Labor: Employment Termination Based on Urgent Managerial Necessity

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Under the Labor Standards Act of Korea (LSA), an employer may not terminate an employee without a justifiable cause. Under LSA, such justifiable cause would include “layoffs” or so-called “administrative terminations” implemented due to ‘urgent managerial necessities of the company. In this article, we take a close look at employment termination based on urgent managerial necessity.

The LSA requires that in order for “layoffs” to be justified, (i) an urgent managerial necessity requiring employment termination must exist, (ii) the employer must have made considerable efforts to avoid layoffs, (iii) the employees subject to termination must have been selected in accordance with reasonable and fair criteria, and (iv) the employer must have consulted in good faith with labor union or employee representative on the methods to avoid termination and standards for selection of employees being terminated.

  • (1) Urgent managerial necessity
  • An employer desiring certain employment termination due to managerial reason must have “urgent business necessity.” Examples of urgent managerial necessities warranting layoffs/administrative terminations of employees include: bankruptcy or other similar business emergencies; M&As and business transfers, etc., implemented in order to prevent severe deterioration of the business; cases where closing down a department/line/division has become unavoidable; reorganization of the office; reduction of the scope of services; closing or liquidation of the business; or other similar causes/purposes, such as, rationalizing the management and/or improving productivity. The Korean Supreme Court has ruled in the past that such ‘urgent managerial necessities’ include only those limited cases where it is necessary in order to prevent a company in a serious business crisis from filing bankruptcy. However, recent case precedent has broadened the scope to include situations where, from a long term perspective, the layoff is objectively and reasonably predicted to be necessary in order to prevent a potentially anticipated business crisis.

We note that even under recent court cases, layoffs implemented where the company’s deterioration in business is due only to temporary occurrences/situations, or where the layoff is implemented merely in order to increase profits without any deterioration in business, the business layoff will be considered invalid.

(2) Efforts to avoid termination

Assuming the above requirement (i.e., urgent business necessity) has been satisfied, in order for the layoff to be acknowledged as valid, the employer must prove that it had made considerable efforts to avoid the termination for a substantial period of time, and that the decision to implement the terminations was made only as a last resort. According to case precedent, examples of valid methods (i.e., efforts) to avoid a business layoff include, reduction in expenses through rationalization of management, reduction of work hours or wages, freezes in new hires, termination (non-renewal) of employment contracts for part time/temporary employees, changes in stationing such as transfer of posts/positions, etc., temporary suspension of business, and inviting voluntary resignations, etc. The employer need not perform all of the above examples, but must make its best efforts to examine and perform the feasible methods based on the circumstances of each business.

(3) Reasonableness and fairness in the selection of the employees subject to termination

After considerable efforts have been expended to avoid the termination, the selection of employees subject to termination must be conducted according to reasonable and fair standards. We note that taking preference in terminating female employees is unreasonable and unfair and constitutes a typical example of an invalid business layoff. In addition, such a practice would be in violation of the LSA and the Act on Equal Employment for Both Sexes which may subject the company to additional/separate fines.

(4) Consultation with Employees

If all of the above requirements under the LSA are met, at least 50 days before the planned date of effecting the relevant termination, the employer is required to consult with the employee representative (i.e., labor union if the labor union has been organized by a majority of employees, or the representative representing a majority of employees in the absence of labor union) with regard to such matters as the methods to avoid termination and the standards for selecting employees subject to termination. During the consultation process, the employee representative should provide opinion, comment or propose alternatives that reflect the opinion of all employees, and the employer should try to accept the opinion, comments, or alternatives suggested by the employees to the extent possible and also provide reasons for any of such opinion, comment or alternatives that cannot be accepted by the employer.