Two decisions set standards for when Labour Standards Act applies
On 25 October 2024, the South Korea Supreme Court issued two decisions on the applicability of the Labour Standards Act. These decisions mark the first occasion that the Supreme Court has set out the detailed standards for determining whether a “business or workplace” falls within the scope of the Act.
The Labour Standards Act (LSA) is South Korea's key employment statute, which stipulates the minimum statutory benefits for employees, employee protections and employer obligations.
According to Article 11 of the LSA, an employer who operates a business or workplace which ordinarily employs five or more employees is subject to all of the provisions contained in the LSA. In particular, an employer who ordinarily employs fewer than five employees is excluded from the restrictions on dismissals and the remedies for unfair dismissal under Articles 23 and 28 of the LSA, respectively.
The meaning of “number of employees regularly employed in a business or workplace” is therefore crucial to determining whether the employee protections measures under the LSA apply.
The worker, a Korean national, entered into an employment contract with the defendant, a foreign company headquartered in the US. The worker was the employer's sole employee working in Korea.
One of the legal issues to be determined was whether the employer was a business or workplace that employed five or more employees. The Seoul High Court had initially held that, in determining whether a business or workplace employed five or more employees, the total number of employees employed by a foreign employer should be included in the calculation. As the employer employed more than five employees outside of Korea, the court held that the LSA applied to the employer, notwithstanding that the worker was the sole employee employed by the employer in Korea.
On appeal, the Supreme Court reversed the decision and remanded the case back down to the Seoul High Court. The Supreme Court held that the scope of a “business or workplace” under Article 11 of the LSA should be limited to businesses and workplaces within Korea. As such, the overseas employees of a foreign employer should be excluded when calculating the size of the total number of employees.
The employee was employed by a Korean subsidiary of a foreign company based in Dubai, which was ultimately controlled by an Australian parent company. The employer shared an office space, and expensed human resources and financial accounting services with a separate legal entity in Korea that was ultimately controlled by the Australian parent company. Subsequently, the employer ceased operations in Korea and dismissed the employee.
On appeal, the Supreme Court held that in determining whether multiple entities should be treated as a single business or workplace for the purposes of Article 11 of the LSA, the court will consider the following factors:
The Supreme Court held that the relationship between the two entities went beyond the typical level of cooperation between companies and were subject to the same management/control by the parent company. Although the two Korean entities were legally distinct, they were to be treated as a single business or workplace for the purposes of Article 11 of the LSA, and the employees of both entities were to be included in when calculating the employee headcount. As the total number of employees employed by the two entities was more than five, the employee protection measures under the LSA applied.
The two recent decisions by the Supreme Court provide clarity on the scope of a “business or workplace” under Article 11 of the LSA. Foreign-based employers or employers with a single legal entity in Korea can take comfort in knowing that only employees working in Korea will count towards the minimum number of five employees required for the application of the LSA.
On the other hand, employers with multiple related legal entities in Korea should review their business operations and consider whether the business operations and functions of the entities are integrated or managed as a single organically connected unit, and consider whether any adjustments are necessary. Where entities are interdependent, employers should be mindful that the provisions of the LSA will apply as long as the total employees employed by the various entities is five or more.
Fatim Jumabhoy is head of the Employment, Pensions and Incentives practice at Herbert Smith Freehills in Singapore. Prawidha Muti is a Partner at Hiswara Bunjamin & Tandjung in Jakarta. Nonnabhat (Niab) Paiboon is a Partner at Herbert Smith Freehills in Bangkog. Gillian Miao is a Counsel at Herbert Smith Freehill’s joint operation firm Kewei in Shanghai, specialising in employment law.
