Determining Applicability of the Labor Standards Act for Foreign Companies with Fewer than Five Employees
Bongsoo Jung, Korean labor attorney at KangNam labor law firm
I. Introduction
Foreign companies often have substantial headquarters, but their domestic branches or offices frequently employ fewer than five people. This situation has led to numerous disputes regarding whether the provisions of the Labor Standards Act (LSA) governing restrictions on dismissals and other protections apply to such workplaces. According to Article 11 of the LSA, the Act fully applies to businesses or workplaces employing at least five workers, while those employing fewer than five are excluded from the restrictions on dismissals under Article 23 and the remedies for unfair dismissal under Article 28.
Recently, the Supreme Court has delivered differing judgments on cases involving foreign companies with workplaces employing fewer than five people, adding to the confusion.
• Case 1 (Supreme Court ruling on October 25, 2024, 2023Du37391): A German company established a Korean branch employing two workers and maintained independent legal and financial accounting systems. The Court determined that this branch constituted a workplace with fewer than five employees.
• Case 2 (Supreme Court Ruling on October 25, 2024, 2023Du46074): An American company employed one worker in Korea, and assigned another Korean-based American company with more than five employees to handle this worker’s salary and social insurance matters. The American company later dismissed the worker. The Court ruled that the workforce count for the purposes of the LSA could not include individuals employed outside Korea and thus deemed the branch to have fewer than five employees.
• Case 3 (Supreme Court Ruling on October 25, 2024, 2023Du57876): An Australian travel company operated two separate legal entities in Korea but managed personnel, accounting, and other administrative tasks jointly in a single office. When one entity ceased operations, it dismissed its employee. The Court determined that while the two Korean entities were legally distinct, they constituted a single workplace, making the entity that ceased operations a workplace with five or more employees.
• Case 4 (Seoul High Court Ruling on February 3, 2023, 2022Nu50412): An American telecommunications company established a business office in Korea and employed two workers. The employees conducted business under the name of the headquarters, worked exclusively for it, and received additional incentives from the headquarters. Both the Administrative Court and Appellate Court ruled that the office was a workplace with five or more employees, considering its integration with the headquarters, and deemed a worker's dismissal unfair. The case was dismissed in the Supreme Court after the company withdrew its appeal.
This article will review the detailed circumstances of these four cases, analyze the criteria used in the judgments, and assess the applicability of those criteria to similar cases.
II. Cases Involving Foreign Companies with Fewer than Five Employees
1. Case 1 (Supreme Court Ruling on October 25, 2024, 2023Du37391)
The German corporation in this case was a company manufacturing and selling construction flooring and road products. It established a Korean subsidiary on November 19, 2014. The employee concerned was hired as a business development manager at the Korean branch on October 15, 2019. The Korean branch consisted of two employees, including the employee concerned. Its duties included handling imports from the German corporation and quality assurance for its products. On April 17, 2020, the German corporation dismissed the employee concerned under the name of its Korean subsidiary but failed to provide written notice in accordance with Article 27 of the Labor Standards Act (LSA).
Although the Korean subsidiary operated independently with its own financial accounting and management systems, it reported transactions, sales performance, and accounting to the German corporation.
The worker filed a complaint with the Seoul Labor Commission on June 5, 2020, claiming the dismissal constituted unfair dismissal under the LSA. The Commission ruled on July 31, 2020, that the dismissal was unfair. The National Labor Relations Commission subsequently dismissed the appeal, upholding the initial decision on December 8, 2020.
However, the Administrative Court overturned this decision, holding that the Korean subsidiary was an independent workplace with fewer than five employees under Article 11 of the LSA and was therefore not subject to the dismissal restrictions. The High Court, on the other hand, found that the worker should be regarded as part of a single workplace, considering the combined operations of the German and Korean entities, and recognized the dismissal as unfair.
The Supreme Court reversed this decision, stating,
In international labor relations where a foreign corporation establishes a legal entity or office in Korea and employs workers, the number of employees working domestically must be the standard for determining whether it qualifies as a workplace employing at least five workers under Article 11, Paragraph 1, of the LSA.
The Court further explained that only when the economic and social activities of the entities are substantively identical can they be considered as one workplace, nullifying the High Court's ruling.
