Shutdown dismissals and layoffs
Final separation
False shutdown
Payment to employees

In these challenging economic times, many companies facing financial difficulties may ultimately choose to end business operations permanently and begin the often confusing process of shutdown (ie, dissolution and liquidation). Properly handling labour and employment issues related to a shutdown can be demanding. If a company is unaware of its obligations, challenges may arise that can complicate the shutdown process.

Shutdown dismissals and layoffs

Under Korean law, layoffs due to business difficulties are treated differently from dismissals resulting from a shutdown. These two issues must therefore be analysed and approached separately.

A company may lay off employees if there is an urgent business need to do so and if it follows the proper procedural requirements. These include:

  • taking good-faith efforts to avoid dismissals;
  • basing dismissals on fair standards;
  • consulting with the labour union or labour representative at least 50 days in advance of the date of dismissal;
  • filing an advance report with the labour authority; and
  • rehiring dismissed employees should their positions again become available within two years.

In contrast, shutdown dismissals are subject to less demanding legal requirements. Both the Korean Supreme Court and the Ministry of Labour and Employment have taken the position that the ability to terminate business operations at will is a fundamental component of the right to conduct business freely. Thus, in most cases a shutdown gives a company just cause to dismiss its employees, as required under the terms of the Labour Standards Act.

The procedural requirements for layoffs do not apply to shutdown dismissals. To dismiss an employee as part of a shutdown, a company must meet only the minimal notification requirements set forth principally in the Labour Standards Act. Specifically, a company taking steps towards a shutdown must provide either 30 days' notice or 30 days' normal wages to each dismissed employee. Some companies elect to provide notice rather than immediately dismissing and paying wages, because either they need the employees to prepare for the shutdown or the notice period is a mechanism that helps employees to cope with their dismissal.

Final separation

After a shutdown, a company has no obligation to guarantee that a third-party company hire its dismissed employees. However, in limited circumstances a third-party company may have an obligation to hire an employee dismissed by a company that has shut down. Specifically, the obligation to hire an employee may exist if the operations of the shutdown company were closely linked with those of a separate company or if the separate company controlled and monitored the work of the dismissed employee.

The Korean administrative courts have addressed the issue of closely intertwined operations. A notable case involved a think tank for a political party, which was a separate entity from the political party. The political party merged with a separate political party. As a result of the merger, the think tank closed.

The employees of the think tank sued the merged political party, claiming that the party was obligated to hire them due to their close business relationship. While the court found in favour of the new political party, it commented that the new political party might have had an obligation to hire the employees if the think tank had been merely an agency or a division of the political party that it served.

In a frequently cited Supreme Court case, several employees of a subcontractor to a manufacturing company claimed that they were entitled to direct employment by the manufacturer. The court found for the employees, citing several factors. Specifically, the court noted that the manufacturer controlled several essential aspects of the employee's work, such as performance evaluations. The court also emphasised that the subcontractor was not wholly independent from the manufacturer. These factors weighed heavily in favour of the employees.

In theory, this case implies that employees of a company that shuts down may claim that they are employees of the manufacturer to which they provided services. To date, however, no case has addressed this issue directly.

False shutdown

The comments above address only true shutdowns, where a company intends to end business operations permanently. If a company chooses to shut down for some purpose other than ending business operations and establishes a new company (eg, in the hope of dismantling a labour union), it may trigger an obligation for the new company to rehire the dismissed employees.

Some companies have attempted to continue business under a different name after ostensibly shutting down their operations by setting up new companies to which they transferred essential assets. In such cases these companies should either rehire their dismissed employees and provide back wages or otherwise compensate the employees for the misconduct. Compensation packages might include compensation for the considerable mental anguish that an employee may experience following termination. When evaluating false shutdown claims, the court will attempt to infer the company's central reasons for carrying out the shutdown.

Payment to employees

When a shutdown company dismisses its employees, it must pay the employees all owed money, including back wages, severance pay and compensation for unused accumulated leave. The employee's rights to such wages are protected under the Labour Standard Act. For example, the shutdown company and its liquidator may be subject to criminal liability if they fail to pay such wages on time.

Of more practical importance is the issue of 'honorary severance pay', which is used to refer to an additional payment given to ease the separation process following a shutdown and in some other circumstances. Employers are not legally obligated to provide honorary severance pay. Most companies preparing to shutdown, however, voluntarily choose to provide such pay because it helps to avoid the labour disputes that may result from a shutdown, such as strikes and legal disputes. In the past, disgruntled employees have brought civil and criminal claims alleging, for example, that directors have mismanaged company funds, and sometimes resorted to a strike and occupation of the premises.

The amount of such honorary severance payment is generally determined on a case-by-case basis through direct negotiation with the dismissed employees or their representative. Many factors come into play during the negotiation process (eg, age or seniority). Honorary retirement payments typically range from between three months' to one year's salary.


A Korean company contemplating a shutdown should evaluate its circumstances carefully and ask several key questions, including the following:

  • Is there any arrangement (eg, a collective bargaining agreement, work rules or employment agreement) that requires the company to consult with, or obtain consent from, the employees in advance of the shutdown?
  • Has it prepared its workforce for the shutdown by providing adequate notice?
  • Does a third party control its operations or employees?
  • Is the shutdown intended for a legitimate purpose?
  • Has it considered honorary severance payments and negotiated these payments properly?

Companies may wish to seek legal advice to help with navigation of this difficult terrain and to avoid exacerbating an already difficult situation.

For further information on this topic please contact Hee-Chul Kang at Yulchon by telephone (+82 2 528 5200), fax (+82 2 528 5300) or email ([email protected]).