Now that the newly-elected Lee Jae-Myung administration has passed the Yellow Envelope Act amendment to the Trade Unions and Labor Relations Adjustment Act (TULRAA), the first major plank of its several planned labor-market reforms that increases the power of Korea’s trade unions, the National Assembly can move on to adopting the remaining reforms.

Chief among those reforms is the government’s announced intention to expand the application of all of the Labor Standards Act (LSA)’s provisions to workplaces with four (4) or fewer employees. Currently, by Presidential Enforcement Decree, certain critical LSA provisions do not apply to these smaller workplaces, meaning that employees of smaller businesses - nearly 10 million workers – do not enjoy all the same rights and privileges of employees in workplaces of five (5) or more employees.

The new administration has announced its intention to expand the application of LSA starting from the second half of 2026. If past history of major reforms to LSA is a guide, this means the government expects the National Assembly to pass the expansion by mid-February next year.

What Does This Mean for Non-Resident Foreign Employers and Smaller Investors?

Non-resident foreign employers have heretofore been in a strange sort of limbo where, if they employ any number of workers in Korea without formally establishing a corporate form, or employ workers through a registered liaison or branch office (entities which do not have limitation of liability as between Korea and the home jurisdiction), those employment relationships have been deemed subject to all provisions of LSA ab initio regardless how many workers.

This is because courts and labor tribunals, without direct legal precedent, have counted the number of employees in the hiring entity – which invariably has been five or more. Innumerable non-resident foreign employers found themselves dragged into dispute in Korea where they had considered themselves not to be operating here, and therefore beyond the grasp of the court or labor tribunal.

A little-noticed Supreme Court decision last October finally held for the first time that the number of employees subject to LSA shall be computed on the basis of employees actually working in Korea, not the entire entity (Sup. Ct. 2023 Du 46074; decision of Oct. 25, 2024). A separate decision the same day held that where separate legal entities integrate their operations, or employees in different workplaces in Korea are under common direction and control from a headquarters abroad, those workers’ numbers in Korea shall be aggregated for purposes of evaluating the five-employee threshold (Sup. Ct. 2023 Du 57876; decision of Oct. 25, 2024).

But the new administration’s plan to expand the application of all provisions of LSA to all workplaces and workers in Korea portends the need for smaller investors, multinational enterprises entering the market, and non-resident foreign employers who directly employ just a few workers without formally registering a business presence in Korea to pay attention to the provisions of LSA which will newly become applicable to their operations and employment relationships here. Benign neglect of Korea’s employment laws and muddling along will become increasingly unworkable when the government achieves this intended reform.

Say, Who’s an Employee, Anyway?

When discussing the five-employee threshold for application of all LSA provisions, it’s helpful to understand how Korea defines an employee and calculates the number of employees.

LSA Art. 2, item 1 defines an employee as “a person, regardless of occupation, who offers labor to a business or workplace for the purpose of earning wages.” This has the practical effect of meaning regardless of rank, seniority, or managerial responsibility, basically everyone who turns up to work for a paycheck is an employee. Of particular interest to US-based employers, this means the people you think of as “independent contractors” probably are employees for purposes of LSA.

Who’s not an employee, then? The employer, obviously. LSA Art. 2, item 2 defines the employer, for purposes of LSA, as “a business owner, or a person responsible for the management of business, or a person who acts on behalf of a business owner with respect to matters relating to employees”. In practice this means the shareholder, or the member of the Board of Directors formally entrusted with day-to-day management of the business in accordance with the Korean Commercial Code – i.e., the Representative Director. For most businesses, everyone other than the registered Representative Director is an employee.

Just Cause for Termination

The most important provision of LSA the government intends to extend to smaller businesses is its Art. 23 – the article requiring “just cause” for termination of the employment relationship. This article ensures that employees covered by the provision cannot easily be dismissed for misconduct or performance reasons, and workforce restructuring can only be accomplished either by employees’ voluntary separations or by a burdensome redundancy process established by LSA Art. 24. However, in workplaces with four or fewer employees, Art. 23’s restrictions on dismissal do not apply, meaning that employers in smaller businesses may dismiss employees without being held to the “just cause” standard. .

The Yellow Envelope Act functionally neuters LSA Art. 24 redundancies by empowering trade unions to undertake industrial action (i.e., strike) over workforce restructuring plans, a measure from which they were formerly prohibited by TULRAA. Korea’s legal framework on industrial action formerly limited trade union activity to matters of pay and benefits, worker safety, and working conditions; conversely, TULRAA prohibited industrial action over matters of “managerial rights”, which included workforce restructuring.

