South Korea: Supreme Court provides clarity on the interpretation of a "business and workplace" under the Labour Standards Act

On 25 October 2024, the 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.

Labour Standards 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.

Supreme Court Decision 2023Du46074

The plaintiff, a Korean national, entered into an employment contract with the defendant, a foreign company headquartered in America. The plaintiff was the defendant's sole employee working in Korea.

One of the legal issues to be determined was whether the defendant 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 defendant employed more than five employees outside of Korea, the Seoul High Court held that the LSA applied to the defendant, notwithstanding that the plaintiff was the sole employee employed by the defendant in Korea.

On appeal, the Supreme Court reversed the appellate 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.

Supreme Court Decision 2023Du57876

The employee was employed by a Korean subsidiary of a foreign company based in Dubai (Employer), which was ultimately controlled by an Australian parent company. The Employer shared an office space, expenses human resources and financial accounting services with a separate legal entity in Korea, that was also 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:

• whether the nature, purpose and method of work and the work location of the two entities are identical;
• whether the human resource function, such as decisions on hiring, work directives, working conditions and terminations, of each entity is performed independently or if they are universally decided for in a uniform manner by the same management team; and
• whether the two entities' business operations, such as personnel or organisational structure, accounting and finances are integrated and managed in close association to pursue a single, unified business objective.

The Supreme Court held that in the present case, 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.   

Key Takeaways

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.