Publications

INTRODUCTION

Korea's economy has experienced moderate growth over the past few years, with a 3.1 percent GDP growth rate in 2003 and around a 4.9 percent growth rate in 2004. Nevertheless, the countrys employment rate has remained low, with only about a 2.0 percent growth rate in 2004; in 2003, the employment rate dropped around one-tenth of a percent. Koreas unemployment rate remains around 3.6 percent, with the most significant job shortages in the trade, services and construction industries. Therefore, the Ministry of Labor (MOL), in cooperation with a number of other Korean ministries and government organizations, have been establishing new laws and regulations in order to improve the employment situation in Korea.

The MOL was established to monitor and improve employment conditions in Korea, including employment security, accident prevention, job training and employees quality of life. Additionally, the Ministry of Education and Human Resources Development is responsible for HR development and the establishment of HR policies in Korea.

 

HIRING TRENDS

New Graduates

Korea continues to face a youth jobless rate of around 9 percent, the second highest in the world after France. Out of the 400,000 university graduates in 2004, only about 20,000 found jobs. Moreover, an estimated 70 percent of companies in Korea stated that they did not plan to hire any new graduates in 2004. Various factors have led companies to implement hiring restrictions, including the fact that some public institutions fail to provide adequate training and preparation for students entering the workforce.

Therefore, the government established a new incentive program for hiring young workers. As of October 2004, companies in Korea were eligible to receive a subsidy for each young worker hired. The government allocated 7.4 trillion won (US $6.8 billion) for the subsidy program, providing 5.4 million won (US $5,000) to large companies and 7.2 million won (US $6,600) to smaller companies for each young worker hired. This program is effective for three years.

Additionally, on October 13, 2004, the Korea Employees Federation (KEF) released an official letter to its 4,000 member companies urging them to ease their hiring restrictions of new employees. The KEF is an independent economic organization in Korea and was established to ensure industrial peace and economic development throughout the country. The 4,000 member companies, both Korean and foreign, include companies in sectors such as manufacturing, banking, transportation, construction, and insurance. However, the KEF has noticed a growing trend among their member companies to place restrictions on the persons they hire, often by age or graduation year.

The KEF has asked its member companies to reconsider their respective hiring methods and regulations, and base their hiring decisions on the most capable and talented individuals. The actual changes in hiring procedures may be decided by each individual company on a voluntary basis (rather than by the KEF). Companies who choose to ignore the KEFs recommendations on lifting hiring restrictions could potentially be accused of age discrimination, though the KEF did not mention any penalties, such as fines.

Irregular Workers

On November 2, 2004, in an effort to add more flexibility to the labor market, the Korean government approved a bill allowing companies to hire an increased number of irregular workers. Irregular workers, such as dispatched workers and subcontract employees, make up over half of Koreas labor force and allow companies to save time and money by avoiding the cost of hiring full-time employees. However, many of these workers receive significantly less pay than full time workers and often work in poorer conditions. The new bill will provide for better treatment and working environments for these employees.

Previously, irregular workers were permitted to work for an employer for up to two years. Under the new bill, their permitted work period is lengthened to three years, though this period may be further extended under certain circumstances, including reasons such as, to continue an ongoing project or to fill an open position after the retirement of a full-time employee.

All companies employing irregular workers are required to state the working conditions in writing, as failure to comply with this rule can result in a fine. Additionally, overtime hours of irregular workers may not exceed 12 hours per week, though an irregular worker with a fixed term now has the right to object to an employers request to work overtime.

FOREIGN WORKER REGULATIONS

Two new regulations announced by the MOL will affect the requirements for companies in Korea wishing to hire foreign laborers. The new regulations will mandate Korean language tests for foreigners wanting to work in factories and will also shorten the length of time that a company must look for Korean employees before hiring foreign employees.

Language tests for foreign workers wanting to work in factories will go into effect on August 17, 2005. The tests are not designed to ensure Korean language fluency, but rather to ensure that workers will be able to identify safety signs and also understand basic orders from supervisors.

The government has not specified when it plans to officially shorten the period of time in which companies must look for Korean worker before foreign ones. The new regulation will shorten the obligatory period from one month to 3-7 days. Companies still must prove to the MOL that they searched for, and were unable to find, Korean workers before attempting to hire foreign workers.

LIVING CONDITIONS

A recent survey, jointly conducted by Gallup Korea and Invest Korea, found that many foreigners working in Korea are dissatisfied with their living conditions. Of the 223 employees of foreign-invested companies that participated in the survey, 27.8 percent responded that they were unsatisfied with their living conditions. Those surveyed expressed dissatisfaction with Koreas transportation, medical, education and housing environments. Recent surveys conducted by the Ministry of Commerce, Industry and Energy (MOCIE) have identified similar complaints among Koreas foreign workers. Complaints such as these have led the MOCIE to embark on a 5-year project to improve the living environments of foreigners working in Korea.

One of the first issues addressed by the MOCIE was the efficiency of visa procedures. To make the process more efficient, the government has increased the sojourn period of foreign visa holders from two to three years. In response to more options for education, the government has increased their efforts to build quality foreign schools. MOCIE announced that in addition to building new foreign schools, it also plans to increase aid to existing schools to increase the quality of their services.

