Hello, I am Attorney Choi Jong-ha from Cheongchul Law Firm.

As mentioned in my previous post, the Labor Standards Act applies quite differently based on the number of five employees. Because of this, many business owners try to maintain the status of businesses with fewer than five employees while expanding their businesses, often attempting to engage in what is called 'business splitting.' This involves reporting separate business registrations for each store or branch, or even establishing entirely separate corporations, and sometimes assigning the title of 'CEO' or 'branch manager' to one of the employees, ensuring that no more than four workers are employed at each store or branch.

However, does such a measure actually have any effect?

The Ministry of Employment and Labor explains that the term 'business or workplace,' which serves as the basis for calculating the number of regular employees, refers to a corporate entity that forms an integrated whole from a business management perspective (Supreme Court ruling 91Da21381, Feb. 9, 1993). Therefore, even if they are geographically distributed, if there is not enough independence to consider them as a single business when taking into account the operational capabilities of each workplace, the higher organizational structure will be assessed as one business altogether (Labor Standards Team-8048, Nov. 29, 2007, Labor Improvement Policy Division-4440, Aug. 8, 2014), thus clarifying that they are judged based on 'independence.'

Furthermore, in cases where corporations are separated, the Ministry of Employment and Labor applies a stricter standard, stating that “in principle, one corporation is considered one business (or workplace), and if there are different corporations, they are considered separate businesses (or workplaces). However, if multiple workplaces belonging to one corporation are geographically dispersed and human resources, labor, finance, and accounting are distinct and operated independently, and if separate collective agreements or employment rules are applied, they can be regarded as separate businesses (or workplaces), allowing for the calculation of the number of regular employees under the amended Labor Standards Act” (Labor Standards Division-4614, Sept. 7, 2005).

Looking at these criteria, it seems feasible to manage the number of regular employees when it comes to 'corporate separation.' However, the courts tend to focus on the actual management situation even when corporations are separated. In essence, if each corporation forms a 'business management whole' with no independence, it cannot be considered as separate corporations.

The Administrative Court of Seoul ruled that although two corporations were formally separated, they had the same CEO and vice president, the shareholder structure was very similar, the business purposes were quite alike, they shared offices and equipment, and they compiled a phone directory that included employees from both corporations, and staff handled the work of both corporations (especially accounting tasks) without distinction. In this case, it was deemed appropriate to consider both corporations as one single workplace when determining whether they employed more than five employees (Seoul Administrative Court, June 13, 2019, 2018 Guhap 58356 ruling), and this ruling was confirmed by the appellate court (Seoul High Court, Nov. 28, 2019, 2019 Nu 48761 ruling).

Similarly, the Seoul Administrative Court ruled regarding a corporation engaged in eyeglass sales and its CEO operating a (related to eyeglasses) weekly newspaper as a sole proprietor, that both businesses specialized in eyeglasses, shared the same management in practice, shared offices, and the work of employees from both businesses (particularly in HR, accounting, etc.) was not separated but mixed together. Thus, they were deemed to be one workplace.

Ultimately, in order for regular employees to be treated as separate under the Labor Standards Act, it is insufficient to merely separate documents form-wise. It is necessary to create an appearance of operating separate corporations where the essential management, human resources, accounting, and financial tasks of the company are conducted independently. However, even with such legal interpretations, separated workplaces may result in employees being prematurely deterred from asserting their rights by thinking, 'Our workplace is split into four, so it won't work.' Therefore, it would be advisable to seek expert review on whether the workplace being engaged is under regulation by the Labor Standards Act.