Shutdown Allowances Under Korean Law

by Brendon Carr

This morning a client got in touch with what I fear may be an all-too-common issue: Headquarters wants all offices worldwide—including the client’s Korea branch office—to close up for a month, with staff on unpaid leave, as a cost-containment measure in response to the credit crunch. Previously, the company had done a week’s closure, during which employees were required to burn off their unused annual-leave balances.

The client asks: What does Korean law have to say about this? As the question seems to be of general interest, and this client may not be a good credit risk right now anyway (got to get those bills out!), I decided not to charge for the answer and to publish it here on Korea Law Blog. J., this one’s for you, buddy!

The first issue raised is whether Korea requires employers to pay some minimum “shutdown allowance.” The answer is yes: Art. 46 of the Labor Standards Act prescribes a shutdown allowance of 70% of the worker’s “average wage” during a period of business suspension due to “reasons attributable to the employer”. In general, this includes all cost-saving measures undertaken to save money. A smaller shutdown allowance is possible, but only by approval of the Ministry of Labor, after making a formal request explaining the business problems faced by the employer. We are advised that historically, MOLAB has been very hostile to employers making this request, but that currently the ministry is aware of global economic conditions and is prepared to be understanding about requests for a lower shutdown allowance.

In cases where the workforce needs to be restructured due to “urgent managerial necessity”, under Art. 24 of the Labor Standards Act an employer may terminate the employment of some workers without additional compensation, provided that certain procedures are followed in respect of worker consultation, number of and selection standards for workers to be made redundant, notice to Ministry of Labor, etc. But simply closing the business for a specific period of unpaid leave is not lawful except by permission of the Ministry of Labor.

As for mandatory use of accrued but unused annual leave entitlement, in principle the employee shall have complete freedom to choose the date and time of use of leave. But it is also possible to make agreements with the employees, individually or collectively through amendment of the Work Rules, in respect of when to use leave. Ministry of Labor is supposed to receive notices of amended Work Rules, but does not have the right to approve changes (well, to be frank, there is an informal “review” phenomenon where MOLAB may recommend or direct changes after receiving reports of changed Work Rules, but you get the idea…).

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