South Korea: Breaking Down The Just-Cause Barrier: A Systematic Approach Of Securing Greater Flexibility In Managing Poor Performing Employees

Last Updated: 11 January 2017
Article by Jaehoon Kim, Sang Hoon Lee and William W. Kim

Imagine being a foreign employer in Korea and maintaining a business operation with over 50 local employees. Imagine further that amongst these employees, one individual ("Employee X") has been missing his sales targets by a margin greater than 70% for the past four consecutive months. Although he has no history of disciplinary sanctions, Employee X slouches around the office, is unmotivated and appears overly relaxed. He also shows no outward display of initiative to turn his performance situation around. As an employer, you decide that he is unfit for continued employment, and as you may have done in other jurisdictions, you seek to terminate Employee X for inadequate performance. However, under Korean law, you may lack just-cause for terminating Employee X despite his blatant performance shortcomings, and employers in Korea have often expressed tremendous frustration when they are forced to continue retaining an employee who, like Employee X, consistently fails to perform.

Therefore, in response to the growing employers' frustration, the Ministry of Employment and Labor ("MOEL") issued its Official Human Resources Guideline ("Guideline") in January 2016. The Guideline consolidated and summarized the factors that the Korean courts consider when determining the validity of a termination based on performance and the MOEL's recommended steps for an employer to increase its ability to terminate their respective Employee X's.

Standard for Employee Termination under Korean Law

Korea does not recognize the at-will doctrine. Instead, under Article 23 of the Korean Labor Standards Act, an employee may be terminated only for just-cause. While there is no clear definition of just-cause, the courts have described it as a "cause that is attributable to the employee which, under the socially-accepted principles, makes the continuation of the employment impossible." Categories where just-cause may be found would depend on the totality of the circumstances and may include, but are not limited to, serious and repeated violations of internal employment regulations; conviction of a serious crime; falsification of one's resume and detrimental reliance by the company; disclosure of trade secrets; and sexual harassment. However, as a matter of general practice, the Korean courts tend not to find inadequate performance (in and of itself) as a sufficient just-cause for an employee's termination.

In the face of such legal standards, foreign employers express the greatest amount of frustration. Their frustration is exacerbated because, in other jurisdictions, the inadequate performance of an employee may be considered not only as a legally sufficient just-cause for termination, but also a logical and reasonable employer response. For example, the employment at-will doctrine in the US provides that an employee without a contract for a fixed term may be fired for any reason or no reason at all (although the US at-will doctrine has been limited by various exceptions and other recognized causes of actions against terminations).

Notwithstanding, the just-cause requirement is not an entirely foreign concept under US employment laws and may arise under three settings: (1) an employment contract for a definite term that is trying to be terminated without cause before the expiration of the term; (2) a written employment contract containing explicit just-cause protection; and (3) employee handbooks or employer practices have created just-cause protection. Similar to Korean law, just-cause in the United States may be categorized as either a business reason that is unrelated to the employee concerned or an employee-based reason. However, in contrast to Korean law, the US recognizes inadequate performance as an employee-based reason for termination. In fact, some employment contracts, known as "satisfaction contracts," expressly permit termination if an employee's performance is not "acceptable" or "satisfactory" to the employer. Courts in the US have generally upheld an employer's termination on the basis of performance so long as the employer is actually and in good faith dissatisfied with the employee, and employees challenging a termination based on a satisfaction contract must demonstrate that the employer was not in fact dissatisfied with them or that the employer fired them for reasons other than dissatisfaction with performance.

The Official Human Resources Guideline

In recognition of the comparative difficulty in terminating poor performing employees under Korean law, all employers should take heed to the MOEL's Guideline from January 2016. According to the Guideline, the MOEL's four (4) major steps for increasing an employer's ability to terminate an employee for inadequate performance are: (1) amendment of the rules of employment or the collective bargaining agreement (if any); (2) adherence to an objective system of performance evaluations; (3) education/training/reassignment efforts; and (4) fair and objective selection criteria for termination.

