|Case Study : Dismissal after Signing Employment Contract but before Official Start of Work
The following labor case is regarding a company signing an employment contract with an applicant and terminating employment after negative feedback from an existing employee of the company who knew the applicant.
A multinational company located in the United Kingdom (hereinafter, “the Company”) decided to hire Mr. H as a Korean branch manager (hereinafter, “the Employee”) and signed an employment contract with him on Friday, May 12, 2016. The Employee was supposed to join the Korean branch office in three weeks. However, the Company heard some unfavorable feedback from one Korean branch employee who had once worked with the Employee (due to his harsh leadership in the previous company, this staff employee told the Company that if the Employee was hired, this employee would quit). The Company therefore canceled the employment contract with the Employee on May 17, 2016. The Termination Letter quoted Section 1 of the signed contract, which stated that, “The Company may terminate the employment relationship at any time without prior notice and for no reason at all,” as well as clearly explaining that the dismissal was due to negative feedback about the Employee. In a quick response email, the Employee complained about the termination and threatened to take legal action if there was no acceptable compensation. The Company then suggested one month’s salary as a cordial settlement, to which the Employee replied that he would accept 12 months’ salary as compensation. In the meantime, the Employee had been busy disparaging the Company and speaking about it in a derogatory manner to the Company’s Korean customers.
To deal with this incident, the Company sought legal advice from this labor attorney, whereupon I reviewed the case in light of related laws and court rulings and provided the most suitable legal opinion.
II. Related Laws and Court Rulings
1. Related Laws (the Labor Standards Act)
Article 15 (Labor Contract Contrary to This Act)
(1) A labor contract which establishes working conditions that do not meet the standards provided for in this Act shall be null and void to that extent.
(2) Those conditions invalidated in accordance with the provisions of paragraph (1) shall be governed by the standards provided in this Act.
Article 23 (Restriction on Dismissal, etc.)
(1) No employer shall dismiss, lay off, suspend, or transfer a worker, or reduce wages, or take other punitive measures against a worker without justifiable reason.
Article 28 (Application for Remedy for Unfair Dismissal, and Related Acts)
(1) If an employer dismisses a worker unfairly, the worker may apply to the Labor Relations Commission for remedy.
(2) The application for remedy under paragraph (1) shall be made within three months from the date on which the unfair dismissal, and related acts, took place.
Article 33 (Enforcement Levy)
(1) If an employer, after receiving a remedy order (including a decision on reexamination concerning a remedy order; hereinafter the same shall apply in this Act) from the Labor Relations Commission, fails to comply with the remedy order by the deadline for compliance, an enforcement levy of an amount not exceeding 20 million won shall be imposed on the employer. (Enforcement levy will be charged twice a year for two years, making a maximum of 4 times.)
Article 111 (Penal Provisions)
A person who fails to comply with a remedy order confirmed pursuant to Article 31 (3) or confirmed after the filing of an administrative lawsuit, or a decision rendered after reexamination of a remedy order shall be punished by imprisonment of up to one year or a fine not exceeding ten million won.
2. Related Court Rulings
1. Where an employer canceled the employment contract before the employee started to work
(1) A case where an employer canceled the employment contract after six months, without hiring the employees on the promised date
The employer notified the applicants at the end of November 1997 of the final decision to hire them, and asked them to submit the related employment documents, such as a confidentiality agreement in December 1997. The employer told them that new employees would start working on March 1, 1998. The employer delayed assigning them any jobs, and finally notified the new employees on June 18, 1998 that their employment had been cancelled. The employer’s notice of cancelling the employment amounts to a dismissal, which was rendered null and void as there were no justifiable reasons for cancellation.
(2) A case where the court determined a 50 percent responsibility to the hired applicants on the one hand, and the company on the other regarding wages to be paid during the period of waiting for employment to begin.
The company and the applicants agreed on employment terms, but the company delayed actually calling them into work for a considerable time. The company had not considered accurately how many new employees would be needed for its new work projects, and informed the hired applicants, after a long period of time, that they would not be hired in actuality due the company being unable to begin a new construction project. The hired applicants who were waiting to be called into work suffered damages as they had had to give up looking for other opportunities to get a new job while expecting to begin working for the company. In this case, the company should compensate the hired applicants for the damages due to lost time and missed opportunities.
On the other hand, the hired applicants were informed of the company’s intention to hire them but were not notified of a specific start date. The hired applicants should have continuously inquired for clear information about the formal start date or what they should do in the event of cancelation of their employment, but the hired applicants had neglected to make any such efforts, which was taken into consideration in calculating the amount of compensation to be given. For this reason, the hired applicants were held partly responsible for their lost opportunities, and should also be willing to take 50% less in calculated compensation. The company was responsible for providing the remaining 50% of calculated compensation.
(3) A case where the Court ruled that the company should pay the entire amount of wages for the period of waiting from the agreed-on start date to the date their employment contracts were canceled.
In this case, the employees were informed in November 1997 that they would be hired by the company, and they were supposed to start working on April 6, 1998. But the company delayed their start date without explaining the reason. Due to the delay, the employees took legal action. The Court concluded that the company had to pay their salaries from the date the decision was made to hire them to the date their employment was canceled (June 30, 1999).
2. A case where a new employee was dismissed due to falsification of information on previous misconduct
Supreme Court ruling on June 23, 2000, 98Da54940: Where an employee is found to have falsified or concealed his education and experience, the company might choose not to hire him/her (if discovered at the point of recruitment) or might choose not to provide the same working conditions (if discovered either at the point of recruitment or during the course of his/her service to the company). This assumption justifies taking appropriate disciplinary dismissal action.
3. Court rulings related to the employment status of a Korean branch manager:
(1) Executive officials are not employees as defined in the Labor Standards Act (LSA).
