Introduction
When a foreign company enters the Korean market, it usually establishes a local presence by setting up a subsidiary, branch, or liaison office (a "Korean entity"). In practice, these entities often remain relatively small in scale. To operate effectively, foreign companies typically hire employees to be employed by such Korean entities.
Legal questions arise when disciplinary measures, such as dismissal, transfer, or demotion, become necessary. Does the Korean Labor Standards Act (the "LSA") apply to these actions? If so, should the headcount requirement under the LSA be based only on the number of employees of the Korean entity, or of the wider workforce of its parent company?
This distinction is critical. If fewer than five employees are counted, key LSA protections, e.g., the prohibition on unjust dismissal (Article 23(1)) and remedies for unfair dismissal (Article 28) do not apply. For foreign companies, therefore, the method of calculating employee numbers may be a critical factor in determining whether fundamental labor protections under Korean laws are triggered.
Which Law Governs the Employment Relationship?
For employees working in a Korean entity of a foreign corporation, the governing law is determined first by the parties' agreement. Under Korea's Act on Private International Law ("APIL"), any contract follows the law explicitly or implicitly chosen by the parties (Article 45(1) of the APIL). If no law is chosen, the default is the law of the country most closely connected with the contract (Article 46(1) of the APIL).
For employment contracts, however, when no choice of law is made in the contract, the law of the country where the employee habitually performs their work will govern. If the employee does not habitually work in any single country, the governing law is by default the country where the employer's business office that hired the employee is located (Article 48(2) of the APIL).
Critically, even if the parties select a foreign law, e.g., the law of the company's headquarter, that choice cannot deprive employees of the mandatory protections of the country where they habitually work (Article 48(1) of the APIL). Thus, if the employee habitually provides services in Korea, the mandatory provisions of Korean law, including the LSA, may apply.
In practice, many employment contracts and company policies will specify a governing law. But where no such choice is clearly made, the law of Korea, where the employees of a Korean entity habitually render services, will almost always apply.
Counting Employees Under the LSA – Five-Employee Rule
Foreign companies often operate Korean entities with only a handful of staff. In such cases, questions quickly arise: when such Korean entity adjusts pay, reassigns duties, or terminates contracts, do these actions trigger protections of the LSA?
The issue is especially sharp with Articles 23 and 28 of the LSA, which restrict dismissals and provide remedies for unfair termination. These protections apply only where a Korean entity employs at least five employees. Entities with fewer than five employees are exempt from working-hour limits, payment for overtime, night and holiday work ("overtime premium pay"), and statutory annual leave entitlements.
Yet, these exemptions have attracted growing scrutiny in Korea. Labor advocates and policymakers increasingly argue that basic protections, e.g., dismissal restrictions, working-hour limits, overtime premium pay, and paid annual leave, should apply regardless of entity size. Proposals for a phased expansion of these protections are under active discussion, suggesting that the "five-employee rule" may not remain fixed in the years ahead.
Nevertheless, the critical issue thus far is how to calculate the number of employees in a Korean entity. Until recently, there has been no precedent on how to calculate employee numbers under the LSA in Korea.
A Supreme Court decision in 2024 provided guidance on this very issue, where a German flooring and road materials manufacturer whose Korean subsidiary had dismissed an employee when only two other employees were working at the Korean entity. The question arose: should the employee count include the parent company's global workforce, which would easily push the number above five, or only those employed in Korea?
The Supreme Court answered decisively: only domestic employees count. The Court reasoned that (i) under Article 11 of the LSA, the "business or workplace" is the operative unit of application, and this unit must be understood as the concrete, localized sphere of economic and social activity within Korea, and (ii) employees working abroad are governed by the labor law of their respective jurisdictions, not the Korean LSA (Supreme Court decision 2023Du37391, rendered on October 25, 2024). The Supreme Court's 2024 ruling firmly established that, in disputes involving foreign corporations, the calculation of employees under the LSA is based solely on those working in the Korean entity.
At the same time, the broader debate is moving in a different direction. Extending full labor protections to employees in establishments with fewer than five workers was one of President Lee Jae-myung's campaign pledges, and public discussion has been mounting in favor of eliminating this longstanding gap. As these debates continue, the prospect of legislative reform remains strong. Foreign companies operating lean Korean entities should therefore monitor developments closely, as today's exemptions may be subject to further changes.
Multiple Establishments and Integrated Operations
In some cases, a foreign company operates not just one but several entities in Korea. In such situations, the calculation of employees is not made by looking at each site in isolation. Instead, the key question is whether the entities form an integrated unit in terms of management and operations.
The Supreme Court has confirmed this approach where the Court would take into consideration whether the Korean entities share common business purposes, work processes, and operational methods; whether personnel and labor management are handled separately or collectively; and whether human and material resources and financial/accounting systems operate independently or as a whole (Supreme Court decision 2023Du57876, rendered on October 25, 2024).
Accordingly, foreign companies with multiple Korean entities must carefully assess these factors. The headcount threshold for applying the LSA may be determined not entity by entity, but across sites that function as a single economic and organizational unit.
Applying the Law in Practice
When legal issues arise concerning the employment contracts and working conditions of employees in a foreign corporation's Korean entity, the first step is to determine the governing law. If the parties have agreed on a choice of law, that agreement will apply. If not, the law of the country where the employee habitually performs their work will govern.
However, even where a foreign law is chosen, the mandatory protections of the country in which the employee actually works cannot be waived. For employees working in Korea, this means that core provisions of the Korean LSA remain applicable regardless of contractual choice. Employers should therefore be mindful that selecting foreign law does not remove the reach of Korean mandatory rules.
At the same time, Korean labor law is evolving. Public debate and policy proposals continue to push for extending full protection even to entities with fewer than five employees. Employers should therefore monitor legislative trends closely. Where interpretation proves complex or disputes appear likely, consultation with specialized labor and international law teams is recommended to ensure compliance and minimize risk.
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.
