Requirements and Legality of Management Layoffs in South Korea

1. Introduction

With the global prevalence of COVID-19, management layoffs have become increasingly common in underperforming industries in South Korea, and even foreign companies facing poor performance resort to management layoffs. However, the criteria for management layoffs in Korea are stringent, with minimal precedents where the Labor Commission and the courts have deemed such layoffs legal.

Therefore, to carry out management layoffs in Korea, it is crucial to meet all the requirements for such layoffs. The process should be carefully executed by considering various factors that the courts have recognized as justifiable grounds for legal management layoffs. Failure to meet these criteria may result in the reinstatement of the laid-off employees and potential liabilities for unpaid wages during the layoff period.

2. Requirements for Management Layoffs

Article 24 of the Labor Standards Act establishes (1) urgent managerial necessity, (2) efforts to avoid layoffs, (3) reasonable and fair criteria for layoffs, and (4) consultation with the labor representative at least 50 days prior as legal requirements for management layoffs.

a. Urgent Managerial Necessity

In determining urgent managerial necessity, recent Supreme Court decisions consider factors such as (1) the industry’s overall financial crisis leading to insolvency, (2) recognition of a business crisis through an audit firm’s management diagnosis report, (3) the scale of total and short-term borrowings, and (4) acknowledgment of the necessity for layoffs by the affected employees.

The Seoul Labor Commission, in a case related to COVID-19 layoffs in the airline industry (Case No. 2021부해744), also considered factors like the need for workforce reduction, employee salaries, and the company’s initiation of a recovery procedure.

Therefore, assessing managerial necessity requires a comprehensive review of (1) industry conditions, (2) employee salaries, (3) financial statement analysis, (4) employee acknowledgment of managerial necessity, and (5) assessments by relevant authorities such as accounting firms or recovery courts.

b. Efforts to Avoid Layoffs

Efforts to avoid layoffs vary based on the reasons for layoffs, the scale of the business, and the number of employees affected. While setting universal criteria is challenging, demonstrating sincere efforts to explore alternatives and the inevitability of layoffs enhances the likelihood of meeting this requirement. Strategies such as (1) prohibiting new hires, (2) implementing voluntary resignations, and (3) unpaid leave should be explored before resorting to layoffs. If layoffs are deemed unavoidable even after these efforts, providing evidence of minimal layoffs will strengthen the case.

c. Reasonable and Fair Criteria for Layoffs

The selection of employees for layoffs must be reasonable. Supreme Court precedents emphasize considering both the protective aspects for employees (e.g., age, family dependents, and other income sources) and the company’s profit-oriented factors (e.g., employee performance and qualifications). Foreign companies, especially, should avoid discriminatory criteria based on nationality or gender, as these may be viewed as insufficient grounds for layoffs.

d. Consultation with the Labor Representative 50 Days in Advance

In cases where a labor union represents the majority of workers, consultations must involve the union. In the absence of a union, the company must engage with a designated labor representative at least 50 days before layoffs. Discussions should cover the reasons for layoffs, the company’s financial situation, efforts to avoid layoffs, the number and scope of layoffs, selection criteria, layoff procedures, and protective measures for affected employees.

3. Conclusion

As mentioned earlier, obtaining recognition for management layoffs in Korea is challenging, and conducting layoffs without careful consideration of legal requirements may lead to reinstatement and payment of backdated wages. Therefore, management layoffs should be approached cautiously, emphasizing the potential consequences of not proceeding with layoffs on the company’s viability.

Analyzing various cases and seeking legal counsel from a reputable firm experienced in handling similar situations is essential. Ahnse Law Firm has successfully handled multiple cases, including management layoffs for foreign companies. For any inquiries regarding this matter, please feel free to contact us.