Workplace Restructuring

I. Understanding Managerial Dismissal

Section3. Matters of Consideration when Planning Managerial Dismissals

1. Legal Issues

(1) Concept
Dismissal for managerial reasons (hereby referred to as managerial dismissal) refers to when an employer dismisses an employee for urgent business reasons. As managerial dismissal is implemented without cause attributable to the employee, there are strict requirements an employer must follow. Such dismissal may be accepted as justifiable according to Article 23 of the Labor Standards Act (LSA) if the employer satisfies four requirements: 1) There exists urgent necessity in relation to the business; 2) Efforts were made to avoid dismissal; 3) Fair criteria was used in the selection of those persons subject to dismissal; and 4) The employee representative was notified 50 days in advance and sincere consultations were done with him/her.

There are some items that need to be considered in reality in the process of satisfying the above four requirements. Firstly, in cases where the Collective Agreement includes an employment stabilization agreement on managerial dismissal or a clause requiring the Labor Union's agreement in the process of managerial dismissal, how the company might deal with them is a matter of concern. Secondly, in a company with only one labor union that represents only production workers, whether an employee representative for white collar employees is needed or not when white collar employees are included in those being dismissed for managerial reasons, must also be considered. Thirdly, in cases where those subject to dismissal exceed 10% or more of the total employees, while the employer has an obligation to report to the Minister of Labor 30 days prior to dismissal, there is no penal provision for failing to do so. Whether the employer chooses to observe the reporting duty or not can be an issue.

(2) Restrictions on Managerial Dismissal According to the Collective Agreement

1) Agreements on procedures for managerial dismissal in the Collective Agreement
In cases where the Collective Agreement contains clauses requiring agreement from the Labor Union on those subject to managerial dismissal and the early retirement package (ERP) bonus (as seen in the box below), the company may not be able to reach an agreement with the Labor Union. If the company cannot reach agreement with the Labor Union, how can the company select those subject to dismissal and how can it determine an ERP bonus?

Collective Bargaining: Article 27 (Reduction of Personnel) 1. When the company intends to reduce personnel due to urgent business reasons, it shall inform the Labor Union of the reason(s) 60 days prior to dismissal and agree with the Labor Union on the criteria and procedure for choosing those subject to dismissal, and ERP bonus. (The order of priority follows voluntary applicants and late joiners).

The phrases in the Collective Agreement, the company shall agree with the Labor Union and The order of priority follows late joiners can be the biggest barriers in the process of managerial dismissal. This is because these phrases form the essential procedures to follow, which are The Company can conduct managerial dismissal, but must do the following: 1) Notify the Labor Union 60 days in advance; 2) Reach agreement with the Labor Union on the criteria and procedures for choosing those subject to managerial dismissal, and 3) Reach agreement with the Labor Union on details of the ERP bonus. It is important that the company follows such procedures.

As for the ERP bonus, reaching an agreement is likely to be difficult as the company expects a lower amount while the Labor Union may insist on the maximum amount. Therefore, since the company has sufficiently consulted with the Labor Union regarding the level of the ERP bonus, it is not necessary for the two parties to reach agreement. The next condition is that the company shall reach agreement with the Labor Union regarding the criteria for choosing those subject to dismissal. If the two parties cannot reach such agreement, the company shall adhere to procedures that choose voluntary applicants and late-joiners first. This means that the company has to respect seniority and select late-joiners as those subject to managerial dismissal in cases where there is no agreement on the matter. If the company has to unilaterally dismiss some employees for managerial reasons, it does not have to pay an ERP bonus to those Union members. The most beneficial course for both parties is to make every effort to reach an agreement on reasonable criteria for dismissal. Accordingly, in order to handle the restrictions on managerial dismissal, both parties are required to set up an appropriate ERP bonus through sufficient consultation, and work hard to reach an agreement on fair criteria for dismissal. Otherwise the company will have to dismiss simply based on seniority.

○ Judicial ruling 1) In cases where there is an article requiring prior agreement with the Labor Union regarding personnel dismissal in the Collective Agreement, such personnel dismissal outside of this process is invalid. Supreme Court ruling on July 15, 2010, 2007Du15797.

In cases where there are regulated in the Collective Agreement articles requiring prior agreement and consent with the Labor Union regarding personnel dismissal, or requiring an agreement on personnel dismissal through consultations with the Labor Union, the dismissals of personnel outside of this process shall be regarded as invalid in principle. However, even though the Collective Agreement contains a requirement of such prior agreement with the Labor Union, the employer's personnel management rights are not always only what can be implemented according to the agreement or consent of the Labor Union. If it is regarded that the Labor Union has abused the right of prior agreement or given up a right of prior agreement intentionally, it is valid for the employer to carry out personnel dismissal without receiving the Labor Union's agreement.

