SOUTH KOREA: In a landmark decision, South Korea’s Supreme Court on October 25, 2024, issued two key rulings regarding the scope of the Labour Standards Act (LSA). These decisions are the first to establish clear guidelines on how to determine whether a business or workplace is subject to the protections and obligations stipulated by the Act. The rulings bring clarity to foreign employers and companies operating in Korea, laying down how employee head counts are calculated for the LSA to apply.
Understanding the Labour Standards Act (LSA) and its implications
According to the latest HRD Asia report, the LSA is South Korea’s fundamental employment statute, establishing minimum standards for employee benefits, protections, and employer responsibilities. Article 11 of the LSA specifies that businesses or workplaces with five or more employees are subject to its provisions. In particular, it exempts businesses with fewer than five employees from certain restrictions, such as those related to dismissals and remedies for unfair dismissal. Determining whether an employer meets the employee threshold is, therefore, crucial in deciding if LSA protections apply.
Court ruling: Foreign employer-employee count limited to Korea
One of the cases revolved around a foreign company, headquartered in the US, with a single employee based in South Korea. The Seoul High Court had previously ruled that when determining the number of employees, the total head count of a foreign employer, including employees working abroad, should be included. As the US employer employed more than five people globally, the court initially concluded that the LSA applied in Korea, despite only one employee being based there.
However, the Supreme Court overturned this decision, clarifying that the LSA’s scope should be limited to businesses and workplaces within South Korea. This means that only employees working within Korea count towards the employee head count required for the LSA to apply to the company. Foreign workers employed outside Korea are not included in the calculation.
Key determining factors for multi-entity operations
The second case involved a Korean subsidiary of a Dubai-based foreign company, ultimately controlled by an Australian parent company. The employee was dismissed after the subsidiary ceased operations in Korea. The core issue was whether the subsidiary and a separate legal entity in Korea, under the same parent company, should be treated as a single business or workplace under the LSA.
In its ruling, the Supreme Court established a set of criteria for determining whether multiple related entities should be considered a single workplace. Factors include:
- Whether the work purpose, nature, and location are identical across the entities.
- Whether human resource functions, such as hiring and termination, are uniformly managed by the same parent company.
- Whether the entities’ business operations are integrated, sharing resources like accounting and finance to pursue common goals.
In this case, the court concluded that despite the legal separation of the two Korean entities, they were effectively operated as a unified business under the parent company’s control. As a result, the total employee count across both entities was considered, meaning that the employee protections of the LSA applied.
Implications for employers and future compliance
These rulings offer clarity for foreign employers and businesses with multiple related entities in South Korea. Foreign-based companies with a single legal entity in Korea can take comfort in knowing that only employees within the country will count towards the five-employee threshold for the LSA to apply.
However, for employers with multiple interrelated legal entities operating in Korea, the ruling urges a review of their business structure. Companies should assess whether their operations are integrated in such a way that they should be considered a single workplace for LSA purposes. If so, the employee protections of the LSA will apply once the collective employee head count exceeds five.
These important decisions underscore the importance of understanding the nuanced application of South Korea’s labour laws, particularly for foreign and multinational companies.