Striking a balance

Author: | Published: 18 Oct 2018
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During the 2017 Korean presidential election to replace impeached former president Geun-hye Park, President Jae-in Moon made labour reform a central plank of his campaign. Among other things, President Moon pledged to reduce excessive working hours, raise the minimum wage and further protect private-sector workers' already strong job security. Without a National Assembly majority, President Moon has had to work across the aisle to make progress on issues requiring legislative action. But in Korea, where even the centre-right is relatively open to pro-labour reforms by the standards of some other countries, both legislative and administrative steps have already been taken to fulfil these campaign promises. More may come.

Business leaders and investors have long argued that what Korea needs is more labour flexibility, not less. For them, seeing Korea take an even more labour-friendly turn may be somewhat disheartening. However, for businesses considering creating, expanding, or reducing a Korean workforce, understanding Korea's labour and employment regime, as well as how it is changing, is key to sound decision-making.

Korea's fairly rigid, worker-friendly employment-law regime makes any kind of substantial restructuring, or change to employees' terms and conditions, very difficult. One can build and structure a workforce in a variety of ways; however, once established, any substantial change to that structure is an uphill trek. This makes it essential to fully understand the implications of the choices one makes when establishing business operations in Korea.

Wage-and-hour rules are also fairly rigid, and apply broadly to most classes of worker other than very senior management and a few exempt industries. And because it is a crime to violate many of Korea's labour laws, compliance is not only a matter of the company's bottom line. It is also a way of ensuring that the chief executive and top executive team keep clean rap sheets.

Any business looking to establish a workforce in Korea, especially foreign investors, should be aware of these and other issues, and seek expert guidance on how to navigate them.

Robust employment protection

Just cause for dismissal

At-will employment is virtually unknown in Korea, where a just cause is virtually always required to dismiss an employee. There are only a few exceptions, including employers below a workforce-size threshold (fewer than five employees). Top executives such as CEOs can also generally be terminable at will as they are not generally considered employees. But virtually all others are protected.

The just cause standard is extraordinarily strict. Even fraud, theft of company property, and workplace violence can fail to satisfy the just cause standard for termination in the Korean courts or labour tribunals, depending on the severity and the particular circumstances (even if they may justify lesser disciplinary measures). Poor performance is expected to be objectively clear and egregious, and to last for multiple years despite the company's genuine and significant efforts to help the employee improve, before it might justify a dismissal. And layoffs for business reasons are limited to cases of urgent business necessity–generally meaning that the company's survival is at risk without downsizing–and subject to other stringent requirements.

Changing terms and conditions

Beyond the protection of employees' job security, their terms and conditions are also protected from unilateral adverse changes. Of course, changing contract terms generally requires an individual employee's agreement. In addition, company policies and well-established practices relating to employees' collective terms and conditions are protected from unilateral adverse change by an employer. The employer must receive majority consent from the affected workers (or consent from a union representing them) to such changes.

Exit packages and severance pay

Once hired, an employee becomes almost a kind of charge of the employer, entitled to continued support as long as the employee remains willing and able to provide the agreed work in the agreed manner, except in exceptional circumstances. Thus downsizing, exiting a poor performer, or even parting with an employee guilty of misconduct seen as too petty to be considered grounds for dismissal, often requires offering a significant sum of money to buy the employee's resignation. Employees have significant leverage to demand a big pay-out to walk away peacefully and sign a release. Since the remedy for unjust dismissal is reinstatement rather than mere monetary compensation, there is no clear maximum pay-out that serves as a de facto ceiling on what an employee may demand. Pay-outs of one year's or even several years' pay are not so uncommon, though the amount depends heavily on the particular circumstances.

These pay-outs are on top of statutory severance benefits that can already be considerable. An employee who works for an employer for at least one year is entitled to severance benefits upon termination of employment, no matter the reason, because severance benefits are considered as essentially deferred wages which have already been earned. Severance benefits can be provided either as a lump sum of severance pay (in an amount roughly equal to one month's salary, around the time of termination, per year of service) or through a qualified severance pension plan (either defined-benefit or defined-contribution).