○ Judicial ruling 2): While a prior agreement with the Labor Union has been made necessary for times of managerial dismissal, consultation alone would be sufficient. Seoul Appellate Court on July 10, 2003, 200Na58138.

As managerial dismissal is a significantly sensitive managerial decision to be made by the management body, it cannot be an item for collective bargaining in principle. Even though managerial dismissal is an essential managerial right and cannot be an item for collective bargaining, the Collective Agreement can introduce an article requiring the company to decide or implement managerial dismissal based on agreement with the Labor Union. In this case, it shall not be determined that the company gave up or severely restricted its own managerial rights. In reviewing the article in the Collective Agreement requiring prior agreement with the Labor Union, the purpose of this agreement does not mean that the company shall have the Labor Union's prior agreement in order to make managerial decisions, but the clause of the agreement shall be translated as 'sufficient consultation' to ensure rationality and fairness in the company efforts to give the Labor Union the opportunities necessary to deliver in advance its opinions on the criteria for managerial dismissal etc., and shall in good faith refer to the Union's opinions.

2) Employment stabilization agreement
Details on employment adjustment cannot be topics for collective bargaining. However, if the company accepted the Union's demand and stipulated it in the Collective Agreement, the employer has an obligation to observe this. A decision by the Seoul Appellate Court states While merging with Company B, Company A will continue the employment of all personnel, and shall not, after the merger, dismiss personnel unilaterally. Supreme Court ruling on May 26, 2011, 2011Do7526.
And a Supreme Court ruling: The company shall not engage in managerial dismissal for the next five years. Supreme Court ruling on Oct. 24, 2003, 2003Da43278. (Daewoo Motors)
In cases where this employment stabilization agreement is newly introduced in the Collective Agreement, it is doubtful whether the company can implement managerial dismissal in light of urgent business necessity.

In general, judicial rulings explain that in cases where a company's very survival is at risk due to financial crisis, or where a company is experiencing very negative business changes it had not anticipated at the time the employment stabilization section was agreed to in the Collective Agreement, this agreement does not have to be honored. However, in all other cases, this agreement remains valid.

○ Judicial ruling: Managerial dismissal in conflict with the employment stabilization agreement is unfair dismissal. Administrative Court ruling on July 1, 2011, 2010Guhap35272.        

Employment adjustments like managerial dismissal are sensitive managerial decisions of the management body and shall not be items for collective bargaining in principle. However, the Collective Agreement, which is a written document of agreements made through collective bargaining between the company and the Labor Union, has no limitations in details, as long as they do not violate law or good public order and customs. In cases where the employer decides to limit unilateral managerial dismissal and concludes an employment stabilization agreement with the Labor Union, this agreement shall be considered a normative portion of the Collective Agreement as the standards concerning working conditions and the treatment of workers. Accordingly, unless there is a special situation like the unfairness of continuing the effectiveness of the Collective Agreement in light of changes that could not be expected at the time the Agreement was concluded, the company's decision to oppose the Agreement is invalid in principle.


(3) Employee Representative for White Collar Employees
In cases where there is a Labor Union consisting of only production workers, and which represents the majority of all employees, when the company intends to include white collar employees in its plans for managerial dismissal for business reasons, is it acceptable to only engage in consultations with the labor union representing only production workers?
In cases where the company intends to conduct managerial dismissal covering all employees, even though white collar employees are not members of this Labor Union, the Labor Union as a majority labor union can represent white collar employees. There should therefore be no legal issues from the absence of a white collar employee representative. However, if those subject to managerial dismissal are not production workers, but only white collar employees, the Labor Union cannot be the employee representative, and an employee body representing the white collar employees shall be established.

○ Judicial ruling: Consultation with an employee representative shall not be considered as sincere if the employee representative and the Labor Union have no interest in matters related to personnel reduction of a particular group of employees subject to managerial dismissal. Administrative Court ruling on Jan. 30, 2004, 2003Guhap18866.

