refunded amount will also belong to the employer.

Joong-hae Choi has extensive experience and rich expertise in various human resource and labor law issues, including employment relationships, personnel management, wages, and dismissals. If you need assistance, feel free to contact me anytime, and I will be a reliable colleague for you.

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