The five-person rule in the Korean law, which exempts owners of businesses with less than five workers from a plethora of legal mandates regarding employee welfare, has now become a major loophole leading to widespread infringement of labor rights, such as in the recent London Bagel Museum incident.
On Nov. 18, the Justice Party held a press conference in front of the Seoul Regional Employment and Labor Administration to call out a well-known barbecue restaurant in Seogyo-dong, Mapo District, western Seoul, which has come under scrutiny as a representative case of “splitting” businesses to avoid labor regulations.
Despite having annual sales of 10 billion won ($6.8 million) and seven directly operated locations, the restaurant avoided paying its employees holiday pay, overtime pay and night-shift pay from November 2023 to February this year, according to labor organizations. The employment administration ordered the business to pay 42.5 million won of unpaid wages to an employee in May.
“The owner operated the locations directly while claiming they were separate businesses with fewer than five employees, circumventing working hour regulations,” said Ha Eun-seong, a labor attorney representing the worker. “In reality, the employee worked more than 60 hours per week.” The owner recently agreed to pay the overdue wages and damages.
In Korea, businesses with less than five workers are exempt from major welfare and payment obligations — giving paid vacation days, providing paid leave on public holidays, keeping the 40-hour weekly work hour rule, the 12-hour weekly cap on overwork, protecting against workplace bullying and so on — leading business to chop themselves up on paper to make it seem as if they are smaller businesses than they actually are.
Another example is a bakery cafe in Daejeon that opened last year and now operates three branches, also found to have used a similar strategy. According to the market analysis site OpenUB, each branch of the cafe reported monthly sales ranging from 4 million won to 21 million won. Although 12 employees worked across all branches, each location was registered separately as having fewer than five employees, avoiding holiday payment.
“I rotated between all three branches working night shifts,” said 25-year-old Kim, who worked at the cafe, testifying that the business functioned as a single operation. In a phone interview with the JoongAng Ilbo, the cafe owner denied all allegations, saying, “There was no splitting or wage theft, and the inclusive wage system was properly applied.”
However, on Nov. 18, the Daejeon Regional Employment and Labor Administration referred the case for prosecution, accusing the business of withholding about 42.8 million won in unpaid wages to six employees, effectively determining the business as a workplace with five or more employees.
The Supreme Court has ruled that multiple business locations can be regarded as one workplace under the Labor Standards Act if they operate as a unified economic and social entity. In other words, dividing workplaces to remain under the five-employee threshold does not exempt a business from labor law protections.
Nevertheless, rights advocates say exploitative practices remain common in the restaurant industry, where many small businesses take advantage of regulatory loopholes to impose excessive workloads on employees. The debate over business splitting intensified after the suspected overwork death of an employee at a London Bagel Museum branch in July.
The number of workplaces suspected of being fraudulently registered as having fewer than five employees has steadily increased. According to data released last month by Democratic Party lawmaker Kim Ju-young, the number of “suspicious under-five” businesses grew from 68,942 in 2018 to 144,916 in 2024. These are defined as businesses registered with fewer than five wage workers, but which, when combined with independent contractors, have a work force of five or more.
“Workplace splitting has become more widespread in the restaurant sector since the introduction of the 52-hour workweek system,” said Labor attorney Lee Mi-so. “A dedicated oversight body is needed to conduct effective audits.”
Labor lawyer Lee Su-yeol added that, “This is a clear example of exploiting a loophole in the law. Since the size of a business has no direct connection to working hours, the government and the National Assembly should consider applying the Labor Standards Act fully to businesses with fewer than five employees.”
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY OH SO-YEONG [[email protected]]
