New Korean Supreme Court Decision on Annual Leave

On October 14, 2021, the Supreme Court resolved the question of how much unused annual leave an employee must be compensated for after serving a single one-year fixed term: the maximum amount is 11 days, not 26 days as some had argued.1) This decision contravenes the position previously taken by the Ministry of Employment and Labor (“MOEL”).

The source of this controversy is Korea’s unusual system of paid-annual-leave accrual. Under the Korean Labor Standards Act (the “LSA”), an employee earns 15 days of paid annual leave immediately, in a lump sum, for completing a full year of employment so long as the employee attended work for 80% of the year.2) During the first year, the employee also earns one day of paid annual leave for completing each month of work—up to a maximum of 11 days—so long as the employee attended work for the entire month.3) As a result, an employee can earn up to 11 days paid annual leave during the first year of employment, and 15 days immediately after the first year, for a total of 26 days.4) Generally, any unused leave expires after a year and employees must be compensated for their unused leave in cash, unless a specific procedure for encouraging the use of leave has been followed.5)

MOEL has previously taken the position that if someone is employed for a one-year fixed-term they earn 26 days of paid annual leave by the end of the term (11 days plus 15), and they must be compensated for any unused days out of that 26-day total if their employment terminates at the end of the term. But the Supreme Court and prosecution service had taken positions that appeared inconsistent with MOEL’s, and there has thus been significant controversy over this question.

On October 14, 2021, the Supreme Court held that if a fixed-term employee under a one-year contract leaves the company at the end of the contract, after serving exactly one year, the employee is only entitled to compensation for up to 11 days of paid annual leave, rather than 26 days. The Court decided that the right to use the 15 days earned for completing a year of service attaches only on the day after completing the first year of work. Therefore, since the right to use the paid annual leave has not been attached, there is also no right to claim compensation for such leave.

This Supreme Court decision was not en banc.6) However, it will likely be treated as having resolved this question relating to one-year fixed-term employees. MOEL, which had adopted a contrary interpretation of the law, has stated that it will review the ruling and issue its own administrative interpretation.

This decision only directly addressed the leave entitlement of fixed-term employees under a one-year contract. So it could leave open the question of whether the holding also applies to permanent employees who quit or are terminated exactly at the end of one full year. Although there is no obvious basis on which to distinguish permanent and fixed-term contracts where the employment terminates after exactly one year, the possibility cannot be entirely ruled out.

Thanks to the Supreme Court’s decision, it is possible for employers to avoid any obligation to compensate employees for unused annual leave if their employment terminates after exactly one year because:

• the 15-day leave grant does not attach unless the employee remains employed at least during one
• additional day after one year’s service; and
• the statutory leave-use-encouragement procedure can be applied to the 11 days granted during the first year, to extinguish any right to compensation for it.7)

The statutory leave-use-encouragement procedure is provided in the LSA and involves sending certain notices at particular times. It culminates with the employer itself determining an appropriate leave period for the employee if the employee fails to do so. Proper implementation of this procedure can be beneficial and is generally recommendable for employers.

By Yulchon, Korea, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact korea@transatlanticlaw.com 

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.