Unofficial translation
SJC Recommendations for Improvement in Business Environment
October 31, 2005
The Seoul-Japan Club (SJC)
Table of Contents
Introduction ················································································ 2
- Labor & Industrial Relations (12 Items) ······························ 3
New 1 Item, Continued 11 Items
- Taxation (2 Items) ······························································· 11
Continued 2 Items
- Finance & Banking (7 Items) ··············································· 12
Continued 7 Items
- Intellectual Property Rights (7 Items) ·································· 16
New 5 Items, Continued 2 Items
- Industrial Policy (2 Items) ················································20
New 2 Items
- Individual Requests (6 Items) ·········································· 22
New 2 Items, Continued 4 Items
- Improvement of Living Conditions (12 Items) ····················· 25
New 5 Items, Continued 7 Items
Introduction
The Seoul-Japan Club (SJC) has made policy recommendations to the Korean government since 1998 on several occassions, and we would like to appreciate quick response and changes the Korean government has been making to our recommendations. However, there are some issues outstanding or matters still in the process of changes. Furthermore, increasing incidents of difficulties regarding intellectual property rights (IPR) have forced us to add new recommendations in this report.
We believe the most critical issue for consideration this year is a resumption and early conclusion of Korea-Japan FTA negotiation process, and outline the purpose as follows:
Since the administration of former president Kim Dae Jung introduced foreign business promotion policy in 1998, Korea had seen a brief jump in foreign direct investment (FDI), which was unfortunately reversed after 2000. However, it started to pick up again in 2004 with FDI of Japan in Korean market, in particular, recording USD2.3 billion (317% increase from a year earlier) in 2004, the second largest volume in history.
A large part of this surge is explained by a rise in green field type investment, notably in component and material manufacturing. Korea has firmly established itself as a global production base of LCD and digital finished products and the Korean government has made a positive change in its FDI policy direction.
As part of our 2003 recommendations, we stressed that stable source of supply is essential
for component and material industry and participation of consumers of component and material in foreign direct investment promotion activityis key to spurring foreign investment. The Korean government, in turn, accepted this proposal and helped investment flowing in by changing its FDI campaign into more integrated efforts jointly with domestic firmssuch as adoptingfrom incentive introduction dominated style.
FDI of Japanese firms in the first half of 2005 is USD362 million, just 68.7% compared with a year ago, but the number of investments amounted to 306 cases, which is a 19.5% gain year-on-year indicating that small and medium sized projects associated with large-scale investment in 2004 are, in many respects, being materialized
Yet the Korean government’s measure for foreign SMEs with small sized investment in plan leaves much to be desired. Since fostering small and medium sized subcontractors propping up large manufacturers is imperative in promoting Korean industry, Seoul strongly needs to fully back foreign SMEs in need of the government’s support, most notably small and medium scale investment projects in component and material sector.
For further growth, Korean economy demands more cooperation between Korean and Japanese businesses that will bring about market expansion or business gains for Korean companies, and I would like to say it is urgent that we resume and conclude FTA talks between the two nations as soon as possible.
I anticipate prompt review by the government and sincerely appreciate its reply as to the progress and decisions concerning our recommendations.
October 2005
Takasugi Nobuya(高杉暢也)
Chairman
The Seoul-Japan Club
1. Labor & Industrial relations
Labor & Industrial relations, in light of Korean business conditions, is a critical issue that not only negatively affects Korean economic affairs but also harms Korea’s reputation abroad. This issue is also a factor having bad influence on Japanese management decisions on Korean market.
Recognizing that addressing labor & industrial relations is a pressing concern, the Korean government is pushing ahead with new changes such as amendment of the Labor Standards Act, enactment of Employee Retirement Benefit Security Act, preparation for the enactment of Protection of Non-regular Workers Policy and revised Act relating to Protection etc. for Dispatched Workers. However disappointedlydisappointly their implementations have so far been slower and less effective than expected. Also downward rigidity of labor conditions coupled with extremely militant attitude shown by some unions toward the management is impeding the government’s effort to attract foreign capital and causing foreign businesses in Korea hesitate from hiring full-time recruits.
In view of this circumstance, continuous and visible improvements in the following respect are required for Korea to nurture foreign investment and ensure job for regular employees, the need agreed upon not only by foreign businesses but also by Korean companies.
Our recommendations on labor & Industrial relations are also mentioned in ‘6. Individual Requests (p.25)’.
A. Need for a system allowing reform in labor contracts and practices
In terms of industrial relations, outstanding issues are: ‘unreasonable compensation and allowances’, ‘demand for a raise in base salary without convincing justification such as adding GDP growth rate to CPI growth rate in the calculation’, ‘making bonus as an every-year payment irrespective of the business performance of each year’ and ‘loose regard for “No work, No pay” principle’. What Korea needs is to align its industrial relations with global standards and make its business environment attractive for foreign investment and set forth clear guidelines governing the below concerns:
①Addressing of downward rigidity in labor conditions (continuous item, details modified)
Clause 1 of Article 97 of the Labor Standards Act spells out that ‘if the rules of employment are modified unfavorably to workers, the employer shall obtain workers’ consent’, and this rule applies when deteriorating managerial conditions force modification of employment rules less favorably to workers.