Fixed-term employment

One way of alleviating the inflexibility of the Korean system is using fixed-term contracts. It is not uncommon for employers to start employees on fixed-term contracts so that there can be a one or two-year period of evaluation – of individual performance as well as business need for the role – beyond the standard probationary period, which is most commonly three months. However, fixed-term contracts are less attractive to candidates and can make it harder to recruit top talent for important roles. Perhaps more importantly, fixed-term employment is generally limited to a maximum of two years, after which an employee automatically becomes permanent if they are kept on. There are important exceptions to that rule: certain licensed professionals (eg lawyers, doctors), manager-level and professional employees whose salary income for income-tax purposes is in the top 25% of all employees engaging in the Korean Standard Job Category 2 (which in 2018 is KRW60,693,000 ($53,777)); people over 55 years old; and research employees of various research institutes. All of these can be kept as fixed-term employees indefinitely, if they are willing to remain as such. Other employees, if they stay beyond two years, become permanent. Properly managing the use of fixed-term contract can be a key tool for maintaining a measure of workforce flexibility.

Mandatory retirement

An employer can also establish a mandatory retirement age in its policies. This should be done from the beginning so it does not represent an adverse change to terms and conditions. Moreover, establishing a mandatory retirement age sets a limit on how long employees can insist on staying with the company. The mandatory retirement age must be at least 60.

Outsourcing and agency workers

Another way to maintain flexibility is simply not to directly hire.

One method is to obtain temporary manpower (aka dispatched workers) from an agency. However, Korean law strictly limits the use of dispatched workers. They can be used only for two years and for narrowly defined specific roles set by law and which exclude, among others, all manufacturing activities. They must also come from a licensed agency. Violating these rules can grant the workers a right to direct employment, and subject the company and its management to criminal liability.

Another method is using an outside service provider. The restrictions on manpower supply do not apply to service providers. However, such relationships can be recharacterised as illegal worker-dispatch arrangements. Courts look at many factors when deciding whether to recharacterise a service-provider relationship in this way, but the central question is whether the company is in substance directing the specific manner in which the workers perform their work as if they are its own employees.

There are quite a few cases where the courts and/or the Ministry of Employment and Labour (MOEL) have engaged in this sort of recharacterisation. Such cases include, among others, ones involving employees of service providers working at the plants of Hyundai Motor Company and GM Korea. In addition, a major franchisor (Paris Baguette) was recently ordered to directly hire several thousand bakers employed by contractors, even though they worked at individual franchisee bakeries and not at the franchisor headquarters. The manufacturing sector has traditionally been a primary target for scrutiny, with production-line work being strictly off-limits to dispatched workers. But other areas have also come under increased scrutiny, as seen in the Paris Baguette case, and another recent case involving telecommunications company LG U+.

Overtime and working hours

Broad application of wage-and-hour rules

The theme of strict protections for workers extends beyond employment-protection and into Korea's wage-and-hour rules as well. Unlike in the US, in Korea the vast majority of workers are entitled to premium pay for work beyond regular hours, overnight work and work on days off. The premium is calculated at a rate of 50% – meaning that pay would be time and a half – and generally calculated cumulatively (ie up to 250% pay, for weekend overtime at night). Senior managers/executives with discretion over their own hours and significant personnel-management authority can also be deemed exempt. Others, however, including even skilled and licensed professionals and well-compensated managers, are in fact entitled to overtime pay and subject to maximum working-hours limits.

New 52-hour week rule

A recently passed law has abolished the past practice of allowing up to 68 hours per week of work, comprising 40 regular hours, up to 12 overtime hours, and up to 16 day-off hours (generally on weekends). Instead, 52 hours, comprising 40 regular and 12 overtime hours, will be the limit under most circumstances. As a compromise measure, however, although work on a company-designated day off (eg, Saturday, Sunday or a public holiday) will count for the purposes of the weekly 12-hour overtime limit, overtime and day-off premiums will not apply cumulatively to eight hours of work per day off. This means that the premium-pay rate can only reach a maximum of double-pay, not 250%, as long as only eight hours are worked on any given day off.

