In 2023, an investigation by the Ministry of Employment and Labor into subcontractors of Coupang CSL, a delivery subsidiary of Coupang, revealed that about 20,000 workers were not enrolled in industrial accident and employment insurance. This omission of mandatory insurance enrollment under the Labor Standards Act occurred because these companies contracted workers as individual business owners rather than as employees. This practice, where workers are subordinate to the business but are contracted as individual business owners to reduce labor costs, is known as the “fake 3.3 contracts.” The term refers to the 3.3% tax that workers pay when contracted as “individual business owners,” and is labor jargon indicating that such contracts are expedient.

According to an August 30th news coverage by “Channel PNU,” fake 3.3 contracts are widespread across various age groups and industries. A 2022 survey by the “Finding-Rights Union” (Kwon Yu-hada) of 1,008 respondents found that 48.4% of employees in businesses with 5 to 50 employees were under fake 3.3 contracts. However, there is still no comprehensive survey of all workers nationwide, making it impossible to gauge the full scale of this practice. Yoo Seon-Kyung (Director, Busan Labor Rights Center), stated, “There is still no complete survey on the reality of fake contracts, while it’s difficult to find age specific characteristics, it’s a contract form that’s generally spread across many age groups.”

■Most Young People Unaware of Fake 3.3 Contracts

Fake 3.3 contracts are prevalent because they reduce labor costs for businesses compared to regular employment. When an employer hires an employee, they must provide Four Social Insurances and pay statutory-leisure pay and annual paid leave as per the Labor Standards Act. However, by contracting workers as “individual business owners,” they only need to withhold 3.3% in taxes, which comes from the worker’s compensation. And no additional labor costs will be incurred for the business owner.

The problem is that workers under fake 3.3 contracts are not protected by the Labor Standard Act. They are not eligible for mandatory enrollment in the Four Social Insurances, including industrial accident insurance and unemployment benefits. Workers who are injured while working at these establishments cannot receive support for medical expenses through the Korea Workers’ Compensation & Welfare Service, which is typically available through industrial accident (workers’ compensation) insurance. They are also unable to receive unemployment benefits, which are usually available when an employee is dismissed from a workplace where they have worked for more than three months. Yoo stated, “Due to the 3.3 contract, there are cases where workers cannot receive compensation from workers’ compensation insurance or are not eligible for unemployment benefits because employment insurance does not apply to them.

Choi In-Hwa (Haeundae-gu, 22), whom the reporters met, worked as a restaurant server for one year and six months but couldn’t receive severance pay due to a fake 3.3 contract that she was persuaded to sign by the owner at the time of hiring. Current labor laws stipulate that workers should receive wages above the minimum wage, guaranteed break times, weekly holiday allowance for perfect attendance in a week, and severance pay according to the “Employee Retirement Benefit Security Act,” but individuals were unable to exercise these rights.

Another victim, Song Hyeon-young (Dept. of French Language Education, 22), who worked as a part time instructor at an English academy, had to work overtime beyond her contracted hours due to additional classes during exam periods. but couldn’t discuss her pay. Song, as an ultra-short-time worker working six hours a week, should have received at least 50% additional pay for overtime, but the fake 3.3 contract prevented this.

The reason most young people enter into these contracts is “lack of knowledge.” The income tax (3.3% business income tax, 0.3% local income tax) arising from fake 3.3 contracts was perceived as “normal” among some youth. PNU Student A, who worked at a BBQ restaurant under a fake 3.3 contract and bore the full cost of pension and premium, was unaware until the interview that under a regular employment contract, these costs would be split with the employer. PNU Student A said, “I searched about fake 3.3 contracts and found that there are cases where it’s deducted for part-time jobs, so I thought there was no problem.”

Some chose fake 3.3 contracts for short-term benefits. Choi, who was persuaded by the academy director that a 3.3 contract would be better as paying into the Four Social Insurances would reduce their salary, continued to choose fake 3.3 contracts over the Four Social Insurances in subsequent part-time jobs. This is because the 3.3% withholding tax seems much “cheaper” than the four major insurance premiums, which amount to 9% of monthly salary.

However, in reality, there isn’t much difference in the financial burden between the two contracts, with only some pros and cons depending on the situation. According to the National Pension Act, all Korean citizens aged 18 to 60 with income are obligated to join the National Pension Service. If employed, the cost is split 4.5% each between employer and employee, but as an individual business owner, one must bear the entire 9%. For health insurance, which is 7.09% of the monthly salary, employees split the cost with their employer, but as a freelancer under the local subscription, one must bear the entire cost.

■Even with a fake contract, you can be a “worker”

Even if a worker is dependent on the employer for their labor, even under a fake 3.3% contract, they can still be recognized as an employee if they are dependent on the company and are thus entitled to protection under the Labor Standards Act. This is because labor laws are interpreted based on the substance of the work relationship rather than the form of the contract. Kim Su-Min (Part-time Lecturer, Graduate School of Law) emphasizes, “People should clearly demand a proper employment contract and request modifications if there are clauses about 3.3% deductions related to wage payments.” However, if it’s difficult to go against the employer’s wishes, she emphasizes, “Keeping detailed records of work dates, hours, and job content may allow people to claim wage differences or severance pay later.”

However, with a fake 3.3 contract, the worker faces the difficulty of having to prove their worker status themselves. The burden of proof for determining worker status lies with the worker, including factors such as “whether the employer determines the work content,” “whether labor is provided under the employer’s direction and supervision,” “whether the employer specifies working hours and location.” Min Kang-Mo (Policy Director, Kwon Yu-hada) points out a loophole in the law. He said “To prove worker status, one must demonstrate facts about being under supervision and not bearing business-related costs, but usually the employer holds this information. For those working in industries other than office work, it may be difficult to possess such evidence.”

He suggests that a system strengthening the employer’s burden of proof is needed, similar to California’s ABC test, where the employer must prove that the worker is not an employee. The ABC test assumes a worker is an employee unless the employer can prove that “the worker is free from the employer’s control and direction,” “the worker performs work outside the usual course of the employer’s business,” “the worker is customarily engaged in an independently established trade, occupation, or business.”

There are also calls for educating employers about how fake 3.3 contracts can be disadvantageous to them. If a worker with substantial “worker status” reports the employer, the employer may face fines for not reporting social insurance enrollments and must pay overdue insurance premiums and late fees. Yoo emphasizes the need to educate employers that “the responsibility ultimately falls on the employer when obligations are not met.” Currently, the Busan Labor Rights Center is running a “Neighborhood Labor Attorney” program where labor attorneys visit small businesses to provide labor-related consultations, preventing law violations due to employers’ lack of knowledge about labor laws.

Reported Jung Yoon-Seo

Translated by Seo Yoo-Jung