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COVID-19: Scope of Payment of Business Shutdown Allowances and Filing a Request to Reduce the Allowances

2020.03.31

We would like to update you on an employer’s obligation to pay its employees a business shutdown allowance (the “Allowance”) in the event the employer implements a business suspension due to difficulties resulting from COVID-19. 

Article 46 (1) of the Labor Standards Act (the “LSA”) provides that when a business shuts down due to a cause attributable to an employer, the employer shall pay the employees concerned allowances of at least 70% of their average wage during the shutdown period (note: if the amount equivalent to 70% of the average wage exceeds the ordinary wage, the employer may pay the ordinary wage as the shutdown allowance).  

The courts and the Ministry of Employment and Labor (the “MOEL”) have broadly interpreted the above “cause attributable to an employer” reference to include business disruptions that occur within an employer’s scope of influence.  Accordingly, in cases involving a reduction in the workload, subcontractors suspending construction work, relocation of a factory, decrease in sales, financial difficulties, etc., it was found that employers were required to pay the Allowance.  Meaning that, if an employer implements a business suspension due to difficulties arising from COVID-19, regardless of whether the employer is at fault for such challenges, it is likely that the employer will be required to pay the Allowances.  

Nonetheless, we also note that the LSA allows for exceptions to the Allowance.  That is, if unavoidable reasons make business operations impractical, upon receiving the approval of the Regional Labor Relations Commission (the “RLRC”), the RLRC may reduce the Allowance partially or in its entirety (Article 46 (2) of the LSA).  If an employer wishes to request such reduction, the employer should submit an application to the RLRC listing the Allowances to be paid, the specific reasons for such request, etc.  In principle, the RLRC will notify the employer of its decision within 30 days.   

Recently, we note that the RLRC granted reductions of the Allowance on the grounds that unavoidable reasons made business operations impractical: (i) where a hospital faced a serious financial crisis due to an increase in debts and potential bankruptcy; and (ii) where a travel agency suffered financial difficulties due to a restriction on travel to Korea by the Chinese government. 

As such, if an employer is facing business difficulties due to, for example, COVID-19, we believe the company may (i) first consider implementing a business shutdown and paying the Allowance to the employees; and (ii) if unavoidable reasons make business operations impractical, the employer may consider filing a request to the RLRC for a reduction of the Allowance as explained above.   

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