South Korean business owners who close their companies without complying with labor and tax requirements could face criminal penalties, additional financial liabilities and civil disputes, according to a government guide released on July 13 to help entrepreneurs navigate the business closure process.
The Korea SMEs and Startups Agency (KOSME) published its Business Closure and Insolvency Practical Guidebook, outlining the legal, labor and tax procedures that sole proprietors and corporations should follow when winding down their operations.
The guide places particular emphasis on employee dismissals, warning that employers remain fully subject to labor laws even when a business is closing.
Under South Korea’s Labor Standards Act, employers generally must provide workers with at least 30 days’ advance notice before termination or pay 30 days of ordinary wages in lieu of notice. Failure to make the required payment can result in penalties of up to two years in prison or a fine of approximately $14,600.
The guide cites the case of a retailer that abruptly ceased operations because of financial difficulties and immediately dismissed 20 employees without advance notice or dismissal compensation. After workers filed complaints with labor authorities, the company’s chief executive was fined about $7,300 and ordered to pay roughly $21,900 in dismissal compensation.
KOSME also sought to correct common misconceptions about severance pay, particularly regarding foreign employees.
The agency said foreign workers are entitled to the same statutory severance benefits as South Korean employees under domestic labor laws. Employers hiring workers under the E-9 non-professional employment visa should also ensure payments are processed through the country’s mandatory departure guarantee insurance program.
In one example, a manufacturer employing eight foreign workers declined to pay severance after closing, believing the employees were ineligible because they were not Korean nationals. Labor authorities later ordered the company to pay approximately $23,400 in severance and insurance benefits and imposed an administrative fine of about $3,700 for violating employment permit regulations.
The guide also cautions employers against relying on severance waiver agreements signed by employees before leaving the company.
In one case, a restaurant owner persuaded a head chef to waive roughly $3,700 in severance pay in exchange for remaining employed for an additional two months instead of being dismissed immediately. The employee later filed a claim, and a court ruled the waiver invalid, ordering the employer to pay the severance along with accrued interest.
KOSME said severance pay is a statutory right that generally cannot be waived in advance, regardless of any written agreement between an employer and employee
The guide also warns that dissolving a corporation does not necessarily eliminate a chief executive’s personal financial obligations.
In one case, the head of a company remained personally liable for a bank loan after the business was liquidated because he had signed a personal guarantee. After repaying about $73,000, he was unable to cover the remaining balance of roughly $146,000 and ultimately sought court-supervised personal debt restructuring.
KOSME also advised business owners to complete all tax filings before closing, warning that unpaid corporate income taxes, value-added taxes and payroll withholding taxes could leave company executives secondarily liable for outstanding tax obligations.
The agency said the guide is intended to help entrepreneurs navigate complex closure procedures, including corporate liquidation and the settlement of legal obligations, while making it easier to pursue future business opportunities.