However, Korean custom makes it hard to downgrade labor conditions, much less changing them less favorably even worsening business health demands it. This restraint is curbing employment of regular labors and even making it sometimes risky to do business in the nation.
From this standpoint, SJC proposes that the Korean government amend current regulations ‘not to require consent of trade union as a prerequisite when modifying the rules unfavorably to workers’ to redress downward rigidity of labor conditions, and adopt and deploy system enabling smooth reform of labor conditions like work-sharing system suited to ever-shifting managerial conditions.
②Issues regarding introduction of five-day workweek (continued item, details modified)
With the enforcement of amended Labor Standards Act, Seoul has decided to legally set ceiling for annual paid leave, suspend a monthly paid leave and change one day paid menstruation leave to unpaid leave, and remove lackluster promotion of the use of annual paid leave. In addition, in reply to our last recommendations, it showed a willingness to promote reform by saying ‘we will strongly guide both labor and management to change collective agreement during collective wage bargaining in the spirit of amended labor standards act.’
But this government measure can only go so far as long as trade unions positively respond to collective agreement or the amendment to employment rules. In practice, as a result, many Japanese companies in Korea are paying compensation for unused annual paid leave while being forced to embrace five-day workweek.
In order to ensure comprehensive and reasonable agreement while incorporating the spirit of amended Labor Standards Act in the industrial relations, SJC urges that the Korean government newly legalize ‘disallowing employer to compensate for unpaid leave that has not been taken despite of the promotion of its use’.
③Adjustment at the Labor Relations Commission (LRC) (continued item, details modified)
In case an amendment to collective agreement is not agreed and this issue is referred to the Labor Relations Commission (LRC), the commission should not reach a decision based on individual point of difference just to avoid strike but should judge from comprehensive standpoint so that it can win acceptance of the business on its decision.
B Employment system in general
④Amendment of retirement allowance (pay) system Severance pay system (continued item, details modified)
SJC urges that the Korean government arrange reasonable retirement allowance (pay) system severance pay system and legal average wage so that fair and just industrial relations that conform to international practices can be established.
In detail, we call for a discontinuation of the rule governing ‘retirement allowance (pay) system’severance pay system’ that does not reflect different managerial conditions of different businesses, especially that of legal average wage, a basis of computing allowanceseverance pay, required across the board by the law. Even if it is not feasible to abolish legal average wage, it is contradictory to base calculation of allowanceseverance pay on average wage upon the time of discharge, since retirement pay, in nature, is a deferred wage. From this perspective, we propose that allowanceseverance pay be computed based on the average of actual wage that retiree had earned during his total term of employment.
It is desirable that security after retirement is gained through means like National Pension system and not by legal allowanceseverance pay system, which burdens employer. It is a merit to worker if legal average wage is applied when wage escalates with years number of employment period. However this system is impeding the company that is considering an adoption of wage peak system and employment extension (extending retiring age limit) or that is planning annual pay scheme or performance-based incentive package. In light of this harmful implication, we recommend abolition of this wage or reduction in the scope of its application.
⑤Relaxation of the terms of dismissal for Regular workers (continued item, details modified)
Article 30 (Restriction on Dismissal) of the Labor Standards Act states that an employer who lays off a worker without justifiable reason shall reemploy that worker and is imposed with punishment (Article 110 of the same Act: imprisonment for less than five years or a fine not exceeding thirty million won). In Korea, a worker who is in the process of dispute with an employer over his dismissal can seek a remedy at the Labor Relations Commission even before his discharge is decided to be justifiable by administrative court. Since enough protective recourse against unjustifiable dismissal is in place for a worker, we believe an employer considered full implications of the layoff before arriving at the decision.
For instance, even though an employer deliberately or from lapse of judgment dismisses and thus incurs suffering on the part of a worker, current law requires punishment of that employer. We think this is against international practice and it shall instead be resolved by civil procedures including indemnification for damage.
Also Article 31 of the same act dictates that an employer give a notice 60 days prior to dismissal when he lays off a worker for managerial reasons. This restriction hampers operation of a business even the managerial conditions worsens and SJC proposes a change in this requirement to around thirty days.
⑥Flexible application of the requirement for employment of veterans (continued item, some modification)
According to Korean law (Article 49 of the Act on Honorable Treatment and Assistance of Veterans), a company with 20 or more employees year-round (a manufacturing company with 200 or more employees at all times) must employ a certain percentage (3~8%) of veterans. However as there are only limited number of veterans meeting foreign businesses’ recruitment criteria, we recommend flexible application of this requirement, for example, making exception to non-Korean businesses operating in Korea.
In response to our last recommendations, Seoul replied that ‘Korea is working hard to recommend qualified veterans including those with linguistic skills to foreign invested businesses as much as possible’, and we wish to know what is the current progress in this regard.
