[Viewpoint] Competitiveness through leaner labor

Korean policy makers and government officials continue to grapple with the issue of enhancing Korea’s competitiveness and attractiveness as a destination for increasingly scarce foreign capital.

Until certain burdensome regulations are fundamentally changed, managers, employees and foreign investors must consider creative measures to navigate statutory obstacles, minimize labor-related costs and achieve some measure of workforce flexibility.

Many employers have cited a lack of labor force flexibility as a major obstacle to doing business in Korea.

Among the key concerns is the absence of at-will employment under Korean law. Employers are required to demonstrate “just cause” in order to terminate a regular (permanent) employee, a vague and often difficult standard to meet.

The second frequently identified hurdle is the requirement for employers to pay severance upon an employee’s separation from his employer.

Under the Labor Standards Act (LSA), all employees with one year or more of continuous service are entitled to a minimum of one month’s average wages per year of service, plus compensation for any accrued and unused annual leave, to be paid within fourteen days of the employee’s effective date of departure.

This entitlement applies regardless of the circumstances surrounding an employee’s departure: whether he retires, is terminated, or even joins a key competitor of his previous employer, the employee must receive this statutory severance payment.

The third key obstacle is radical organized labor. The Trade Union and Labor Relations Adjustment Act of 1997 provides that a union may be formed in virtually any workplace, with no minimum requirement in terms of the number of employees or the proportion of the workforce represented.

Although the percentage of Korean workers who are union members is relatively low (about 11 percent) and significantly lower than the rates found in many Western countries, collective bargaining negotiations with unions in Korea are often contentious and extremely draining in terms of time and money. Even many employees now openly question the effectiveness and usefulness of the labor unions, given the protections employees enjoy under the LSA.

Eliminating or substantially reforming the employment sector in an era of extreme economic uncertainty and upheaval appears to be highly unlikely.

Thus, employers should consider taking the following steps as practical alternatives:

First, make hiring decisions very carefully. It is always puzzling to witness the efforts (and expenses) employers are willing to undertake or incur to dismiss or remove incumbent employees, in contrast to the relative carelessness employed in selecting employees for hire. These workers are referred to as “permanent” employees for a reason, and in this area an ounce of prevention (in the form of employee screening) is certainly worth at least a pound of cure (the significant costs incurred in dismissing and replacing an employee).

Second, hire new employees on a probationary basis. Korean labor law generally permits employers to subject their new hires to a probationary period of up to six months. The use of a probationary period allows management to directly evaluate a new hire in a real working environment for a definite period without incurring an obligation to permanently hire the employee. While “just cause” for termination is still required for involuntary dismissal during the probationary period, performance-based termination is generally easier to justify; in addition, prior notice or payment of 30 days’ ordinary wage in lieu thereof is not required for probationary periods of three months or less.

Third, consider non-regular workers. Companies are encouraged to extensively use non-regular workers (defined as part-time, fixed-term and dispatched workers) whenever and wherever possible. Use of these employees provides more flexibility, as upon termination in principle they are entitled to compensation only for the remainder of their respective terms.

However, employers must observe the following restrictions in effect following the passage of the Non-Regular Workers’ Act in 2007: (a) discrimination between regular and similarly situated non-regular workers is prohibited; and (b) after two years of continuous employment, non-regular workers are automatically converted to permanent (regular) employees and will thereafter enjoy the full protections of the LSA.

Fourth, continuously and honestly evaluate employee work performance. Many employers seeking to terminate low performing employees do not have any performance evaluations of the employees in question on file; in other cases the evaluations are almost invariably and inaccurately positive, making it nearly impossible to either recognize good performers or correct poor ones. Evaluating employees in a consistent and transparent manner is in everyone’s best interest.

Last, in seeking to reduce HR costs, focus on discretionary costs first. Before implementing a reduction in force (which is likely to lead to strong employee opposition and may damage the employer’s reputation in Korea), company management should conduct a thorough review of all HR-related costs and benefits. If certain benefits are found to be discretionary (i.e., not guaranteed either by law or contract), the employer may in many cases reduce or eliminate them without first securing employee consent. This may present a cost-effective alternative to the implementation of a costly and controversial early retirement or voluntary separation program.

Implementation of these recommendations will be a great start in positioning employers to meet their workforce needs and compete in 21st century Korea.

*The writer is a foreign legal consultant at Kim & Chang.

by Patrick Monaghan