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Recent Supreme Court Decision regarding a Layoff (Urgent Business Necessity Requirement)


We would like to bring your attention to an important decision regarding layoffs recently rendered by the Supreme Court.

On June 9, 2022, the Supreme Court overturned a decision by the High Court (which had ruled that a layoff implemented by a company engaged in the steel pipe manufacturing business was unfair because it did not meet the “urgent business necessity” requirement under the law), and remanded the case back to the High Court (Supreme Court Decision 2017Du71604, June 9, 2022).

In its decision, the Supreme Court opined as follows:

“An urgent business necessity is not only limited to a situation where a company avoids insolvency, but also includes circumstances where a reduction in personnel is required in advance to cope with a possible crisis in the future. However, such personnel reduction should be acknowledged to be reasonable from an objective point of view.”

As to the company in question, the Supreme Court ruled that the ‘urgent business necessity’ requirement was in fact met in light of the following reasons: (i) the industry itself under which the company was doing business had suffered severe difficulties such as a drop in international crude oil prices and a slump in the US energy industry; (ii) the accounting firm that studied the status of the company's business conditions suggested that the company “faced a liquidity crisis”; (iii) the company recorded even lower revenue than expected as pointed out by the accounting firm; and (iv) the size of the company’s short-term loans significantly increased and the company's assets were put on sale.

In addition, the Supreme Court ruled that (i) as part of its efforts to avoid layoffs, the company implemented the layoff process after a series of restructuring measures, including a voluntary retirement program, and thus, the layoffs may be justified even if the number of employees to be laid off is relatively small as a result of the company’s efforts to avoid layoffs, and (ii) the “urgent business necessity” requirement may not be deemed to have been met only when there are continuous accumulated deficits.

Interestingly, the first instance court (i.e., District Court) in the above case found that the layoff implemented by the company was justifiable. In particular, with respect to the legal requirement to demonstrate that the company made “efforts to avoid layoffs”, it is noteworthy that the first instance court applied a more relaxed standard to determine the legitimacy of the layoff, citing the legal principle of the existing Supreme Court precedent that “the method and degree of efforts to avoid a layoff are not definitive and fixed, but depends on the degree of the employer’s managerial crisis, the managerial reason for the layoff, the content and size of the business, and the number of employees by position.”

For your reference, the Korean courts have tended to apply strict standards when determining the requirements for layoffs. Recently, however, the National Labor Relations Commission seems to broadly determine the scope of justifiable layoffs, as layoffs implemented by some companies in the airlines and hotel business were found justified.

For workplaces where layoff cases are pending or are expected to take place due to an urgent business crisis, it is advisable to carefully review the criteria for determining the “urgent business necessity” requirement proposed by the above Supreme Court decision and prepare in advance for legal disputes, etc. related to layoffs.


[Korean version]