Recent Supreme Court decision on applicability of the Labour Standards Act on branch offices

At a glance

• The Labour Standards Act (LSA) establishes minimum working conditions and a legal framework for employer-employee relationships in Korea.
• The LSA applies to businesses with at least five regularly employed employees, making the employee count critical for determining protections under the Act.
• Through two decisions issued on 25 October 2024, the Supreme Court laid out specific standards to determine the scope of a 'business or workplace' to which the LSA will apply. 

This article has been reproduced with the permission of the authors Weon Jung Kim, Ki Young Kim, Paul Cho, Hyun Jae Park, Ji Yoon Jeong and Hoin Lee at Kim & Chang.

The LSA is Korea’s fundamental law regulating the minimum working conditions for employees and prescribing the basic legal framework for employment relationship between employers and employees, including the rigorous 'just cause' termination standard. The LSA sets out the scope of its applicability in article 11, stating that it applies to all businesses or workplaces in which at least five employees are regularly employed. As such, the concept of 'number of employees regularly employed in a business or workplace' is a critical factor in determining whether the employee protection measures of the LSA would apply.

Through two decisions issued on 25 October 2024, the Supreme Court laid out specific standards to determine the scope of a 'business or workplace' to which the LSA will apply.

The first Supreme Court decision 

In determining whether a foreign entity hiring employees in Korea will be considered as a "business or workplace that regularly employs five or more employees”, the Supreme Court held that the determination should be limited to "the business or workplace located within Korea” and further elaborated that "employees that work outside of Korea where the LSA does not apply should be excluded from the number of regularly employed employees”.

This decision is in sharp contrast to the appellate decision by the Seoul High Court which had held that not only the employees in Korea but all employees that worked for the head office should also be included in calculating the number of regularly employed employees and hence in determining the application of the LSA.

The Supreme Court, however, remanded the appellate decision, holding that the employees that a foreign employer employs outside of Korea where the LSA does not apply should be excluded from this calculation.

The Supreme Court based its decision on the following reasons:

• The construct of a 'business or workplace' should be limited to social / economic units that are identical in substance and to which the various regulations pertaining to an employment relationship can uniformly apply. Therefore, the concept of a 'business or workplace' under Article 11 of the LSA should be limited to businesses and workplaces within Korea.
• Unless there are exceptional circumstances, the employees of foreign employers in foreign jurisdictions should be governed by the employment laws of their respective jurisdictions. As such, foreign employees who are not governed by the LSA in the first place should not be counted into its headcount threshold.

The second Supreme Court decision

In this case, the Supreme Court held that even two separate legal entities can be viewed as the 'same business or workplace' if the two entities are organically connected and subject to the same management to a degree where they can be viewed as being identical social / economic units.

The Supreme Court based its decision on the following reasons:

• Generally, two legal entities that are separate and independent from each other cannot be viewed as one business or workplace.
• However, an exception to this is if the relationship between two legal entities goes beyond the typical level of cooperation between companies or control between parent / affiliate / subsidiary entities to the point they can be viewed as an identical social / economic unit that is organically connected and managed as a single unit.

The following points should be comprehensively considered in determining whether multiple entities can be treated as one business or workplace: 

• whether the type, characteristic, purpose, method, and location of work are identical;
• whether the Human Resources function, such as hiring, work instructions, determining working conditions, and terminations of each entity is performed independently or uniformly decided across the board for all entities by the same management team; and
• whether each entity’s business operation is intertwined and their personnel or organisational structure, finance, and accounting are managed in close relation to pursue a single business objective.

These decisions marked the first occasion in which the Supreme Court explicitly set out detailed standards for determining the number of employees regularly employed by:

• a foreign entity hiring employees in Korea; and
• multiple entities that have close business interactions with each other.