The Yellow Envelope Act abolished this distinction between worker rights and managerial rights. So upon the effectiveness of the Yellow Envelope Act March 10, 2026 - real soon now – the formal LSA Art. 24 process will become something which exists only in notion for employers who cannot endure a strike. Even in workplaces where there is no trade union, at the first hint of management plans to restructure or reduce the workforce, a union can form instantly and the workers may strike. Because LSA Art. 24 requires employers to attempt restructuring by voluntary redundancy programs before commencing formal process which may ultimately lead to mass layoffs, workers in Korea are now empowered to stop the process cold through collective action.

According to long-standing case precedent, “just cause” means a material fault or act of misconduct attributable to the employee which is so serious that it irrevocably breaks the trust relationship between employer and employee, so that by prevailing social standard in Korea, the contract of employment cannot be maintained (Sup. Ct. 91 Da 17931, decision of April 24, 1992; Sup. Ct. 2002 Du 9063, decision of December 27, 2002). This is a very high standard. It doesn’t mean that employers can never dismiss an employee, but it does require employers to both have very strong proof of the employee’s fault or misconduct, and also be prepared to defend its reasons in court or before a labor tribunal.

In Korea’s dispute resolution process for wrongful dismissal claims under LSA Art. 23, the employer bears 100% of the burden of proof.

Recourse to Labor Tribunal Seeking Redress

LSA Art. 30 affords workers who have been terminated from employment the option to petition a labor tribunal of the local Labor Relations Commission for redress – i.e., a reinstatement order.

Under current law, this provision does not apply to employees in workplaces with four or fewer employees. In those workplaces, employees who feel they have been unfairly dismissed may only seek redress in district court proceedings which (i) take a year or more to resolve; and (ii) cost the employee actual money. These factors tend to discourage employees in smaller businesses from disputing their termination.

By contrast, the labor tribunal process is markedly faster – from filing to decision usually takes 60-90 days – and costs the employee very little because the employee doesn’t have to prove anything. As noted, where LSA Art. 23 applies, the employer has the burden to prove everything and justify its managerial decision to terminate the employee. And the tribunal is not comprised of professional judges, but rather of three members representing the employer side, the “public interest”, and the employee side. Whether or not this means the labor tribunal is predisposed to find in favor of the employee is debatable, but in general employees tend to believe their chances are better.

The consequence of this change will be a much greater chance for the employer to become embroiled in dispute.

Written Notice of Termination

LSA Art. 27, also applicable only to workplaces with five (5) or more employees, provides that the employer must terminate the employee in writing, stating both the reason for termination and the effective date of termination. This article also states that termination shall not be effective unless and until the employee has actually received the notice.

Because the employer is only permitted to defend the reason for termination stated in the termination notice, the extension of this provision to smaller businesses will increase the complexity of dismissing an employee.

Working Hours, Overtime Payment, and Annual Leave

Under current law, the entire LSA chapter addressing working hours, workers’ eligibility for overtime premiums for extended, holiday, and overnight work, and annual leave does not apply to workplaces with four or fewer employees.

This means there is no obligation to track employee working hours, no enforcement of the maximum 52-hour workweek, no obligation to compute overtime allowances, and no obligation to provide employees 15-25 days of annual leave in accordance with LSA. Additionally, this means there is no obligation to track employees’ use of annual leave, nor to handle the complex system of enforcing the “use it or lose it” principle.

Extension of this chapter to smaller businesses will present a perplexing burden inasmuch as smaller businesses tend to operate without formal processes or a layer of supervision.

Workplace Harassment Provisions

Additionally, workplaces with four or fewer employees are not currently subject to the LSA’s Art. 76-2 and 76-3 prohibiting workplace harassment and making employers responsible to investigate and take “appropriate action” in response to claims of harassment.

These provisions empower the Ministry of Employment and Labor (MOEL) to investigate reports, issue corrective orders to employers, and in extremis, to recommend prosecutors take action to impose criminal punishments where employers do not adhere to corrective orders.

As with the working hours, overtime payment, and annual leave obligations, where the employer does not have direct supervision in the workplace, the extension of these anti-harassment obligations to smaller businesses will leave these employers in a highly vulnerable position in respect of workplace harassment charges.