Consequences of a Business Transfer in Korea: Employee Transfer?

In Korea, there is no statutory provision for the protection of employees in the event of a business transfer. Therefore, it has been left to the Korean courts to decide whether, and in what circumstances, employee transfer may occur as part of a business transfer.  The following is a basic explanation of the law of business transfer in Korea as it relates to the relationship between an employer and an employee.

The Korean courts have generally held that, in the event of a business transfer, unless the employee objects, the employment relationship between the employee and employer (transferor) will automatically transfer to the transferee (without any need for the specific consent of the employee) – inclusive of the terms and conditions of the employment relationship existing at the time of closing of the business transfer, unless otherwise agreed to.  However, while it is a fairly well-established principle, this right to automatic transfer does not necessarily equate to an automatic protection against dismissal.

Though the occurrence of business transfer, per se, cannot be ground for dismissal, “urgent business necessity” – ordinarily a justification for termination under Korean labor law  – may be assumed, in the event of a business transfer. Therefore, it is necessary to look to the Korean courts’ decisions for guidance as to the circumstances in which the employment relationship may, or may not, automatically transfer as part of a business transfer.

The first consideration with regard to this issue, is, of course, whether a “business transfer” has occurred.

In general, a business transfer has occurred if there has been a transfer of the company’s business as a whole – of the business’s organisation as a whole, including the transfer of human resources and both tangible and intangible property and rights. So, for example, if property is transferred only after a liquidation of the transferor’s assets, then a “business transfer” has not occurred. “In any case, the personnel or organisation structure should retain its integrity,” (Supreme Court Decision 99Du2680 Decided 27 July, 2001).

However, a business transfer may be held to have occurred even though the transfer was only partial – provided that, the transferred portion retains the same business function that it had prior to the transfer, with the employees involved in the same way (Supreme Court Decision 2002Da70822 Decided June, 2005).

In the case that the transfer is a transfer of assets, only, then the employment relationship between the employee and transferor is not automatically assumed by the transferee (Supreme Court Decided 99Du2680, 27 July, 2001).

However, care must be taken in assessing the actual nature of such a transfer, as in some cases a transfer may be nominally referred to as an “asset transfer” yet, substantively, a transfer of the company’s business as a whole and therefore deemed a “business transfer.”

Automatic transfer of the employment relationship extends only to those employees in employment with the transferor at the time of closing, and related to the business – or portion of the business – transferred.

Thus, a second consideration is, whether the person concerned was indeed employed by the transferor at the time of closing of the business transfer. A claim for reinstatement by a former employer of the transferor as against the transferee could not be upheld as a valid claim by the Korean courts.

Automatic transfer has been held not to extend to a former employee presently engaged in unfair dismissal proceedings against the transferor (Supreme Court Decision 91Da40276 Decided 14 July, 1997; 91Da41750 Decided 23 May, 1993).

The automatic transfer will, of course, not extend to an employee who has already voluntarily resigned and received severance pay from the transferor; however, receipt of severance pay may occur in the case that an employee is required to resign from the transferor in order to be re-hired by the transferee, merely in accordance with business policy, as part of the transfer process.

As for the carrying-over of the terms and conditions of the employment relationship, harmonization is permissible, although, for any change that would be disadvantageous to the employees, the transferee must obtain the consent of the majority-representing labor union, if there is one, or else the consent of a majority of the employees. If the change is not disadvantageous to the employees, then only consultation is required.

Of course, the transferee may be offering terms and conditions that are indeed favorable to those existing at closing. Liabilities, such as unpaid wages or other payments, should be jointly and severally borne by the transferor and transferee, although the transferee may exercise its right to indemnification against the transferor.

We shall be posting more updates on Korean Labor & Employment law over the next couple of weeks.

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