Amid an increasing debt ratio and worsening profitability under an unfavorable export situation, Company A has come up with a restructuring plan. The plan inevitably includes laying off a number of workers, which may result in strong opposition.
Recently, corporate restructuring has been emerging as a major issue which has far-reaching economic and social repercussions beyond marginal corporations and local economies in Korea. Corporate restructuring is the process of adjusting corporate organization towards greater efficiency and survival in an environment of oversupply and financial crisis.
In short, corporate restructuring is about reforming insolvent companies or inefficient organizations into productive and efficient ones. Commonly, it involves downsizing and/or selling unprofitable businesses and closing or merging overlapping organization sections. In a broader sense, restructuring can include R&D activities aimed at developing new technologies for the future.
When it comes to corporate restructuring, it is imperative to downsize the workforce and is therefore called a pain-sharing process. A reasonable point of compromise is sought between management and the workforce, but when corporate restructuring becomes real, workers may voice discontent that ‘innocent workers have to take sole responsibility for management failures’. Severe conflicts between labor and management are likely to occur at workplaces where restructuring takes place, as job losses severely and directly impact the particular workers and their families.
When corporate restructuring is unavoidable if a company wishes to survive and protect the future of the majority of workers, CEOs should not hesitate. However, what can CEOs do to minimize conflict with workers and still overcome the company’s difficulties? The KEF recommends taking the following ideas into consideration.
Do not miss the ‘golden time’ for corporate restructuring
Corporate restructuring is the process of making an insolvent company into a more profitable business in response to economic changes. Insolvent does not mean simply a quarter-to-quarter decline in sales or temporary business difficulties.
Sometimes, CEOs hesitate to make the decision to restructure even though the need to do so is evident. In most cases, companies do not feel the necessity to restructure until they are short of cash or on the verge of massive default. However, sometimes CEOs must make painful decisions in order to ensure a company’s survival in the long term.
CEOs would be wise to remember that missing the right time for restructuring has often resulted in a company disappearing from the industry. There have also been a number of companies which ignored advance warnings and therefore made business conditions worse. Struggling companies that miss the golden time for corporate restructuring and fail to get back on track will need to engage in corporate restructuring later on a larger scale, which will have an even greater negative impact on workers.
Layoffs are the last option
As corporate restructuring can be seen as a new beginning, it is important to retain valuable human resources for the future. Therefore, when reducing labor costs, CEOs need to do their utmost to minimize the number of layoffs, recognizing them as the last option.
CEOs are advised to seek other ways of restructuring instead. This can include self-help efforts of the management, relocation of jobs, granting leaves (rotating long-term leaves or unpaid leaves) to workers and reducing working hours. Such measures can be recognized as sincere efforts to avoid layoffs should the ultimate decision to let go personnel be challenged in court.
If these measures are successful in improving the company’s situation, a consensus can form among the workforce that ‘everyone survives if the company survives’, something which will eventually be helpful for the company to rebuild itself.
Ensure a reasonable and fair selection process regarding who is downsized
Despite such efforts, if a company decides to downsize its employees, greater attention should be given to setting a reasonable and fair process for determining redundancy. Early retirement or resignation after recommendation by management can be regarded as dismissal if management has forced employees to retire early or resign.
Regarding this issue, Korean courts have ruled that factors such as company profitability, employees’ age, number of dependent family members, and possibility to re-hire should be taken into consideration in a comprehensive manner during the selection process.
During the Asian financial crisis in 1997 to 1998, many companies determined as redundant one member, mostly the wife, of a married couple working for the same company. Given the fact that the other one maintained employment, this method was encouraged as a desirable way to restructure. However, the Supreme Court decided that using such criteria to determine redundancy amounted to unfair dismissal, and therefore invalid as gender discriminative.
Is it justifiable then to determine non-regular workers, such as fixed-term and temporary, as redundant? According to Supreme Court precedents, this is possible as their employment status is more flexible than for regular workers. Nevertheless, it may still be considered a violation of the non-discrimination rule.
The most contentious case in determining redundancy is when union members are selected. Surely when only trade union members are targeted or many are selected even through a fair process, conflicts over unfair labor practice are likely to arise. As employers are required to prove that the selection criteria for redundancy are justifiable, they need to be prepared in advance.
Continue efforts to persuade workers
Reducing the number of employees during restructuring causes a severe clash between labor and management interests: it is very difficult to reach amicable agreements. Employers need to continue their efforts to help employees understand why workforce downsizing is needed. CEOs need to persuade their workers that, without taking prompt actions, the scale of downsizing will increase and more jobs will be at stake, and that such blanket opposition to downsizing will only make the situation worse. If necessary, CEOs have to show a willingness to reveal corporate information that will help to convince employees.
Make enough efforts to explain to workers the reasons for restructuring
It is not easy to conclude an agreement regarding restructuring when it is accompanied by downsizing as interests between labor and management diverge. However, management needs to work hard to help the members of the organization understand the reasons. CEOs are recommended to impress the members that more jobs could be in danger without a prompt measure, and blanket opposition to redundancy could make the situation worse. If needed, information related to restructuring should be opened.
Avoid further emotional hardship for workers through imprudent decisions
Ironically, sometimes restructuring turns into a ‘spending spree.’ Some companies pay bonuses to the remaining workers after downsizing, as a way of avoiding feelings of rebellion among the workers. However, paying bonuses can easily make the dismissed workers feel they have been lied to and may even lead to legal disputes. Remember that most disputes are brought to court by dismissed workers. Dismissal for managerial reasons and company efforts to avoid dismissal may well be nullified by the court if bonuses are paid out. Companies should carefully deliberate on measures to show shared sacrifice. If companies dispose of some assets, use the private property of the employers for business, or reduce the wages of its executives prior to requiring sacrifice from the workers, downsizing may be more acceptable.
By all means, hiring new personnel or paying bonuses right after downsizing should be avoided as they may well add fuel to the fire for the remaining employees and become a new source of dispute.
Supporting dismissed workers through outplacement programs will help reduce disputes and resistance. Such programs will also help downsizing to be accepted by the remaining workforce, and positively influence their loyalty.
When selecting subcontractors for the outplacement program so the dismissed workers can find new jobs through the subcontractors, companies should pick those with decent outplacement programs so they can be of actual help.
Article 25 (1) of the Labor Standards Act stipulates that employers who have dismissed a worker for managerial reasons shall, if the worker desires, grant hiring preference to the dismissed worker within three years from the date of the dismissal if they intend to hire someone who will perform the same duty as the dismissed worker did at the time of such dismissal. Of course companies should abide by the law when such workers qualify to be rehired.
In addition, it is important that dismissed workers be rehired if the company has agreed to do so once the business gets back on track. If companies carry out such a rehiring agreement in good faith, this will serve to improve the sense of loyalty and belonging for both the rehired worker and those who continued working after restructuring.