2. Case 2 (Supreme Court Decision, October 25, 2024, 2023Du46074)
Company 1 is a U.S. corporation specializing in optimization services for petroleum and gas machinery, with no domestic office in Korea. Company 2 is another U.S. corporation engaged in selling non-destructive testing equipment and operates a Korean sales office employing more than five workers. The two companies have no shareholder or business relationship.
The worker (plaintiff) entered into an employment contract with Company 1 on May 1, 2018, and performed duties in Korea while using business cards displaying Company 1’s name, domain, and website address. The worker was the sole employee working in Korea under Company 1’s supervision but worked at Company 2’s office. Company 1 later notified the worker that their employment contract had been terminated.
The worker’s social insurance and salary were managed by Company 2, which was reimbursed by Company 1.
On June 9, 2020, the worker filed a complaint with the Seoul Labor Commission, arguing that the contract expiration notice constituted unfair dismissal. However, the Commission dismissed the complaint on August 5, 2020, reasoning that the worker’s employer, Company 1, had no domestic office, and personnel management was conducted abroad, rendering the LSA inapplicable. The worker appealed to the National Labor Relations Commission on September 17, 2020, but the appeal was dismissed on April 24, 2020, for similar reasons.
The District Court ruled that the LSA did not apply because the governing law was Delaware state law.
The High Court (Appellate Court), however, determined that the number of employees should include both domestic and foreign workers employed by the foreign headquarters, reasoning that there was no justification for excluding foreign employees when assessing the number of regular employees. Since Company 1’s global employee count exceeded five, the court ruled that the LSA applied and deemed the dismissal unfair.
The Supreme Court cancelled the High Court’s ruling, stating:
In cases where a foreign corporation employs workers abroad, foreign labor laws apply unless there are special circumstances otherwise. Therefore, employees working abroad, to whom the LSA does not apply, cannot be included in determining whether the workplace constitutes a business or workplace employing at least five workers under Article 11, Paragraph 1, of the LSA.
3. Case 3 (Supreme Court Ruling on October 25, 2024, 2023Du57876)
The plaintiff in this case was a domestic entity of a foreign corporation (a Dubai-based company, hereinafter "Company B/Plaintiff"), ultimately controlled by an Australian corporation ("Company A"). Similarly, another domestic entity ("Company C") was the Korean branch of another Dubai-based corporation ("Company D"), also controlled by the same Australian corporation (Company A). Both parties in this case, Company B/Plaintiff and Company C, were companies engaged in the same business—overseas hotel reservations—but handled hotels in different regions. From March 2019 to October 2020, Company C shared Company B/Plaintiff's office space in Korea. The two entities operated as a single workplace, characterized by the following:
① The human and physical resources, as well as financial and accounting systems of Company B/Plaintiff and Company C, were interlinked and operated cohesively.
② Personnel and labor management for employees of both entities were centrally managed by Company D in Dubai.
③ By the time of the dismissal in question, Company B/Plaintiff and Company C had already consolidated their human and physical resources, functioning as a single economic and social unit for a significant period.
The employee in question (“the Employee”) joined Company B/Plaintiff in October 2016 as an accountant. In October 2020, Company B/Plaintiff informed the Employee they were being dismissed due to closure of the business. The Seoul Labor Commission dismissed the Employee’s request for remedy, ruling that Company B/Plaintiff and Company C were separate businesses. However, the National Labor Relations Commission overturned this decision, treating Company B/Plaintiff and Company C as a single workplace under the Labor Standards Act (LSA) and ruled the dismissal was unfair.
The District Court held that while Company B/Plaintiff and Company C were formally distinct and independent legal entities, they functioned operationally as a single workplace. Combining the number of employees from both entities exceeded five, making the LSA applicable, and the dismissal was deemed unfair.
The Appellate Court upheld this ruling, emphasizing that the core criterion should be the substantive uniformity and integration of business operations, including production, sales, management, personnel, labor, and accounting, rather than merely focusing on legal structures.
The Supreme Court affirmed the lower court's decision, establishing criteria for assessing the integration of workplaces under the LSA. The Court ruled:
The term “business or workplace” under Article 11, Paragraph 1, of the Labor Standards Act refers to a unit of economic and social activity that is cohesively and organically managed. The separation of corporate legal entities is a key criterion for determining whether they constitute separate businesses or workplaces. As a rule, organizations with separate legal personalities cannot constitute a single workplace absent special circumstances. However, when multiple legally distinct entities exhibit operational and economic integration to the extent that they function as a single unit, they may be considered a single business or workplace. Factors to consider include the nature, purpose, and method of operations; uniformity in directives, employment, dismissal, and labor management; and the degree of interdependence in human, physical, and organizational resources, as well as financial and accounting integration.