The Ministry of Health and Welfare has chosen certain private and university-run hospitals to be designated as providers of medical services to foreigners. These hospitals are required to be able to issue prescriptions in English. The ministry plans to provide aid to these hospitals in order to strengthen language education for staff members.

The Invest Korea Plaza project is one of the main projects being undertaken by the government to try and increase the quality of life for foreigners. It is now under construction in southern Seoul. The plaza is designed to offer a one-stop service for foreign residents. By contacting a single project manager at the plaza, a foreigner can access services ranging from investment counseling, to help with education and housing concerns. The planned completion date for the plaza is September 2006.

HEALTH INSURANCE

The National Health Insurance Corporation (NHIC) is one of the main organizations in Koreas social security system. It is the only public health insurer in the country and is in charge of running the National Health Insurance (NHI) program, committed to providing Koreans with adequate healthcare services. However, the NHIC has often been criticized for its high premiums and low coverage. Moreover, it faces a debt of over one trillion won (US$975 million).

In response to these problems, Koreas Ministry of Health and Welfare (MOHW) announced in January 2005 that it will increase health insurance coverage for NHIC subscribers. Over the next three years, health insurance coverage will gradually be raised a total of 10 percent, from 60 to 70 percent. The MOHW plans to establish a task force to determine specific ways to reduce medical costs for patients. As part of the increased coverage, the NHIC plans to change its coverage standards and also start providing coverage for medical services not currently included under the scheme. However, the MOHW may also raise NHIC contribution premiums to help support this increased coverage.

TAX BENEFITS

In order to create a friendlier foreign investment environment, the Korean Ministry of Finance and Economy has implemented new income tax rules exclusively for expatriate workers and foreign companies. Under these new rules, foreign employees living in Korea will now have a choice of two methods when calculating their Korean income tax: they may apply for a flat tax rate of 17 percent of their gross income, or they can choose to utilize the current tax system, under which their adjusted gross income is subject to a tax rate of 9 to 36 percent, depending upon their level of income.

Korea also extended a personal income tax exemption for foreign engineers until 2006. The exemption, which lasts for the first five years of employment, was set to run out at the end of 2003, but was extended. Therefore, those starting work on or before December 31, 2006 can claim the exemption. It applies to foreign engineers working for a Korean company, designated research institutes, or in certain industries including mining, construction, engineering, and environmental.

Foreign-invested companies located in Free Economic Zones or Free Trade Zones in Korea may also be eligible for new tax benefits. Qualifying companies are manufacturing and tourism companies with a foreign direct investment of at least US $10 million, as well as freight companies with a minimum foreign direct investment of US $5 million. These companies will be eligible for a 100 percent exemption from Korean income tax for three years, including corporate and local taxes, and then a 50 percent exemption for two additional years. These companies will also receive an exemption from customs duties for three years.

Foreign businesses who are executing development work in Free Economic Zones may also receive the same tax benefits as foreign companies that have locations within Free Economic Zones. However, these foreign businesses must meet a minimum foreign investment of US$30 million. With the implementation of these new tax exemptions for foreign businesses and expatriates, the Korean government hopes to increase international competitiveness among companies in Korea.

PENSION UPDATE

In an effort to financially stabilize the pension system and better prepare for the fast-aging society, the Korean government approved long-term measures in January 2005 to reform the pension scheme. Previously, Koreans paid a monthly pension contribution of nine percent and received 60 percent of their wages after retirement. However, if those pension rates were maintained, the Korean government predicted that the National Pension Fund would run out of money by the year 2047. The new pension scheme provides for the collection of higher pension contributions and a reduction in monthly pension payments.

A National Pension Council was established to oversee the implementation of these new pension reforms. As just mentioned, workers previously received 60 percent of their wages after retirement, but after January 2005, the percentage dropped to 55 percent and by 2008, the rate will reduce to 50 percent. Beginning in 2010, the monthly pension contributions will increase from the current 9 percent to 10.38 percent. Additionally, the rate will rise 1.38 percent every five years after 2010, reaching 15.90 percent by the year 2030. Other changes were made in the pension scheme to reflect the changing demographics and family patterns in Korea. Pension benefits were decreased for employees who filed for pensions under the age of 60. However, those who continue working after the retirement age of 60 are eligible to receive additional benefits.

Second, the Employee Retirement Benefit Security Act was also passed in January 2005 and will become effective in December of this year. Under this Act, the MOL will set up a Retirement Pension Deliberation Committee to manage the operations of employee retirement schemes. The new pension regulation will be applicable to all businesses and workplaces in Korea with five or more employees. Any employee who averages at least 15 working hours per week and works for at least one year will be eligible to join a retirement scheme. Those businesses with fewer than five employees will be required to abide by the new regulation sometime between 2008 and 2010.

Any employer who establishes a pension plan will be required to designate a Retirement Pension Trustee. The Trustee will perform services such as setting up and managing the pension account, collecting the contributions, paying benefits, etc. In addition, either the employer or Trustee is responsible for providing pension holders with information about their plan on a yearly basis.

Go back to HR Issues & Recruiting Publications for Korea

Go back to the Pacific Bridge Homepage