1.

Relevant Legal Principles

In determining whether a fixed-term employee has a legitimate expectation of renewal, Korean courts look at the totality of the circumstances surrounding the employment relationship. This includes any renewal-related provisions in the employment contract, company rules of employment, or collective bargaining agreement and, even absent such provisions, the substance of the employment contract, the background of its formation, the criteria applied for renewal, whether renewal requirements or procedures have been established and how they operate in practice, and the nature of the employee’s duties are considered. Where these circumstances show that the parties have come to share an understanding that the contract will be renewed if certain conditions are met, the employee is recognized as having a legitimate expectation of renewal (see Supreme Court Decision 2007Du1729, rendered April 14, 2011; Supreme Court Decision 2011Du12528, rendered February 13, 2014, among others).

Where an employee already assumes a legitimate expectation, and the question is whether the employer had a reasonable basis for refusing to renew despite such expectation, the courts determine whether the grounds and process for the refusal were objective, reasonable and fair in light of social norms. That determination takes into account: (i) the employer’s business purpose and nature; (ii) conditions at the workplace; (iii) the employee’s position and substance of the duties performed; (iv) the circumstances surrounding formation of the employment contract; (v) whether renewal requirements or procedures have been established and how they have operated in practice; and (vi) whether any cause is attributable to the employee. The employer bears the burden of proving these circumstances (see Supreme Court Decision 2015Du44493, rendered October 12, 2017, among others).
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2.

Key Findings of the Decision

The Supreme Court identified the following circumstances in concluding that the lower court’s finding that the company’s refusal to renew was unreasonable could not be upheld.
 

• Workplace conditions and background of the employment contract: The company hired the Employee as a team leader, drawing on the Employee’s prior experience, at a time when the team’s revenue was already declining, with the specific aim of turning that revenue around. After the Employee joined, the team’s revenue continued to fall sharply and reached zero in the first quarter of 2022, during the term of the third contract.
   

• Establishment and operation of renewal requirements and procedures: When the team’s revenue failed to improve after the Employee was hired, the company’s representative director repeatedly told the Employee that the contract could not be renewed unless team revenue improved, without ever mentioning any renewal condition other than revenue. It is also relevant that the third contract was concluded a considerable time after the company changed how it dealt with customers suspected of unauthorized software use, from sending warning letters to sending self-inspection request letters (the “Policy Change”). Taken together, these facts support the view that the Employee had effectively been told that improvement in revenue, achieved despite the Policy Change, was a condition for renewal.

• The Employee’s position and duties, and whether the shortfall was attributable to the Employee: The Employee argued that the Policy Change caused the decline in the team’s revenue. However, it is unclear whether the Policy Change actually affected revenue, and there is no indication that the Employee ever raised the Policy Change with the representative director as a cause of the decline. Even assuming the Policy Change did have some impact, given the Employee’s position as team leader responsible for managing and improving revenue, the Employee should have identified and analyzed any problems caused by the Policy Change and proposed measures to restore revenue, and should have delivered results. In fact, after the Policy Change took effect, the Employee personally set target revenue figures for the second through fourth quarters of 2021; however, actual achievement rates were only 58.7% in the second quarter, 23.5% in the third quarter, and 6.5% in the fourth quarter.
   

3.

Implications

In earlier cases, Korean courts have primarily focused on factors such as whether a formal performance evaluation form was established and evaluation criteria were disclosed to employees in advance, whether the evaluation items changed over time, and whether those items were reasonable; treating these as evidence that a performance evaluation was objective and reasonable and that a refusal to renew based on it was therefore justified (see Supreme Court Decision 2021Du45114, rendered October 28, 2021, and its first-instance decision, Seoul Administrative Court Decision 2019Guhap6130, rendered August 21, 2020).

The Decision is notable for taking a different approach. It based the reasonableness of the refusal to renew on the following: (i) the fact that a renewal requirement (i.e., team revenue) had effectively been established, given the background to the employment contract and the Employee’s position and duties, and (ii) the fact that this requirement had been repeatedly and clearly communicated throughout the renewal process. In other words, the Decision confirms that the absence of a standardized evaluation framework or supporting metrics does not, on its own, defeat the reasonableness of a refusal to renew.
 
That said, the Decision should not be interpreted as holding that a decline in revenue alone is enough to justify a refusal to renew a fixed-term contract. On its facts, revenue served as an objective measure of performance given the purpose of the hiring and the nature of the role; that measure had been set as a renewal condition and repeatedly reinforced throughout the formation and renewal of the contract; and, against that measure, the shortfall in performance was clear. The Decision is therefore likely to be most significant for employment relationships where the nature of the role allows performance to be measured against an objective metric that is built into the renewal process, for example, fixed-term contracts with clearly defined performance accountability.

Employers engaging fixed-term employees should take the Decision as an opportunity to review how renewal requirements and procedures are set and applied in practice, and to prepare for disputes over renewal expectations of fixed-term employees and the reasonableness of any refusal to renew.