Article 24 (paragraph 3) of the Labor Standards Act is designed to provide opportunities for those potentially subject to managerial dismissal to have their own representing body put forward their interests to the company. In cases where downsizing predominantly affects employees of 4th rank or higher, it is necessary to consult with employee representatives who represent the interests of employees at 4th rank or higher. The employee representatives with which the hospital consulted regarding managerial dismissal represented employees of 5th rank or lower and the Labor Union was a minority Labor Union also representing employees of 5th rank or lower, the employee representatives and Labor Union members were not those potentially affected by managerial dismissal. Therefore, consultation with these employee representatives and the Labor Union cannot be regarded as sincere consultation with the employee representative required for managerial dismissal.

○ Administrative Guideline: Labor Ministry Guidelines: Labor direction-3856, on Sept. 18, 2008.

Who is the main employee representative for consultations on dismissal for managerial reasons?
When planning managerial dismissals involving all employees, the company shall consult with the Labor Union representing the majority of employees. However, in cases where dismissal for managerial reasons targets employees of a particular rank, it is desirable to consult with the Labor Union composed of those employees of that particular rank so as to prevent labor disputes.

(4) Reporting to the Ministry of Employment and Labor
The Labor Standards Act regulates that during times of managerial dismissal, An employer intending to dismiss more than 10% of the total number of workers in any given month shall report to the Minister of Employment, 30 days prior to first dismissal, the dismissal plan stipulating 1) reasons for dismissal; 2) number of workers to be dismissed; 3) details of consultations with a representative of workers; and 4) dismissal schedule (Article 24 (paragraph 4) of the LSA). However, this clause does not include any necessary conditions or procedures to satisfy the need for justification of managerial dismissal, nor does it include penal provisions. It therefore leaves in question whether the company has to observe this clause or not.

Provided, Article 33 (Report of Large Changes in Employment) of the Basic Employment Policy Act regulates that If changes in the volume of employment due to the automation, installation or expansion of production facilities or the reduction, adjustment, etc. of business scale reach the level prescribed by Presidential Decree, the employer shall report to the head of the competent employment security office on matters related to the changes. If the employer neglects this clause, a fine up to 3 million won can be levied. The level prescribed by Presidential Decree is 30 persons or more per workplace or a company ordinarily hiring less than 300 employees; and 10% of the total employees for workplaces or companies ordinarily hiring 300 employees or more. Accordingly, even though there is no influence on justification for managerial dismissal, it is desired that employers report to the Minister of Labor 30 days prior to managerial dismissal in order to avoid the fine for negligence and promote acceptance of eligibility for unemployment benefits later.

(5) Comments
As managerial dismissal involves dismissing a large number of employees due to a company's urgent business necessity, employers should make every effort to follow the restrictions found in the Labor Standards Act and relevant clauses of their Collective Agreements. This is necessary not only to verify that the company is using managerial dismissal as a last resort, but also to exhibit to employees surviving such dismissals that the company has done its best to protect its workforce. It is also highly desirable for the company to make sufficient efforts to avoid unilateral managerial dismissal for reasons to anticipate reliable labor relations in the future.

2. Voluntary Early Retirement Programs

(1) Necessity of Voluntary Early Retirement Programs
It is difficult to dismiss employees when following all the requirements for Dismissal for Managerial Reasons under the Labor Standards Act. As this dismissal requires the employer to follow specific procedures to verify managerial reasons, many companies replace dismissals for managerial reasons by adopting a voluntary Early Retirement Program ("ERP") instead.
Voluntary early retirement means that the employee resigns at his or her own discretion, which can be a positive situation by giving employees more options than if they were dismissed for managerial reasons. If the company pays employees an additional ERP bonus and employees accept it, personnel reduction will take place even without dismissal for managerial reasons. This situation frees the company from any risk of violating the related laws, as well as the need to enter into legal proceedings or report to the Ministry of Labor.
Recently, a number of companies that have dismissed employees for managerial reasons, or were in the process of dismissing for managerial reasons, have lost lawsuits for unfair dismissal because of a lack of effort to avoid those dismissals, so ERPs can be an alternative to dismissal for managerial reasons. Thus, I would like to concretely review some implementation methods for ERP, as well as considerations to be made when using an ERP instead of dismissing for managerial reasons.

(2) Implementation of Voluntary Early Retirement Programs

1) The Concept of Voluntary Early Retirement
Voluntary early retirement refers to terminating employment when the employee submits a letter of resignation voluntarily upon accepting an employer's recommendation that He/she do so. Here, as the employer intends to dismiss the employee for unilateral business reasons (without reasons attributable to the employee), it is necessary for the employer to offer sufficient rewards to the employee so that the employee willingly submits a letter of resignation. During the time before imminent dismissal for managerial reasons, voluntary early retirement with bonuses might be the best option for the employee, rather than being fired without compensation.