C Part-time worker relations
⑦Abolishment of part-time worker rules etc. (continued item, some modification)
SJC proposes abolishment of part-time worker rules since working condition for part-time workers including paid leave and severance pay system is a matter that should be determined in consideration of managerial conditions of each business through talks between labor and management. In response to our last recommendations, Seoul replied that ‘part-time worker shall be entitled to legal protection guaranteeing basic working conditions proportionate to his work hours’. Yet severance pay etc. must be given based on ‘the contribution that retiree made to the company’ not on ‘hours’, and thus we believe it is absurd to estimate these benefits on par with those for regular employees.
The bill on ‘Protection Measures for Non-Standard Workers’, currently introduced to the National Assembly, states ‘employment period of non-regular worker as three years, and application of the restriction on dismissal if employer hires him for more than three years’. We are certain this measure will restrict flexibility of labor market and thus urge that the Korean government stop pushing this enactment that may deprive the motivation of the foreign businesses to investment in Korea.
⑧Amendment of dispatched worker rules (continued item, details modified)
Expansion of category of jobs for dispatched workers and extension of dispatched period to three years is what’s contained in the revision of ‘the Act relating to Protection, etc., for Dispatched Workers’ (hereinafter ‘the revised act’) but no change is made on an employer’s employment requirement of that dispatched worker when that dispatch period is overdue.
Requirement to employ after two years of dispatch (the revised act: three years) is problematic in that an obligation to protect dispatched worker, which should be borne by both the dispatcher and the user of dispatched worker, is imposed entirely on the user of dispatched labor. Worse yet, an employer, who wishes to continuously employ a dispatched worker, must lay him off before two years of dispatch (revised act: three years) expires, a condition that may disrupt normal operation of a business and troublesome in light of keeping flexible employment conditions for both employer and worker. This absurdity, we are certain, justifies a suspension of the requirement to employ dispatched worker after two years of dispatch (revised act: three years).
Also the revision entails ‘prohibition of employing dispatched worker in less than three months after a termination of three years of dispatch’, an impractical solution which we believe would definitely disrupt normal operation of a business as that absent person’s role will remain vacant during that period. So we ask this revision to discontinue.
D Industrial relations
⑨Reduction of full-time official of trade union, pay suspension during union walkout etc. (continued item, some modification)
In view of a widely accepted international norm of placing full-time official of trade union on the union’s payroll, it is hard to understand Korean practice of employer bearing the salary of full-time trade union official. Although this practice may have become a norm in Korea, sheer number of these full-time officials is increasingly overburdening employer with the obligation to pay for their wages.
No progress has been made though payment to full-time official of trade union should be scaled back in phases and we are convinced administrative guidance of the Korean government to reduce unnecessarily high number of full-time officials of trade union is in order.
There are also some worrisome trends in ‘Roadmap for Industrial Relations Reform’ unveiled in December 2003, which contains a plan to recognize certain level of wage for full-time official of trade union. SJC believes this is against international norm and urges that the effective date of the prohibition of wage to full-time official of trade union (Article 6 of Addenda to Trade Union and Labor Relations Adjustment Act) should be kept unchanged at any cost.
In contrast to labor unions in other countries where they go on strike after they have enough financial resources (living expense) in their coffer, trade unions in Korea, in most cases, easily decide on walkout irrespective of whether they have enough resources to last and demand financial compensation including wage lost during the walkout as a precondition for calling off strike. As employers will hold onto the principle of ‘No work, no pay’ facing this irresponsible demand, we urge that the government shouldsupport this tough stance in the future.
⑩Strict and immediate enforcement on union’s illegal labor activities (continued item, some modification)
Unlawful labor practices of union such as lockout that usually go unpunished are hampering fair labor-management talks. We are urging stringent and immediate enforcement by police, court of justice, the Ministry of Justice and the Ministry of Labor to stamp out these violations.
In response to our last recommendations, the Korean government replied that ‘it will take stern measures against any violation regardless it is committed by labor or management and measure out punishment depending on the severity of the case ‘, and we wish to know what actual ‘stern measures’ were taken.
Though rules exist such as clause 1 of Article 38 of the Trade Union and Labor Relations Adjustment Act (prohibition on obstructing or interrupting work or other normal services, and resorting to violence or threat in the disputes – Clause 1 of Article 89, Penal Provisions) and Article 42 of the same act (prohibition of acts of violence, etc.), their actual cases of application are yet unclear.
For the Korean government’s reply of stern measures (response to our last recommendations), we wish that it faithfully put its words into action and we hope to see actual cases.
Cases of trade union’s unlawful activities are also mentioned in Item ① of 6. Individual Requests.
E Others
⑪Establishment and operation of the Labor-Management Commission (continued item, some modification)
‘Roadmap for Industrial Relations Reform’ publicized in December 2003 relaxed requirement formerly demanding ‘resolution’ to ‘agreement’ to be valid and proposed to make those issues agreed or resolved by the commission as binding as the rules of employment.