Executive officials, including directors, are mandated by their employer to deal with a certain scope of business management. In general, they are not in an employment relationship that requires them to provide a given type of work under the supervision and control of the employer and receive a given amount of wages in return. In this sense, executive officials shall not be considered employees under the LSA, unless under some exceptional circumstances.
(2) A person who provides a specific service under the direction and supervision of others, such as a director, and who receives fixed pay as remuneration can be regarded as an employee defined by the Labor Standards Act.
Whether it is appropriate to regard a director as an employee defined by the Labor Standards Act has nothing to do with the manner in which the contract is made but whether the director was paid to provide a service that requires him to be subordinate to another. Such a director can be regarded as an employee regardless of whether he/she is holding the position or title of a company director or auditor, in the real sense or just in name, as long as he/she receives remuneration as compensation for providing a specific labor service under the direction and supervision of the employer or he/she receives remuneration as compensation for taking charge of a specific labor service under the direction and supervision of persons such as the representative director in addition to the duties assigned to him/her by the company.
III. Answers to Questions on the Issue
The following questions and answers describe the employment situation on which this labor attorney was asked to provide legal advice, and the best course of action.
Question 1. Can the Company cancel employment with the Employee based on Section 1 of the Employment Agreement or not according to Korean Labor Law?
Since the employment contract has been made, its cancellation requires a justifiable reason to be considered legal. The Company should verify the justification for termination.
However, the level of justification differs according to timing :
1) From the time the employment contract is signed to actually starting work
Low-level justification required. If the employer has reasons to cancel then, this is the best time.
2) From actually starting work at the workplace to the end of the first 3 months
Mid-level justification required. To terminate employment, the employer should verify why the employee is not suitable for the work. However, this 3 month period is still a time when more weight is allowed for the employer’s judgment.
3) From the fourth month of employment
The criteria for justifiable termination are much stricter.
Question 2. If the Company cancelled the employment contract before the Employee started to work, what legal liabilities would the Company face? If the Company cancelled the employment contract after the Employee started to work, what legal liabilities would the Company face?
As long as an employment contract has been made, the employer cannot dismiss the Employee without a justifiable reason. If the Employee is dismissed, the Employee can apply to the Labor Relations Commission (LRC) for remedy. The LRC may determine that the employer must reinstate the dismissed employee and pay back pay. If there is a justifiable reason for the Company deciding not to hire him, it would be a justifiable termination. Review of dismissal cases related to the cancellation of employment contracts before employees start to work reveals that some companies have delayed for long periods of time the start date for hired employees, which resulted in significant cost to the employees in terms of lost time and lost opportunities. Most cases ended with the companies having to pay salary during the waiting period.
Question 3. How much compensation for damages would be appropriate to the Employee for a peaceful settlement?
The Company heard the negative feedback about the Employee only 5 days after signing the employment agreement. If the Company had heard such negative feedback before signing, it likely would not have signed on the Employee. Since the Company canceled the employment contract before he started working, the Employee’s damage will likely be considered only 6 lost days for opportunities to find other options. If the Employee had begun working for the Company, it would have to hold itself to very strict standards in terminating the employment contract. However, the termination was done only five days after the agreement was signed and still before the Employee had begun to work.
From the Employee’s perspective, he had been looking for a job, and did not quit his previous one specifically for this opportunity. The Company has also had clear negative feedback about the Employee from a previous coworker.
Furthermore, since the employment contract was canceled, the Employee has denigrated the Company in conversations with Company clients, damaging the Company’s reputation. This can be very clear evidence that the Company cannot reinstate him.
In this light, I felt the Company should pay compensation amounting to 6 days’ salary. However, I respect the company’s decision to give one month’s salary as compensation, deeming it a reasonable way for the Company to avoid any unnecessary legal litigation or additional disputes.
Question 4. What legal actions can the Employee take to get the best possible compensation in the Korean legal system?
The Employee may take legal action in the form of applying to the civil court or the LRC for remedy. Ninety-five percent of dismissal cases are handled by the LRC directly.
① Applicant Regional Labor Relations Commission (3 months required in legal process)
② Appealing Applicant National LRC (3 months required in legal process)
③ Appealing Applicant Administrative Court (one year or longer) High Court (one year or longer) Supreme Court (one year or longer)
④ Applicant Civil Court (more than one year) High Court (more than one year) Supreme Court (more than one year)
In 2017, about 10,995 dismissal cases were processed in the LRC and the National LRC. Civil suits take more time and money and are more difficult. The LRC provides many advantages in this legal remedy process. No fees are required, and a decision is made within three months.
Whether the Employee takes legal action or not is up to him, but he will certainly take action if there is a good possibility of winning significant compensation. However, if his case is not strong enough, he will not. I want to give two different opinions based upon this employment case for the cancelation of a just-signed employment contract.
1. If the employment contract is signed directly between the CEO of the UK multinational and the Employee, and if the actual work has not started at the workplace, it is like a normal contract between party A and party B. Also, the Employee was supposed to work as a country manager in charge of the Korean branch office. This means his status is more like a commissioned contractor than an employee protected under the Labor Standards Act. In this case, Party A can cancel the contract in accordance with what is stipulated in the employment agreement, of which Section 1 states the Company may terminate the employment relationship at any time without prior notice or for no reason at all.
2. The employment contract is more likely to be subject to Korean labor law, as it describes that it would be subject to Korean labor law. In this case, the Employee may file an application with the Labor Relations Commission (LRC) for remedy against unfair dismissal. If the Employee does so, the Company will need to appoint a legal representative to respond. In order to prevent such action, it is reasonable to offer compensation of one month’s salary. The Employee’s demand for 12 months’ wages is beyond consideration, and likely comes simply from his desire to receive more than what is offered.