4. Case 4: Appeal (Seoul High Court Decision, February 3, 2023, 2022Nu50412), Withdrawn during Supreme Court Proceedings
An American telecommunications company established a Korean subsidiary ("Corporation A") on November 22, 2007, employing three regular workers. The employee in question (“the Employee”) joined Corporation A on January 4, 2016, as a sales director and was dismissed on October 12, 2020. The Employee filed a complaint with the Seoul Labor Commission on December 17, 2020, seeking remedy for unfair dismissal.
The Korean subsidiary served as a local office for marketing and customer support on behalf of the U.S. headquarters. The following facts were relevant:
① Recruitment and salary negotiations for the Employee were conducted directly by an executive of the U.S. headquarters via video interview;
② The Employee conducted sales activities in Korea, signing contracts using templates provided by the U.S. headquarters, and received performance-based incentives;
③ Contracts were executed in the name of the U.S. headquarters, not the Korean subsidiary;
④ A manager from the U.S. headquarters supervised the Employee, reviewed weekly reports, and approved leave and expenses;
⑤ Organizational charts listed the U.S. headquarters executive as the Employee’s superior;
⑥ Daily reporting and expense approvals were directed to the U.S. headquarters;
⑦ The Employee received HR-related emails directly from the U.S. headquarters;
⑧ The Employee did not receive any direction or supervision from the Korean subsidiary’s representative director.
The Seoul Labor Commission ruled on February 10, 2021, that the U.S. headquarters and Corporation A together constituted a single workplace forming an operational unit. It determined that the company, with at least five regular employees, was subject to the LSA's dismissal restrictions. This ruling was upheld by the National Labor Relations Commission on May 17, 2021, and by the Administrative Court, which dismissed the company’s appeal.
The Seoul High Court cited precedent in its judgment:
A workplace is defined as an operationally cohesive unit of economic and social activity. The determination of whether a workplace constitutes an independent economic unit must consider factors such as the nature of the business, employee interactions, the integration of physical and organizational resources, and unified managerial oversight. Spatial separation does not necessarily imply operational independence; even geographically distinct entities, like foreign headquarters and domestic offices, may be considered a single workplace if integration exists.
The Seoul High Court, in adjudicating this case, cited the following legal precedent:
A workplace refers to an economic and social activity unit that operates cohesively and organically as a single management entity. The determination is based on whether the unit satisfies the conditions of being a substantively independent economic entity, regardless of the separation of corporate legal personality. A workplace can consist of either a single location or multiple locations, and this must be assessed by comprehensively considering specific facts. Furthermore, whether an employer has acted as a “single operational entity” should be judged not by formalities but based on the substantive employment relationship. Therefore, the determination of whether a unit qualifies as a single workplace under the criteria for applying the Labor Standards Act must take into account factors such as the uniformity of work locations, the use of provided facilities, the business's purpose and operational methods, the organizational structure, personnel exchanges, and the specific directions and supervisory relationships in the course of work execution.
The Court further stated:
The managerial separation and independence of multiple “businesses or workplaces” should be judged comprehensively by examining factors such as the organic interconnection or distinction between their purposes, personnel exchanges involving executives or employees, the separation of finances and accounting, the physical independence of work locations, the organizational independence of managerial decision-making structures, and the separation of work supervision and attendance management. In this context, spatial independence is only one factor in determining the independence of a “business or workplace.” Spatial independence alone does not necessarily imply managerial independence as a “business or workplace.” This principle applies equally to cases where foreign headquarters and domestic offices are spatially independent.
After reviewing the precedent and factual relationships in this case, the Seoul High Court concluded: “Although the plaintiffs present themselves as separate and independent legal entities, they have, in practice, been operated as a single workplace forming an integrated management unit.”
The case was finalized on October 16, 2024, as the company withdrew its appeal to the Supreme Court, affirming the High Court's decision.
III. Judgments and Applicability of Each Case
1. Case 1: Supreme Court ruling on October 25, 2024, 2023Du37391
The Supreme Court recognized the Korean branch of a German corporation, consisting of two employees, as an independent entity with financial autonomy. It ruled that, as an independent workplace, the employee count for the purposes of the Labor Standards Act (LSA) should consider only the employees of the Korean branch, and exclude those of the foreign corporation.
