A necessary evil

The Korean economy has entered a lengthy winter because of sluggish exports that primarily drive the economy, due to poor performance by mainstay products and deteriorating external conditions resulting from uncertainties such as U.S. interest rate hikes. The government and ruling party declared the economy was in an emergency condition and threatened to railroad economic stimuli measures including bills for labor-sector reform if the main opposition remained uncooperative. The National Assembly speaker declined to go along and warned that he’d use his veto power. But nonetheless few would disagree that the local economy is in rough waters.

While the legislature has been dragging its feet on economic reforms, companies have been rushing to restructure and streamline in order to stay afloat in such a challenging business climate. The restructuring wave has been broad and includes not only the hard-up shipbuilding and shipping industry, but also the financial sector, which fears a spillover effect from corporate insolvencies. Corporate restructuring is a double whammy for the job market, where opportunities are already scarce for young people. But the painful process is still necessary to keep businesses running. Zombie companies that survive entirely on loans must be wound up to make their industries healthier. If they are allowed to linger on, they could spoil the industry and hurt solid companies. We saw such damaging effect during the late 1990s financial crisis.

Corporate restructuring is never easy or pleasant. It is like pruning to make a tree grow stronger and yield richer fruits. When branches sprawl and become too heavy, the nutrients from the roots cannot be evenly spread out. For a good harvest, surplus branches must be cut to make room for air and sunlight. Timing and scope is important in pruning. If the pruning is deferred or hurried, the plant could die. A company too must not be rash when it implements necessary streamlining. It could prompt a strong backlash from employees and union members and face conflict or bad publicity, which could lead to greater losses. Labor streamlining should be restricted to a necessary minimum.

According to the labor law that has provided guidelines on layoffs since the last crisis that required a bailout from the International Monetary Fund, a company that has to restructure labor resources due to a deteriorating financial condition must meet four requirements: urgent cause to serve a management purpose, proven endeavors to prevent layoffs, fair selection of people to be made redundant, and sincere discussion with the employees. If the employers do not meet any of the four requirements, they would be dismissing employees on unfair and illegal grounds.

But it is not easy for a company to prove an urgent management cause. It must prove that its state is so bad that it cannot afford the employees. There are court precedents on layoffs when a company was on the brink of going bankrupt. But it still is not easy to justify layoffs unless a company is in serious trouble. Korea’s regulations are much stricter than in the United States and even Europe, where there are tough guidelines on dismissals. European states do not factor in management necessity when assessing the justice of massive layoffs.

Korean companies must first try reorganization, reduction in overtime work, pausing new hires and submission of early retirement before implementing layoffs. One court case ruled that a dismissal was unjust because the employer had not sought voluntary retirement applications before making the move. That is why managements often pressures employees to leave the company under the pretext of voluntary retirement. Employers must remember that hasty restructuring could bring about more harm than good.

Translation by the Korea JoongAng Daily staff.

*The author is a professor at the Law School of Hankuk University of Foreign Studies.

by John Lee