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Court Rules that Company’s Implementation of Unpaid Leave of Absence on Employees is Justifiable and that It is Not Obligated to Pay Business Suspension Allowance Under Article 46 of the Labor Standards Act

2023.06.27

The Seoul Central District Court held that a travel agency’s (the employer, hereby referred to as “Company A”) decision to place three employees on unpaid leave of absence as a means of overcoming a business crisis caused by COVID-19 was justifiable and that the imposition of unpaid leave was caused by a factor not attributable to the employer (i.e., force majeure). The Seoul Central District Court added that placing the employees on unpaid leave was within Company A’s personnel management rights and dismissed the employees’ claim for compensation corresponding to their leave (Seoul Central District Court Decision 2022Na42756, June 20, 2023).

Company A, which was engaged in the travel business, was undergoing a business crisis due to the onset of COVID-19 in early 2020 and the Government’s quarantine policy in response to the pandemic. The situation was so severe that Company A had to take extreme measures, such as liquidating its subsidiary, selling its shares, etc. As a means of avoiding layoffs amidst this business crisis, Company A placed 1,300 employees on paid leave (for three months) and unpaid leave (for three months), after reaching an agreement with its labor management council. However, out of the 1,300 employees, three employees refused to be placed on unpaid leave. In response, Company A inevitably notified the three employees in writing, confirming their unpaid leave status. The three employees claimed that the situation constituted a business suspension due to a reason attributable to Company A and filed a lawsuit to seek a business suspension allowance of at least 70% of their average wage pursuant to Article 46 of the Labor Standards Act.

The trial court and appellate level decisions within the Seoul Central District Court dismissed the plaintiffs’ claims on the ground that the unpaid leave was not attributable to Company A and that the company had a justifiable reason to exercise its managerial prerogative. The appellate level decision was thus finalized.

The courts held that, as a matter of principle, Company A was obliged to pay a business suspension allowance to the plaintiffs pursuant to Article 46, Paragraph 1 of the Labor Standards Act as no consent was obtained from the plaintiffs. However, the courts considered the following factors in their decision to hold that Company A had no obligation to provide the statutory business suspension allowance of 70% of the average wage to the plaintiffs: (i) Company A was undergoing a serious business crisis, incurring losses of approximately KRW 100 billion in 2020; (ii) Company A decided to implement various measures in order to avoid liquidation, such as liquidating its subsidiary, selling its shares and its head office building, etc.; (iii) unpaid leave was imposed on the employees as a means to avoid layoffs; (iv) of the 1,300 employees, only three employees refused to provide consent to the unpaid leave; and (v) Company A reinstated the employees in October 2021 as a result of its attempts to avoid the layoff.

On behalf of Company A, Kim & Chang submitted objective evidence before the Seoul Central District Court to argue that the business crisis was a reason that cannot be attributed to Company A, and highlighted that Company A engaged in more efforts compared to other companies within the same industry to avoid restructuring despite the severe challenges it faced. As a result, we were able to successfully defend Company A in this lawsuit.

This is the first case where the Seoul Central District Court recognized that unpaid leave imposed without the employees’ consent for managerial reasons is not attributable to the employer. The court considered the totality of the circumstances, including the special nature of the crisis caused by COVID-19 (a force majeure event), the serious liquidity crisis faced by Company A, and the company’s efforts to avoid liquidation and layoffs. This decision will serve as an important case precedent in disputes involving the legitimacy of unpaid leave imposed for a business reason.

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