The Court emphasized that the term “business or workplace” in Article 11 of the LSA refers to workplaces located within South Korea. It further stated: “A business or workplace is deemed to exist only when the economic and social activities are so integrated and cohesive that the regulations governing employment relationships can be uniformly applied.”
In this case, the German corporation's Korean branch operated independently in the South Korean market, generating its own revenue and conducting its own operations. Although the Korean subsidiary was subject to the German corporation’s management as a subsidiary, the Court found this to be characteristic of a multinational corporation and not grounds to negate the branch's independence.
This judgment affirms the independence of a Korean branch if it operates its own accounting and business activities, even under the control of a foreign parent company.
2. Case 2: Supreme Court Ruling on October 25, 2024, 2023Du46074
In this case, a U.S. corporation did not establish a Korean branch but employed one worker in Korea and assigned that worker to a third foreign corporation’s office. The third corporation handled the worker's payroll and social insurance. The U.S. corporation later dismissed the worker. The Supreme Court ruled that the employment relationship existed only between the worker and the U.S. corporation that signed the employment contract and issued work instructions. It dismissed the argument that the worker’s payroll and insurance arrangements through the third corporation established an employment relationship between the employee and that third corporation.
The High Court had previously ruled that the employee count should include the foreign corporation’s global workforce, deeming the business a workplace with five or more employees. However, the Supreme Court rejected this, stating that the LSA applies only to workplaces located within South Korea. Since the U.S. corporation had no legal presence in South Korea, it was not subject to the LSA.
This decision establishes that foreign corporations without a legal entity or office in Korea are not subject to South Korean labor laws, even if they employ individuals within Korea.
3. Case 3: Supreme Court Ruling on October 25, 2024, 2023Du57876
In this case, the Korean branches of two foreign subsidiaries of the same Australian parent corporation shared office space and integrated their operations. The two entities exchanged personnel and operated their financial systems as a single unit. When one branch closed, the employee of that branch was dismissed. The Supreme Court ruled that the two entities functioned as a single workplace, given their integration of human and physical resources, financial systems, and unified management. Consequently, the dismissal was deemed unfair under the LSA. The Court distinguished this case as one involving two separate legal entities that, in practice, operated as a single business unit. It ruled that the closure of the branch was more akin to the dissolution of a department rather than the closure of an entire business. This decision highlights that multiple entities with operational, financial, and personnel integration can be deemed a single workplace for the purposes of the LSA.
4. Case 4: High Court Ruling on February 3, 2023, 2022Nu50412
An American telecommunications company established a Korean subsidiary (“Corporation A”) to engage in telecommunications services. The employee concerned (“the Employee”) was hired by the U.S. headquarters through an interview conducted by a U.S. executive. The Employee conducted business in Korea in the U.S. headquarters’ name and used its contracts and systems.
The Seoul Labor Commission ruled that the U.S. headquarters and Corporation A constituted a single workplace. It found that the U.S. headquarters effectively managed recruitment, work instructions, and compensation, and thus the combined workforce exceeded five employees, making the LSA applicable.
Both the first and second instances upheld this judgment, rejecting Corporation A’s claim that only the Korean subsidiary's employees should be considered. The case was closed after the company withdrew its Supreme Court appeal, finalizing the High Court’s decision. This case reinforces that foreign headquarters and a Korean subsidiary may be treated as a single workplace if there is substantial integration in personnel, operations, and decision-making.
IV. Conclusion
Case 1 affirms the independence of a Korean subsidiary if it operates independently, while Case 2 clarifies that foreign corporations without a legal presence in Korea cannot be subject to the LSA. However, Case 3 and Case 4 establish that operational and managerial integration can lead to multiple entities being treated as a single workplace under the LSA. The key precedent established in Case 1 and Case 2 is:
A business or workplace is deemed to exist only when the economic and social activities are so integrated and cohesive that the regulations governing employment relationships can be uniformly applied. The term “business or workplace” in Article 11 of the Labor Standards Act refers to workplaces located within South Korea.
At the same time, Case 4 highlights the importance of examining the substantive and practical relationships governing employment to determine whether the LSA is applicable. Courts appear to be moving toward recognizing the independence of Korean subsidiaries in some cases while emphasizing the importance of operational and managerial integration in others. Foreign corporations operating in Korea must carefully evaluate the criteria for determining employee counts under the LSA to ensure compliance.
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