South Korea: Key Limits on Employer Latitude in Structuring Workforce

South Korea is commonly spoken of as a country with burdensome or inflexible employment laws. This article highlights four key sets of legal limits upon employers in Korea, in part reinforced by new legislation.

For the most part, these limits apply to workplaces with five or more employees. Of pervasive importance in this area is the Labour Standards Act (LSA), the bedrock of employment law in Korea.

First, terminating an employee requires "just cause", or substantial justification, under the LSA. Korea is not an "at-will" employment jurisdiction. Generally, there must be some justification beyond mere redundancy, and also beyond mere humdrum performance. The occasional instance of mild negligence, for example, or inaptitude for relatively minor aspects of the work, usually will not rise to just cause, but gross and repetitive incompetence will.

Internal company rules or policies are not decisive in this regard. Dismissing an employee for a specific reason stipulated in work rules may still be deemed abusive and in bad faith, and hence invalid, for lack of just cause. The employer has the burden of proof of showing just cause. Even in case of clear fault on an employee’s part, dismissal may be invalid as being disproportionate.

The just cause requirement is moderated in one important context: Layoffs in case of "urgent managerial necessity". Under the LSA, an employer may lay off workers as necessary to avoid or stem a business crisis, as opposed to mere cost-cutting or strategic restructuring. This is subject to conditions: While facing the dire situation, the employer must use "best efforts" to minimize layoffs, apply fair, reasonable criteria in selecting employees for layoffs, and, in good faith, at least 60 days before the layoffs, "consult with" employees (which does not necessarily mean obtaining acquiescence).

Key terms here such as "urgent managerial necessity" and "best efforts" are not well defined. The crisis facing the employer may, at any rate, be something short of impending insolvency. Also, it is important to note that Korean courts may be inclining to allow management more leeway in this context. But the validity of a layoff can only be considered case by case. Various factors weigh on this, including competitiveness amid market conditions, for example. In view of uncertainties, and to avoid disputes, often a company will first offer extra compensation to employees, on top of accrued severance, to induce voluntary retirement.

The concept of "best efforts" to minimize layoffs is likewise undefined under the LSA, but, under Supreme Court precedents, this can include for example efforts to curb labour costs by negotiating a wage freeze, or offers of temporary leaves or voluntary retirement plans, or discontinuance of temporary or part-time employees, or other cost-cutting steps.

Following layoffs, in any case an employer is subject to a rehiring obligation. Under an obsolescent LSA provision, in any new hiring after a layoff, the employer must "exert effort" to rehire previously laid-off employees, until the second anniversary of the layoff. From 1 July 2007, however, there will be a hard-and-fast rule: if an employer decides to hire employees to the same position as that of a laid-off employee within three years after his layoff, the employer must rehire that employee.

The just cause requirement affects employer’s right to end any employment that is for an indefinite term. But what about an employment contract for a fixed period, say one or two years? Initially, such a term clause is valid, so that the employee may be released at the end of the term, without any issue of just cause.

However, the course of conduct can nullify the term clause. Under court precedents, where a contract has been renewed on the same terms and conditions several times, a court may disregard the duration clause, and instead treat an employer’s refusal to renew the contract as effectively a dismissal–requiring just cause.

Moreover, under new legislation, there will be a specific trigger period: If an employer uses a "temporary" employee (one with a limited term contract) for longer than two years, that employee will be regarded as employed indefinitely—hence, as the contractual term expires, a non-renewal would be tantamount to termination and therefore require just cause. This is under the new Act on Protection of Temporary and Part-time Workers, which comes into force 1 July 2007

To illustrate, a company might hire a worker on a renewable one-year contract signed 1 July 2007, and renews the contract for one year from 1 July 2008. A second renewal of this one-year term, from 1 July 2009, would result in indefinite employment: While the contract still points to a one-year term ending 1 July 2010, in fact the company must retain the employee indefinitely, absent just cause to in effect dismiss—that is, not renew—him.

For companies using outsourced workers whom they directly supervise (or "dispatched workers"), a recent amendment to the Act on Protection of Dispatched Workers presents an ultimatum: If you use a dispatched worker for longer than two years, you must then hire the worker directly, as your own employee. (That is, unless the worker says no, or there is sufficient "reasonable excuse" for not employing him directly, a concept which awaits further definition in an implementing decree). This new rule, adopted 30 November 2006, will take effect from 1 July 2007. A worker to be so "adopted" is entitled to the same employment conditions as apply to employees handling the same tasks, and at any rate no worse terms than previously applied to him.

Long-term use of dispatched workers has been common in some industries in Korea, such as retailing. In view of the new rule, one point worth asking (nowhere addressed in the new law) is why companies might not simply try to turn over dispatched workers at intervals of at most two years.

Under the same two pieces of new legislation cited above, an employer will be prohibited from discriminating against temporary or part-time employees, or against dispatched workers (even prior to compulsory "adoption" as regular employees), in terms of pay or other working conditions, as compared to indefinite-term, full-time employees engaged in the same or similar types of work in the relevant business.

While most of the new legislation takes effect from 1 July 2007, the anti-discrimination provisions take effect in stages: from 1 July 2007 for workplaces with at least 300 employees, and for national and local government employers; from 1 July 2008 for workplaces with 100 to 300 employees; and from 1 July 2009 for workplaces of fewer than 100 employees.

Businesses in Korea face an array of legal restrictions that affect the ability to restructure a workforce, and limit flexibility in the use of alternative arrangements such as outsourcing. Issues may come up in oblique ways—for example, there may be a substantial difference between a three-year agreement and renewable one-year agreement. Understanding the legal regime can be critical for human resources planning in Korea.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.