2) Matters To Be Considered When Planning ERPs         
In companies adopting ERPs, many competent employees may find employment with other companies after receiving their ERP bonus. Although the main purpose of ERPs is to terminate incompetent or unproductive employees, they may also impact the company negatively should they lose competent employees as well. Therefore, it is necessary to establish a clear purpose and clear methods ahead of the implementation of an ERP. That is, if plans for an ERP mostly attract employees not specifically targeted for early retirement by the company, the company needs to have the authority to reject applications.

3) Establishment of an ERP Bonus
The employer's major concern may usually be focused on the level of financial compensation rather than legal disputes with the employees concerned. In cases where voluntary early retirement is used as a means of dismissing employees, whether that ERP becomes successful or not is greatly dependent upon the level of the ERP bonus. Generally speaking, in determining ERP bonuses, the employer needs to consider both the length of service of the employees (reflecting their contribution to the company) and the company's ability to pay those bonuses. The employer needs to pay special attention when determining the level of compensation, recognizing that the first ERP bonus paid out will become the standard for any following ERP cases.

4) Informing Employees Subject to Voluntary Early Retirement
The ideal method is for the company to specify which employees will be subject to voluntary early retirement from those who fall behind their peers in terms of skills and performance. In this case, the company creates a list of employees under consideration in advance, explains the ERP to them, and asks them to accept. If the company cannot persuade some employees to accept the ERP, then the company can begin dismissing for managerial reasons, following the guidelines under the Labor Standards Act. The employer needs to make clear to the employees that there will be no benefits should they refuse the ERP and wait to be dismissed for managerial reasons. In cases where employees are dismissed for managerial reasons, the company is not obligated to pay any financial compensation like the ERP bonus.

5) Implementing the ERP Together With Dismissals for Managerial Reasons
In cases where employees do not accept the ERP that the company offers, the employer needs to dismiss those employees for managerial reasons, following the guidelines in the Labor Standards Act. In these cases, timing of the dismissals is important. If the desired number of personnel accept the ERP, it is not necessary to announce any dismissals.

If dismissals are announced at the same time as the ERP, some serious problems may occur in the company's organizational atmosphere or in the ERP bonus. Accordingly, it is recommended that the company announce the ERP before basic requirements and legal procedures needed to dismiss employees for managerial reasons. If the number of ERP applications exceeds the target, it is not necessary to dismiss any employees for managerial reasons. If the number of ERP applications falls short of the target, it is necessary to implement the basic requirements and legal procedures to begin dismissing employees for managerial reasons. That is, the company should begin dismissing the selected employees for managerial reasons if the number of applications for the ERP is insufficient. At the same time, the employees should be informed that there will be no ERP bonuses upon dismissal for managerial reasons. In this case, the managers-in-charge who directly consult with the employees subject to voluntary early retirement need to be properly trained.

In cases where it is desired that only specific employees accept early retirement, it is recommended not to announce the ERP to all employees, but to only inform the employees subject to early voluntary resignation. Those employees who accept the ERP will finish their employment when they receive the ERP bonus and submit their letters of resignation. However, the rest of the company's contracted employees will finish their employment when their contract period has expired. In this case, cancellation notices for contracted employees also need to be considered.
(3) Other Programs Outside of ERP bonuses
It is necessary to develop other programs to reduce the psychological impact on an employee from sudden resignation. That is, personnel reduction should be implemented with "legal severance pay + ERP bonus + outplacement + unemployment allowance."

(4) Comments
As ERPs are systems where the employer provides an ERP bonus and the employee resigns in return for that ERP bonus, involuntary dismissal does not have to occur. If the employee submits a letter of resignation and receives severance pay and the ERP bonus, his or her resignation is accepted as a proper closing of labor relations, even if He/she has applied for remedy against the company.

Dismissal for managerial reasons is the only method to dismiss an employee without a reason attributable to the employee under the current Labor Standards Act, which has strict legal requirements and procedures for actual practice. ERPs have frequently been used to avoid the aforementioned problems and minimize the number of employees subject to dismissal for managerial reasons.

In particular, as ERPs can offer sufficient rewards and provide opportunities for re-employment, they can reduce opposition from the affected employees. ERPs will also build reliability within the remaining employees so that they can concentrate on their duties. Therefore, it is recommended that companies develop an ERP suitable for their own situations and thereby prevent many future disputes resulting from dismissals for managerial reasons.


For further questions, please
call (+82) 2-539-0098 or email bongsoo@k-labor.com

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