Narrowed industry exceptions and phase-in

This amendment has also dramatically narrowed the scope of designated industries where special labour-management agreements are permitted to authorise additional overtime. These changes have already had the effect of requiring a significant number of employers to find ways to arrange reductions in their employees' working hours. And more will become subject to these changes over time, as the 52-hour week is being phased in based on workforce size. Employers with 300 or more employees, as well as most government-invested or government-controlled employers, are already subject to the 52-hour limit. Those with 50 to 299 employees will become subject on January 1 2020, and those with five to 49 will become subject on July 1 2021.

Flexible hours and other alternative working-hours systems

Korean law provides for various optional working-hours systems that can somewhat alleviate the burden of these maximum-hours limits and overtime-pay requirements. Most of these options involve averaging working hours over a certain calculation period rather than determining compliance each week and day. Most require a written labour-management agreement, though a two-week averaging period can be used simply by having it in a workforce policy. If provided in a labour-management agreement, workers in certain types of jobs that involve significant discretion over the manner of performing their work (such as news reporters, scientific researchers and R&D employees), can also agree to deem their working hours to be a certain amount, rather than actually keeping track of them on an ongoing basis. Another approach used by some employers is to pay a pre-agreed fixed allowance for a certain amount of overtime expected to be worked regularly, so that additional premium pay is required only if a worker performs more overtime than agreed in advance.

While the above systems and approaches can alleviate some of the inflexibility in Korea's working-hours and overtime rules, these systems are narrowly construed and strictly applied, so care must be taken to ensure compliance when using them.

Minimum wage

KRW10,000/hour minimum wage

President Moon made an explicit campaign promise to increase the minimum wage to KRW10,000 per hour. So far, the government is on track to reach that goal, having raised the minimum wage to KRW7,530 per hour for 2018 (a 16.4% increase) and KRW8,350 for 2019 (a 10.9% increase). There is growing industry pressure in opposition to the increases, claiming that the sharp minimum-wage increases imposed by the Moon administration are depressing employment, while failing to truly raise aggregate wages for low-income earners and to deliver the effective demand-side economic stimulus that the government promised and intended.

Regulatory change: counting paid days off for minimum-wage compliance

Another pro-labour change being pursued by the government is to amend the relevant regulations under the Minimum Wage Act to clarify that paid days off should be counted (eight hours per day) when converting monthly pay to an hourly wage for purposes of minimum-wage compliance. Counting more hours per month has the effect of increasing the denominator and thus decreasing the hourly wage used to determine minimum-wage compliance. This change can be effected unilaterally by the government through the normal regulatory process.

There has long been a split between the MOEL's view and the relevant Supreme Court precedent. MOEL's view has been that paid days off should count, such that full-time workers who receive the minimum statutory one paid day off per week would be considered to have 209 working hours per month. To the contrary, the Supreme Court – though in a panel decision, not en banc – has held that only actual working hours should count, so the same full-time worker would be deemed to have only 174 working hours per month for minimum wage purposes.

Companies that have followed the Supreme Court's more employer-friendly approach will have to adjust. Moreover, deciding whether to designate both days of the weekend as paid days off, or only one (with one unpaid), will take on greater importance for such employers.

Pro-business minimum wage reform

Even while raising the minimum wage significantly as described above, the government has tried to somewhat soften the blow by reforming the way minimum-wage compliance is determined

A recently passed law allows more kinds of compensation to be counted for the purposes of minimum-wage compliance. Many forms of compensation that do count for purposes of calculating the basic wage on which things like overtime pay are based, do not count for purposes of determining minimum-wage compliance. For example, bonuses and cash welfare benefits have typically not been included in the minimum-wage calculation.

