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Cort Musical Instruments' Wrongful Termination Suit and a Suit for Unpaid Wages

Deal Highlight 6.

HR team wins a favorable ruling in a wrongful termination suit and a suit for unpaid wages on behalf of Cort Musical Instruments

Cort Musical Instruments, a guitar manufacturer, laid off some of its employees on April 12, 2007 due to managerial difficulties (the "First Termination") and, having failed to overcome the managerial difficulties, closed down its plant and laid off the rest of the employees on August 31, 2008 (the "Second Termination"). With respect to the First Termination, the Supreme Court, on February 23, 2012, held that the First Termination was not justified because Cort failed to establish an urgent managerial necessity. Accordingly, the Supreme Court ordered Cort to reinstate the terminated employees and pay unpaid wages since the date of the First Termination. In two separate suits involving the Second Termination, Yulchon obtained favorable decisions on behalf of Cort that 1) the Second Termination was justified; and 2) although Cort was liable for wages owed to employees laid off as part of the First Termination, the liability ended on the date of the Second Termination, as further elaborated below.

1. Wrongful termination suit in connection with the Second Termination
The employees terminated as part of the Second Termination argued that i) Cort did not experience any managerial difficulty as in the case of the First Termination; and ii) the Second Termination was not justified because the closure of the plant was just a pretext to relocate Cort's overseas operation where its foreign subsidiary continued to manufacture guitars. However, the court recognized that the First and Second Termination occurred at two different times and substantial changes in circumstances occurred between the two Terminations. Accordingly, the court in this suit ruled, despite the Supreme Court's decision holding that the First Termination was not justified, that the closure of the plant and the subsequent Second Termination, which occurred a year and four months after the First Termination, were justified.

This decision is significant because the court recognized just cause for termination of employees and closure of a plant where a company, manufacturing the same products through its domestic and foreign subsidiaries, was prompted by the company's failure to overcome a managerial difficulty brought by structural problems (such as costly labor) and to maintain its competitive advantage in the export market. It should also be noted that the court in this suit recognized an urgent managerial necessity for a layoff where a company, although not on the verge of filing for bankruptcy, could demonstrate a reasonable justification such as losing its competitive advantage due to structural problems.

2. Suit to recover wages following the invalidation of the First Termination
Following the Supreme Court's decision invaliding the First Termination, the terminated employees filed a suit for reinstatement and unpaid wages from the First Termination on April 12, 2007 although it was impossible for Cort to reinstate the terminated employees because it had shut down its business completely after the closure of the plant on August 31, 2008. The court in this suit reasoned that as long as the closure of the plant on August 31, 2008 and the subsequent Second Termination were justified, the employees' inability to perform their services to the Company after September 1, 2008 could not be attributable to Cort. Accordingly, the court ruled that the terminated employees could not demand wages from September 1, 2008 onwards.

As a result of this decision, Cort will no longer be required to reinstate the terminated employees and Cort's liability for unpaid wages will be limited to the wages for the period between the date of the First Termination and the date of the Second Termination (a year and four months), down from the wages to date (five years). This decision is notable because the court in this suit recognized that the Company would not be liable for wages for the terminated employees if the Company closed down a plant and its business for a justifiable reason. Previously, there was virtually no case law denying an employer's liability for unpaid wages following the closure of its business, even though it was a well-established principle of law that an employer should not be liable for wages if employees were unable to provide their services to the employer without any fault on the part of the employer.

Partners Hee Chul Kang, Hong Kun Yoon and Sang Wook Cho and associates Jae Woo Park, Hyun Jeong Kim and Dai Won Chung of Yulchon's HR team handled the case.