  1. Amendment to the Rules of Employment (and/or Collective Bargaining Agreement)

    In principle, an employer may establish just-cause for termination if (1) the employee concerned is unable to perform his/her contractual duties or is capable of only partially completing his/her duties; and (2) the termination ground(s) is (are) prescribed in the relevant Rules of Employment ("ROE") or the Collective Bargaining Agreement ("CBA"). Therefore, to reduce the legal risk of disputes and to better create a basis for justifying inadequate performance as a ground for termination, the MOEL recommends that employers explicitly include "inadequate capabilities" or "poor performance" as grounds for termination in their respective ROEs or the CBAs, as applicable.

    Please note that when an employer wishes to make disadvantageous changes to a working term/condition, the employer must, in principle, obtain consent from the majority union, or if no such union exists, from the majority of the employees. However, as one may argue that the insertion of additional grounds for termination is to provide clarity and specificity to an overly broad ROE provision, the legal procedure for making disadvantageous changes may be unnecessary. If in the latter, the employer would only be required to hear the opinions of the majority union or the majority of the employees, as applicable.
  2. Establishment of a Fair and Objective System of Performance Evaluations

    The Guideline recommends that an employer establishes a fair and objective system of evaluations consisting of the following components:

    a. System Establishment

    1. The employer must determine the criteria (e.g., categories, performance levels, etc.) for selecting the employee candidates who will be subject to the evaluation system;
    2. The employer must select specific and diversified standards of evaluation (e.g., evaluated functions and performance areas);
    3. The employer must consult with and incorporate the opinions of the Labor Management Council (if required or applicable) in the evaluation system.
    b. System Implementation

    1. Evaluation Unit – The employer must determine whether the performance of a relevant department or group will be factored into an employee's individual evaluation or if the individual evaluation will be strictly based on the personal performance of the employee. Please note that the MOEL considers evaluations that are independent of the performance of others to be more objective.
    2. Evaluation Standards – When selecting the evaluation standards, the employer must try to base the evaluations on objective criteria (e.g., sales amount, etc.) as opposed to subjective criteria such as employer satisfaction or workplace attitude.
    3. Evaluation Method – Evaluations based only on the individual and not the based on the comparative score relative to other employees will be considered as more objective and fair.
    4. Appeals Process – The employer may provide an appeals process so that employees may object to their performance evaluations results.
    5. Evaluation Process – System Establishment→ System Implementation→ Evaluation→ Notice of Results→ System for Appeals
  3. Education / Training / Reassignment Efforts

    The employer must objectively select the training candidates through evaluations and provide opportunities (e.g., additional education, training, guidance) to the candidate to improve work performance. Additionally, the employer must make other efforts to avoid termination (e.g., reassignments in accordance with the law, target readjustments, etc.). The various efforts must not simply be mere formalities aimed at satisfying the factors to ultimately terminate the employee. Instead, the employee must be allowed with a reasonable amount of time to receive the training and demonstrate improvement.

    However, despite the foregoing, if the improvement of the employee is nevertheless impossible or the employee's performance caused or is causing significant harm to the employer's business, a termination for inadequate performance may be considered.
  4. Fair and Objective Selection Criteria for Termination

    The employer may proceed with the termination after adequately, fairly, and objectively completing the steps outlined above.

Recommendation in Practice

The legal landscape for employee termination in Korea is unique and may be more difficult to navigate than in other jurisdictions, including the United States. Given the strict just-cause requirement for employee terminations and the courts' tendency to not find inadequate performance (in and of itself) as a sufficient just-cause, employers in Korea must strive to secure their own flexibility to manage their workforces. It is recommended that employers spend a considerable amount of time reviewing and understanding the MOEL's Guideline before structuring or revamping their performance evaluation systems.

Two additional points of consideration are:

  1. Please note that the MOEL's Guideline is a non-binding document. That is, structuring a performance evaluation system in accordance with the Guideline will increase the employer's ability to terminate an employee for inadequate performance. The Guideline steps do not guarantee that a termination pursuant to the performance evaluation system will be upheld if challenged.
  2. As a matter of practice, the performance evaluation process should be administrated over a period of at least 6~12 months. For example, an employer's process that completes within 1-2 months will most likely be insufficient.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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