Key Korean Labor Law Issues for Foreign Companies

When a global company establishes a subsidiary or branch in Korea and begins hiring local employees, one of the first major regulatory challenges it encounters is Korean labor law.

Employment practices that may be common in jurisdictions such as the United States—including relatively flexible termination practices—or collective agreements and HR guidelines adopted by an overseas headquarters do not necessarily operate in the same manner under Korean law.

Korean labor law consists largely of mandatory employee-protection rules. Accordingly, even if an employment agreement provides that the laws of the foreign parent company’s jurisdiction will govern the contract, Korean labor law will generally apply to work performed in Korea.

Foreign companies that simply apply their global HR systems to Korean employees without local legal review may face unfair dismissal claims, complaints filed with the labor authorities, criminal complaints, reputational damage, and significant settlement costs.

This article explains three core areas of Korean labor law that foreign companies should understand: termination, working hours, and severance pay.

1. Termination: There Must Be Just Cause and Proper Procedure

Article 23(1) of the Korean Labor Standards Act provides that an employer may not dismiss an employee without “just cause.”

“Just cause” generally refers to circumstances in which there is a sufficiently serious reason attributable to the employee such that, under generally accepted social standards, continuation of the employment relationship can no longer reasonably be expected.

Item	Legal Standard
Just Cause	There must be a sufficiently serious employee-related reason making continuation of the employment relationship unreasonable under generally accepted social standards.
Advance Notice of Dismissal	At least 30 days’ prior notice is generally required. If notice is not given, the employer must generally pay at least 30 days’ ordinary wages in lieu of notice.
Written Notice Requirement	The employer must provide written notice specifying the reason for dismissal and the effective date of termination.

A low performance evaluation score, underperformance, or a change in the parent company’s business structure will not necessarily constitute sufficient grounds for dismissal on its own.

In the case of dismissal for managerial reasons, including restructuring or redundancy, Article 24 of the Labor Standards Act generally requires satisfaction of four principal requirements:

1. an urgent managerial necessity;
2. best efforts to avoid dismissal;
3. reasonable and fair criteria for selecting employees to be dismissed; and
4. prior consultation with the employee representative at least 50 days in advance.

2. Working Hours and Premium Pay: The 52-Hour Workweek

For workplaces with five or more employees, Korea generally applies a maximum 52-hour workweek consisting of:

• 40 hours of regular working time per week; and
• up to 12 additional hours of overtime based on agreement between the parties.

Requiring employees to work beyond the statutory maximum under ordinary circumstances may result in criminal penalties.

In addition, if a company fails to maintain an appropriate system for recording and managing employees’ working hours, accumulated overtime claims can potentially develop into significant wage disputes.

Where overtime, nighttime work, or holiday work is required for business purposes, the employer must calculate and pay the applicable premium wages in accordance with Article 56 of the Labor Standards Act.

Premium Pay Structure

Overtime and nighttime work between 10:00 p.m. and 6:00 a.m.:
An additional 50% of ordinary wages, resulting in payment at 150% of the ordinary wage rate.

Holiday work:
For up to eight hours, an additional 50% applies, resulting in payment at 150%. For work exceeding eight hours on a holiday, an additional 100% applies, resulting in payment at 200%.

Annual paid leave:
An employee who has attended work for at least 80% of a one-year period is generally entitled to 15 days of annual paid leave. Employees with less than one year of service generally accrue one day of paid leave for each month of perfect attendance.

Where unused annual leave remains and the statutory requirements for extinguishing the employer’s payment obligation have not been satisfied, the employer may be required to pay compensation for unused annual leave.

3. Severance Pay and Retirement Pension

Under Korean labor law, statutory severance pay is generally guaranteed to employees who have continuously worked for at least one year and whose prescribed working hours average at least 15 hours per week, regardless of the size of the workplace.

A provision in an overseas parent company’s employment agreement stating that severance pay is already included in the employee’s annual salary, or an arrangement under which severance pay is divided and paid monthly together with salary, may be held invalid under Korean law.

In such a case, amounts previously paid as purported severance installments may instead be treated as ordinary wages, creating a risk that the employer must pay statutory severance again when the employment relationship ends.

An employer must generally provide at least 30 days of average wages for each year of continuous service.

“Average wages” are generally calculated by dividing the total wages paid during the three months immediately preceding the termination date by the total number of calendar days during that period. The calculation may include not only base salary but also regularly and continuously paid allowances and certain bonuses.

If the calculated average wage is lower than the employee’s ordinary wage, the ordinary wage may be used as the relevant basis for calculating severance pay.

Under the Employee Retirement Benefit Security Act, employers may also operate retirement benefit arrangements such as:

• Defined Benefit (“DB”) plans;
• Defined Contribution (“DC”) plans; or
• Individual Retirement Pension (“IRP”) arrangements.

Upon termination of employment, severance pay must generally be paid within 14 days from the date on which the payment obligation arises, unless the parties agree otherwise due to special circumstances.

Unjustified delay may result in statutory delay interest and may also expose the employer to criminal liability.

Even if an employee signs a waiver before or after termination stating that he or she will not claim statutory severance pay, such a waiver may be invalid where it violates mandatory labor law protections. The employer should therefore ensure that the statutory amount is properly settled.

4. Common Legal Mistakes Made by Foreign Companies in Korea

Foreign subsidiaries and branches in Korea frequently make the following HR and employment-law mistakes.

① Applying Global Standard Employment Documents Without Korean-Law Review

Foreign companies sometimes use employment agreements, employee handbooks, or disciplinary policies prepared by overseas headquarters without adapting them to Korean law.

Provisions that conflict with mandatory Korean labor laws—such as unrestricted discretionary termination clauses or provisions excluding statutory premium pay—may be invalid regardless of the parent company’s internal policy.

They may also lead to complaints filed with the labor authorities or labor inspections.

② Overreliance on Performance Improvement Plans

Completing a Performance Improvement Plan (“PIP”) does not automatically establish just cause for dismissal.

Korean courts and labor commissions closely examine factors such as:

• the objectivity and fairness of the performance evaluation;
• whether sufficient opportunities for improvement were provided;
• the duration and substance of the PIP; and
• whether reassignment or other less severe alternatives were considered.

Accordingly, dismissal based solely on failure to meet PIP targets may still be found unfair.

③ Misclassifying Executives as Non-Employees

Even where an individual is formally registered as a director, branch manager, or other corporate officer, he or she may still qualify as an “employee” under Korean labor law if, in substance, the person works under specific direction and supervision and receives fixed compensation.

If so, termination of the individual’s engagement may give rise to unfair dismissal claims and claims for unpaid severance or other statutory employment benefits.

④ Excessive Use of Non-Compete and Confidentiality Restrictions

Non-compete provisions modeled on overseas headquarters policies may be difficult to enforce if they impose excessively long restriction periods or cover an unreasonably broad geographic area or scope of business.

Korean courts may find such provisions invalid where they excessively restrict an employee’s constitutional freedom to choose an occupation.

Applying a Foreign Headquarters’ HR System to Korea Without Local Adaptation Can Create Serious Employment-Law Exposure

Korean labor law contains strong mandatory protections that may override contractual arrangements or internal policies adopted by an overseas headquarters.

Applying global compensation structures or termination procedures without careful Korean-law review can lead to labor complaints, unfair dismissal proceedings, criminal investigations, and substantial financial and reputational costs.

For successful localization, foreign companies should prepare employment agreements, work rules, and HR procedures that comply with Korean labor law from the beginning of their Korean operations.

Ongoing advice from experienced Korean employment counsel can also help foreign companies identify and manage employment risks before they develop into significant disputes.