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Korea to formalise rules for transfer of undertakings in business transfers
07/06/2021
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Namsan Tower, Seoul
Authors
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Brendon Carr
Brendon Carr is a partner (senior foreign legal consultant) at Hwang Hong & Co. PC

On 17 May 2020, the Environment and Labor Committee of Korea’s National Assembly approved a draft bill entitled the “Act on Protection of Employees in Business Transfer” (the “Bill”), formalising rules for the transfer of undertakings in business transfers.

Much of the content of the Bill will be familiar to anyone who has dealt with transfers of undertakings under the European Union or the United Kingdom, under the EU Directive on Transfers of Undertakings or the UK’s Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). The content should also be familiar to those with previous experience in mergers and acquisitions or business transfers in Korea, as it principally codifies and expands upon principles that have been developed through case precedents over the past two decades.

Critically, however, the Bill introduces for the first time an information and consultation obligation with mandatory timing that may affect closing dates for business transfers. Previously, although court precedents had clearly established rights for employees to refuse transfer of the employment relationship in a business transfer, and to demand to be transferred together with the business, there was no obligation for the transferor to communicate anything to employees until the day of transfer.

The Bill must be approved by the National Assembly and promulgated, together with a Presidential Enforcement Decree, before it will be effective. However, as the Bill is co-sponsored by 57 representatives out of 300 in the National Assembly, its passage appears to be highly likely.

Overview

In cases of business transfer, all rights and obligations under contracts of employment are deemed to automatically transfer along with the business, and the transferee or successor in interest shall be obliged to observe existing agreements. Changes to terms and conditions of employment may only be accomplished by collective approval of the workforce; where half or more of the workforce is represented by a trade union, the approval of the union shall be required. In unionised workplaces, collective agreements are also deemed to automatically transfer along with the business. Dismissal of employees as a consequence of business transfer is expressly prohibited.

Scope of application

The Bill defines a “business transfer” as any of the following:

  • the transfer of all or part of a business in accordance with a business transfer agreement, investment/contribution in kind, etc;
  • the merger, division, or spinoff under the provisions of the Korean Commercial Code and other Acts; and
  • a change or suspension of primary contractor in construction and other engineering projects where subcontractors are in place.

Although these conditions are not expressly excluded by the language of the Bill, based on its clear inspiration from the EU Directive, the Bill as currently drafted does not apply to:

  • businesses (or the relevant part) not situated within the Republic of Korea;
  • stock sales;
  • the transfers of assets not constituting a cohesive economic entity or where the economic entity does not retain its identity; and
  • liquidations in bankruptcy.

New information and consultation obligations

Not later than three months prior to the proposed closing of a business transfer, the transferor shall inform and consult with the workforce; where half or more of the workforce is represented by a trade union, the employer shall consult with the union.

Additionally, the transferor must notify individual employees of the fact of an agreed business transfer and transfer of undertakings not later than 60 days prior to the agreed closing date. The Bill establishes a right for employees to refuse transfer within 30 days of receipt of notice, or, in the case that an employee does not receive notice, within 30 days of the employee’s discovery that undertakings will be transferred.

These obligations may combine to create an extended consultation period and may complicate the timeline of business transfers, particularly where the transfer is being negotiated secretly at a global level.

Penalties

Most Korean statutes, including employment-related statutes, contain provisions concerning penalties for nonobservance of obligations. The penalties may take the form of criminal punishments including the possibility of imprisonment or a criminal fine, or in the alternative, an administrative or non-criminal fine. As currently drafted, the Bill lacks any penalty provisions; it is not clear as of this writing whether the Environment and Labor Committee is considering amendment of the Bill to include penalties, or whether it is intended that the Act on Protection of Employees in Business Transfer will not be enforced through state action.