Labor Issues Arising in the Context of Insolvency

Abstract

This article identifies the labor-related issues that may surface in the event of an insolvency in the wake of the recent increase in insolvencies attributable to economic downturn. Under Korean legal framework, two statutes serve as a primary source of safeguard against employees’ unpaid wages during insolvencies: (i) the Debtor Rehabilitation and Bankruptcy Act (the “DRBA”) under which an employee’s unpaid wage claim against the employer is given priority over other types of claims and (ii) the Labor Standards Act (the “LSA”) under which an employee’s wage claim (i.e., for the last three months of employment), severance claim (i.e., accrued for the last three years of employment) and other claims (e.g., accident compensation) arising out of the employment relationship are given priority over other secured claims, taxes, utility charges, and other claims with respect to the company’s total assets. Notwithstanding the statutory protection, labor issues are present during insolvency proceedings as evidenced by the following three major cases. In Tongyang, Inc. case, the court wrestled with the scope of an “employee” within the meaning of the LSA in the context of a rehabilitation proceeding. In Ssangyong Motor case, the court held that a large-scale layoff during the rehabilitation proceeding was justified. In Hankook Ilbo case, the court approved the employee-creditor’s application for the commencement of the rehabilitation procedure against the employer.