The recent spread of coronavirus has become a vital concern for the well-being and health of the general public in many countries around the world, but it has also begun to have an alarming and destabilizing effect on the global supply chain for many industries which have become dependent on the People’s Republic of China (the "PRC") as the supply source for many parts needed to produce their products. 

This concern is materializing in the Korean auto industry which has built a global supply chain with the PRC being a vital center of supply for many of the key parts for the production of automobiles in Korea.  Due to the measures being taken by the PRC government and the businesses in the affected regions inside the PRC, we are beginning to witness a material disruption of the global supply chain for auto parts, with adverse effect on production by the automobile manufacturers in Korea. 

For example, the Korean news media have reported that Hyundai Motors, Kia Motors and Ssangyong Motors are contemplating (or have started to institute) temporary measures to reduce their production in response to the parts shortages caused by the events taking place inside the PRC due to the coronavirus.  According to various Korean news sources, Hyundai Motors will temporarily shut down its production of all vehicle lines from February 7 (with a partial shutdown beginning on February 4); Kia Motors will reduce production at its Hwasung and Kwangjoo Plants; Ssangyong Motors will shut down its Pyeongtaek Plant from February 4 to February 12; and Renault Samsung is considering a temporary shut down on February 10.  GM Korea  is also reported to be considering changes to their production depending on how long the coronavirus situation continues. 

Given the foregoing, it may be timely for the auto parts manufacturers supplying parts to the automobile manufacturers in Korea to consider the possible downstream impact of the slowdown in production activities by the automobile manufacturers and to consider what preparatory measures may be needed to address such slowdown.  In this update, we discuss some of the HR considerations to address the possible shortage of work for the employees in case the demand for auto parts were to temporarily decrease due to the disruption in the supply chain as described above.  Specifically, we discuss business suspension, leave of absence and administrative leave as temporary relief measures which may be considered by the auto parts companies. 
 

• Business Suspension:  Employers may consider business suspension—i.e., sending workers home with pay—if there is a shortage of work for their employees, which results from causes such as poor sales performance, reduction in production volume due to business rationalization, among other things.  Under the Labor Standards Act, employers must pay 70% of the average wage during the duration of business suspension as business suspension allowance.  It is worth noting, however, that the employees (and the unions, as applicable) could resist receiving reduction in pay and demand 100% of the average wage, as was reported by the Korean news media in case of Hyundai Motors.  Please note that there may be prior consultation or prior consent requirement in the collective bargaining agreement with the union, so it would be prudent to check for such requirement.

• Leave of Absence:  Another measure which employers may consider to address shortage of work for their employees is to place a number of employees on leave of absence.  The employers must have just cause for placing workers on leave of absence—which essentially means that employers can show that it is significantly inappropriate for the relevant workers to continue to provide labor service under the given circumstances—and the employers must follow the relevant provisions in the rules of employment, collective bargaining agreement or other internal company regulations which govern procedural aspects of the leave of absence.  It is also worth mentioning that the duration of leave of absence must be reasonable.  The Korean labor law recognizes that the leave of absence may be unpaid if the deterioration in business is substantial and the unpaid leave can constitute efforts to avoid statutory lay-off.  However, it is possible that the employees (and the unions, where applicable) may claim that the employers failed to pay wages, which can give rise to criminal liability.  Accordingly, unpaid leave of absence should not be implemented without legal review of the relevant requirements and there should also be appropriate employee communication to achieve alignment with the affected employees.  Finally, there is a government-funded program which pays subsidy to the employees on unpaid leave of absence if the employers carry out unpaid leave of absence as response to the need to restructure.

• Administrative Leave:  In case the extent of work shortage is limited, the employers may choose to place the relevant workers on administrative leave.  Although the employers are allowed to place workers on administrative leave as a valid exercise of managerial prerogative over personnel matters, the employers must pay the relevant employees their salary and allowances, which should at least equal what the workers would receive as business suspension allowance. 

In addition to the foregoing HR issues, we view that the supply chain disruption caused by the coronavirus in the PRC may give rise to a number of material issues impacting the legal and the business risk factors facing the auto parts companies doing business in Korea, including issues arising from the interpretation of force majeure clauses in supply contracts and contract disputes over performance breach, among other things.