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Friday 5 June 2015

Workforce reduction in South Korea - Employment and Industrial Relations Law Com news article, April, 2015

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Workforce reduction in South Korea

Brendon Carr

Yulchon, Seoul

bcarr@yulchon.com

 

At the start of 2015, multinational employers in South Korea faced a trend of worldwide economic decline. Even though the Korean economy remains in relatively good shape when compared to the US and Europe, many foreign-invested businesses must reduce their workforce in Korean in the local and global spirit of business reorganisation and ‘shared sacrifice’.

However, Korea’s employment laws make workforce reduction at the employer’s discretion difficult. Even though Korean law recognises the possibility of involuntary redundancies, it is necessary to plan carefully and consider other options before proceeding to layoffs.

Job security defined as a general principle

The Labor Standards Act (LSA) generally governs Korean labour and employment law. This is a comprehensive statute applicable to all workplaces with five or more employees. Under LSA Article 23, paragraph 1, the employer may not terminate an employee unless there is ‘just cause’ for the action.

Similar statutory provisions exist in several European countries – particularly in France, Italy and Germany – and served as an inspiration for Korea’s original job security act in the 1980s. However, employers from those countries are generally astonished by the strict protection of Korean employees’ job security under the LSA today.

Korean court decisions interpreting the LSA and the notion of ‘just cause’ have established only two circumstances where ‘just cause’ is deemed to exist:

•‘fault attributable to the employee’, which makes continued employment impossible; and

•‘urgent managerial necessity’, such as saving a failing business from imminent bankruptcy.

Employee fault

Generally speaking, ‘fault attributable to the employee’ appears to mean that the employee has committed some form of sufficiently serious misconduct and breach of trust, making it impossible to continue the employment relationship.

Court cases involving disputes over construction of this term indicate that other potential interpretations include:

•continuous and persistent unsatisfactory performance; or

•criminal or deliberate harmful acts against the employer, including:

–serious criminal acts outside the line of duty;

–an improper relationship with another employee; and

–material misrepresentation in the hiring process.

Ineptitude for work may also sometimes be a fault attributable to the employee not deemed to have occurred within the frame of the employee’s duties, such as disease or illness. A complete lack of aptitude may also justify a termination (although the court is traditionally quite generous to employees in making these determinations).

Special protection for policy reasons

Public policy protects employees from termination – even those justified by the employee’s fault – during periods of vulnerability. Although debilitating illness or injury may in some cases be just cause to remove an employee from the payroll, workers recuperating from industrial illness or injury are protected from job termination throughout their period of recovery and for 30 days thereafter.

Similarly, employees taking statutory maternity leave may not be dismissed until 30 days from the expiration of the leave.

Redundancies under ‘urgent managerial necessity’

Redundancies in the European context are, in theory, permitted under Article 24 of the LSA. The amended statute provides procedures for effecting mass layoffs owing to ‘managerial reasons’ – any reason not related to the fault of the individual employee(s) subject to the layoff. If the managerial reasons specified in Article 24 exist, then termination is deemed to be for ‘just cause’.

However, the following requirements must be met in order for the terminations to qualify as justified dismissals for LSA purposes.

Best efforts to avoid involuntary job losses

Prior to making redundancies, the employer is required to ‘make every effort’ to avoid them. Supreme Court decisions interpreting this provision have held that employers must first exhaust all other options by offering early retirement packages, instituting a hiring freeze, reducing working hours and other such reasonable measures.

Non-discriminatory selection

‘Reasonable and fair’ criteria must be adopted and used when selecting the employees to be made redundant. Discrimination based on gender is expressly forbidden as a component in determining whom to make redundant (LSA Article 24, paragraph 2).

Consultation with labor unions

The employer is subject to additional notice obligations in workplaces having union representation that represents more than half the employees. Article 24, paragraph 3
of the LSA requires the employer to notify the union of the contemplated reorganisation no later than 50 days prior to the intended date of dismissal.

Moreover, prior to proceeding to the redundancies, the employer is required to ‘consult in good faith’ with the labour union to discuss steps to be taken by the employer to avoid the necessity of redundancies, and the criteria used to select those subject to layoff. In cases where no union exists, these consultations should take place with a person duly selected by more than half of the employees as their representative.

It is important to note that the above-mentioned requirement to consult with the union or employee representative does not grant the union or representative a legal veto power over the employer’s plan. However, it is expected that there will be considerable pressure from employees to preserve job security during the notice period and good faith consultations.

The Supreme Court has held that redundancy planning is not a matter subject to collective bargaining between employers and labour unions. Therefore, industrial actions such as strikes in response to proposed Article 24 redundancies are illegal.

The implementation of redundancies

Re-hiring priority

If an employer who has dismissed workers under the provisions of LSA Article 24 wishes to fill the same positions as those held by the dismissed workers within three years as of the redundancy, the dismissed workers shall be given ‘preferential consideration’ for
re-employment on those positions under LSA Article 25.

Report to the Ministry of Labor and Employment

The employermust file a report with the Ministry of Labor and Employment where the number of redundancies meets or exceeds certain thresholds. The reporting threshold is ten per cent or more of the number of people ordinarily employed by the employer, with a minimum threshold of ten employees and a maximum threshold of 100 employees.1 Failure to file the required report does not affect the lawfulness of the employee terminations.

Employee remedies for unfair termination

Where an employee has been laid off without just cause, the employee’s remedies under Korean law are as follows:

•filing an administrative complaint with the Labor Relations Commission seeking a reinstatement order, to put the employee in the same position as he was in before the wrongful termination

•filing a criminal complaint with the local district labour office under the criminal provisions of the LSA

•starting civil litigation seeking damages and a court order to be reinstated.

Attorneys’ fees, court costs and the time necessary to prosecute civil litigation tend to discourage aggrieved employees from seeking reinstatement and damages through the court. However, the other remedies are very effective.

Both the Labor Relations Commission and the local district labour office have the authority to order that the employee be reinstated in his or her former position with related back pay. Under the LSA’s criminal provisions, defiance of a reinstatement order could subject the employer to a term of imprisonment up to one year, or a fine of up to KRW10m won.

Payments due on termination

No additional payments are required under current law in cases where the termination is due to managerial reasons. However, employers are still liable for certain compensation, including wage payments for work performed until the effective date of termination, accrued and unpaid leave and vacation time, and statutory severance pay.

Practical guidance

•Employers should make concerted efforts to avoid involuntary termination. These efforts should include internal reassignment, third-party job transfers and/or voluntary separation packages. However, it is recommended that employers avoid heavy-handed or coercive methods of inducement that could be seen as constructive termination.

•Comply with union/employee notification and consultation requirements, but do not interfere with union deliberations or actions.

•If layoffs are unavoidable, use fair and objective criteria to determine which employees should be laid off.

•Ensure that all wages, benefits, and required severance, are paid in full within 14 days of termination. Do not apply any set-off for amounts believed to be owed by the employees to the employer without careful review.

Conclusion

According to Korean law, the only way for employers to reduce their workforce lawfully is first to attempt to reach a negotiated settlement with the employee(s) concerned. Frequently, the cost of such a buy-out exceeds 12 months’ salary.

Nevertheless, without mutual agreement for an early departure, the point where Korean law authorises involuntary redundancies of employees may be too late for the company from a business and financial viewpoint. As a consequence, HR managers and their lawyers must be involved in workforce decisions at a very early stage to find the least expensive and most acceptable solutions.

Note

1              LSA Enforcement Decree Article 10(1).

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