Supreme Court: "Strict Interpretation Required for Severance Pay Return Agreements When Employed by Competitors"

Supreme Court Grand Chamber. / Photo by Supreme Court

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that the "agreement to return severance pay," which requires retirees to return their severance pay if they join a competing company within a certain period after retirement, should be interpreted strictly.

Since the operation of the voluntary retirement system aims to resolve personnel congestion within the company, it is difficult to view the payment of severance pay solely as compensation for not transferring to a competing company. Additionally, the severance pay has the character of a bonus to encourage early retirement among long-term employees. Therefore, the return of severance pay should be recognized only in cases where there is a concern that "information acquired from the previous workplace is unfairly used in business to cause damage."

The Supreme Court's Second Division (Presiding Justice Cheon Dae-yeop) announced on the 30th that it upheld the lower court's ruling, which dismissed the appeal filed by Korea Electric Power KPS Co., Ltd. against former retirees Park and Kim in a lawsuit claiming the return of severance pay based on an agreement.

Park joined the company in 1977 and was responsible for quality assurance and quality inspection before taking voluntary retirement in March 2016. Kim joined in 1987, worked in overseas specialized technical services and diesel power plant maintenance, and retired voluntarily in December 2017.

At the time of their retirement, both signed a written pledge stating, "If employed by a competing company within three years after retirement, the voluntary retirement will be converted to general retirement, and the full amount of severance pay will be returned unconditionally." When Kim and Park joined competing companies within three years of retirement, the company filed lawsuits demanding the return of 93.95 million KRW and 162.55 million KRW respectively, as stipulated in the agreement.

In the first and second trials, the courts premised their decisions on the constitutional guarantee of freedom to choose one's occupation, stating that explicit provisions are required to recognize a non-compete obligation.

Therefore, it was difficult to consider that a non-compete agreement was immediately established between the parties through the written pledges submitted by the two individuals; instead, it was deemed a "condition for rescinding voluntary retirement."

The first and second trial courts dismissed the plaintiff's claims, stating, "▲ The company's operation of the voluntary retirement system aims to revitalize the organization and improve work productivity, ▲ The company uniformly received such pledges regardless of position or job duties, ▲ The severance pay has the character of a bonus or merit payment to encourage early retirement, so it is difficult to view it solely as compensation for not transferring to a competing company, and ▲ Considering the relatively long restriction period of three years, it is reasonable to interpret the fulfillment of the rescission condition strictly as 'cases where the workplace employed within three years after voluntary retirement is in direct competition with the plaintiff and there is concern that information learned at the plaintiff company is unfairly used in business to cause damage to the plaintiff.'"

The plaintiff company argued in the second trial that although the freedom of occupation and labor rights of the defendants cannot be excessively restricted, reasonable restrictions are permissible, so at least partial return of severance pay should be recognized. However, this argument was rejected.

The Supreme Court also stated, "The lower court did not err in interpreting the disposition documents, the legal principles regarding the non-compete obligation, or violate the rules of evidence," affirming the correctness of the lower courts' judgments.

This content was produced with the assistance of AI translation services.