Human resources are crucial for sustaining a business, yet occasionally, intense pressure arises to restructure the workforce due to management challenges or economic fluctuations.

Law firm Law-Win outlines essential, general and broad knowledge about the termination of employment relationships that you need to know.

Q: How is a termination of employment conducted in Korea?

According to the Labor Standards Act in Korea, there is a general/typical dismissal (hereinafter “dismissal”) and a dismissal for managerial reasons (hereinafter “dismissal for managerial reasons”).

Dismissal refers to the unilateral ending of an employment contract by the employer, regardless of the terminology used in the workplace or the procedure followed, against the will of the employee, and it should follow Labor Standards Act Article 23, Article 26, Article 27.

The key points of each provision can be summarized as follows:

-- Article 23: “justifiable cause” refers to both substantive justification (whether there is a valid reason for terminating the employee) and procedural justification (whether disciplinary procedures were followed and the employee was given ample opportunity to defend themselves.

-- Jurisprudence defines “justifiable cause” as a situation where, in accordance with societal norms, there exists a reason attributable to the employee significant enough to make the continuation of the employment relationship untenable, or where there is an unavoidable business necessity.

-- Article 26: notice of dismissal must be made at least 30 days in advance of such dismissal.

-- Article 27: notification in writing of the grounds for and timing of the dismissal to the employee.

Q: What is a "dismissal for managerial reasons?"

Dismissal for managerial reasons refers to the termination of employees under certain conditions in order to reduce the number of personnel engaged in a business due to urgent managerial needs. Unlike a dismissal, a dismissal for managerial reasons is 1) carried out due to managerial necessities unrelated to the employee’s fault and 2) accompanied by a reduction measure involving multiple employees. As a result of these characteristics, it has more stringent requirements than a dismissal.

Q: How is a dismissal for managerial reasons carried out?

A dismissal for managerial reasons must follow Labor Standards Act Article 24.

In order to execute a dismissal for managerial reasons, one must: 1) demonstrate an urgent business necessity; 2) show efforts to avoid dismissal; 3) establish reasonable and fair criteria for dismissal; and 4) notify and sincerely consult with the majority labor union or employee representatives at least 50 days prior to the intended termination date.

-- “Urgent business necessity” is limited to situations where the continuation of business is untenable due to deteriorating management, where there is a plausible risk of severe financial hardship or where workforce reduction is objectively deemed reasonable.

-- “Efforts to avoid dismissal” mean that the employer must take every possible measure before a reducing staff, such as streamlining work processes, prohibiting new hires, implementing temporary suspensions and voluntary retirements, initiating unpaid leaves and implementing transfers.

-- “Establishing reasonable and fair dismissal criteria” refers to the standards for selecting employees for dismissal. It is imperative that the criteria are both objectively reasonable and socially acceptable, and that they are applied fairly to select the appropriate individuals for termination. Considerations include work performance, attitude, the company’s financial situation and the health and financial status of the employee, among others.

-- “Consultation with union or employee representatives” requires that the employer, in seeking to avoid termination, must inform and earnestly discuss methods to avert termination and the criteria for such with the labor union -- comprising the majority of the employees at the respective workplace -- at least 50 days before the intended date of termination.

Q: Are there any cases involving dismissals for managerial reasons?

Facts of one case:

Based on a management diagnosis report as of March 2015, it was anticipated that there would be a sharp decline in sales and operating profits from 2015. Financial risks, such as deteriorating cash flow due to plummeting sales, were identified. Market and environmental risks emerged from declining price competitiveness due to the imposition of anti-dumping tariffs on oil wells by the US. Furthermore, operational management risk included insufficient available funds for product manufacturing and company maintenance costs, as well as an increased burden of labor costs for idle workers due to decreased production. As a liquidity securing measure in response to these challenges, there was a proposal to reduce the number of production workers from the current three shifts with 248 workers to a single shift with 65 workers.

In response, the company announced an organizational restructuring plan within the company that included “restructuring approximately 150 production workers and reducing salaries of executive and administrative employees by 50%. From April 16 to April 30, 2015, one administrative employee and six executives resigned. From May 1 to May 20, 2015, 137 production workers voluntarily resigned.

Then, as of the end of August 2015, according to another management diagnosis report, there were 86 production workers, but considering the production volume, the optimal number of production staff was estimated to be a single shift with 65 workers. Maintaining the minimum workforce suitable for the estimated production volume was proposed as one of the liquidity assurance measures. On September 15, 2015, the labor union was notified of the selection criteria for layoffs, the layoff implementation schedule, and other relevant details. This information was also announced internally, and five workers were designated for layoffs. Of these, three who did not submit their resignations were eventually laid off.

Court ruling:

Korea's Supreme Court held that it is not necessary to have continuous accumulated deficits to determine the presence of an urgent managerial need. The records show that there was a consensus between labor and management regarding the pressing managerial need at the time of the layoffs in question. Around the time of the layoffs, another publicly traded company in the same industry, which was known to have a robust financial structure, had even filed for the commencement of rehabilitation procedures, indicating that the business climate was quite challenging. The company’s liquidity crisis, as revealed in the management diagnostic report and other documents, signifies that there was a significant downturn in operations and liquidity crisis at the time of the layoffs, which were unlikely to be easily resolved in a short period. Therefore, objectively speaking, there was a rationale behind the decision to reduce staff in response to this situation.

Yeon Jae-jeong

Law firm Law-Win’s international litigation advisory team was established to effectively resolve domestic and international legal disputes without language barriers, working with competent attorneys specialized in various practical areas such as criminal law, civil law, bankruptcy, etc., as well as with 49 interpreters skilled in over 14 languages. (English, Sinhala, Tamil, Thai, Arabic, Russian, French, Mongolian, Chinese, Burmese, Japanese, Khmer, German, Vietnamese and Uzbek) -- Ed.