However, the recent change in the law will allow companies to count fixed regular monthly bonuses and welfare benefits that exceed a certain threshold as a percentage of an employee's base wage. That percentage will decrease each year until reaching zero, allowing the entire amount to be counted. Additionally, the law allows companies to unilaterally convert non-monthly payments to monthly payments so that they can be counted, by requiring companies merely to consult their workforce instead of obtaining their consent for such change.

This legislation has attracted fierce opposition from labour groups, which have initiated a lawsuit in Korea's Constitutional Court seeking to overturn it.

Unions

Although Korea's overall unionisation rate is the lowest in the OECD (10.3% in 2016), Korean law actually makes forming a union exceptionally easy. Any two employees can file relatively simply paperwork and, almost immediately, a union is formed. There is no need for any election and there are essentially no significant lawful countermeasures an employer can take upon learning about a unionisation effort, nor any mechanism to de-certify a union that lacks broad workforce support.

Once formed, a union can demand good faith collective bargaining and organise industrial action, and an employer is heavily restricted as to how it can respond. An excessively heavy-handed response to union activity may constitute an unfair labour practice, for which the company chief executive and/or other responsible executives can be held criminally liable. The legal standard for judging when a company crosses the line from legitimate opposition to union demands, to illegitimate interference with union activities, is relatively union-friendly in practice.

A union representing two-thirds of the workers in a business can also try to include a union-shop clause in the collective bargaining agreement, essentially cementing the union's status and virtual permanent majority-union status. Korea also allows multiple unions to be formed in a single business. Companies, however, have the right to demand a single bargaining channel.

Criminal liability for executives

Korean employment law is heavily criminalised. What this means is that many routine employment-law compliance failures, such as paying insufficient wages or overtime pay, having employees work excessive hours, responding forcefully to union action, and more, can constitute crimes for which the chief executive or other responsible executives are personally responsible.

When the relationship with a worker or a union turns especially adversarial, it is not an uncommon tactic for that worker or union to file a criminal complaint. This typically drags the company chief executive into an investigation and can potentially result in a conviction. Although such criminal penalties are often merely moderate fines, they can be jail time depending on the circumstances.

Anticipate the issues

Korea can be an exceptional place for investment and business development for a variety of reasons, including its advanced technology and infrastructure and a highly educated population. However, the use of any sort of manpower is subject to fairly rigid constraints that make it especially important to get things right from the start, or at least to identify and fix problems early. Especially given the Moon government's increased focus on expanding, strengthening, and enforcing Korea's already strict employment and labour law regime, great care should be taken to be aware of, and properly navigate, potential pitfalls.

About the author
 

Soojung Lee
Senior foreign counsel, Yulchon

Seoul, South Korea
T: +82 2 528 5246
F: +82 2 528 5228
E: slee@yulchon.com
W: www.yulchon.com

Soojung Lee is a senior foreign counsel in Yulchon's labour and employment practice. Soojung advises both domestic and foreign multinational companies in relation to all manner of labour and employment matters in Korea, including workforce reduction, employee and executive termination, collective labour relations, discrimination, use of non-regular workers, and general employment law compliance.

A native Korean speaker, Soojung has extensive legal and business experience in both Korea and the US She has been recognised as a legal expert in the labour and employment field in Korea by prestigious international and domestic publications and directories, such as Chambers Asia-Pacific and Who's Who Legal.


About the author
 

Christopher Mandel
Foreign attorney, Yulchon

Seoul, South Korea
T: +82 2 528 5040
F: +82 2 528 5228
E: cmandel@yulchon.com
W: www.yulchon.com

Christopher Mandel is a foreign attorney and a senior associate at Yulchon, practicing employment and labour law. Christopher's practice is focused on advising foreign clients that have, or are looking to establish, a Korean workforce. He previously worked as an associate in the New York office of Sullivan & Cromwell, and clerked for the Honourable William H Yohn, Jr. of the United States District Court for the Eastern District of Pennsylvania.