Full Labor Standards Act Coverage, a Heavy Burden on Small Businesses

The government has moved to fully apply the Labor Standards Act to workplaces with fewer than five employees. The intent is to guarantee minimum rights to workers who have until now been outside the law’s protection. However, given the reality that most small business owners and self-employed people operate on a very small scale, it will not be easy for this expansion of the system to work properly in practice.

More than 80% of self-employed people in Korea run small workplaces with five or fewer employees. In a situation where management burdens have already accumulated due to the minimum wage, rent, and rising raw material costs, applying the Labor Standards Act across the board will inevitably lead to a sharp increase in labor costs.

To avoid the law’s application, it is common for businesses to reduce headcount and operate as “disguised under-five-employee workplaces.” The tens of thousands of such cases each year show that simply expanding the law cannot solve the problem. Effective oversight and supplementary measures are essential.

The government has announced a plan to gradually apply the 52-hour workweek, overtime and holiday pay, and annual leave to workplaces with fewer than five employees by 2027. However, forecasts suggest that this process alone will require about 20 trillion won in fiscal spending. The goal of expanding labor rights is highly likely to come back to very small business owners as a cost they cannot bear.

Blanket application that does not take into account the reality of very small business operators may lead to reduced hiring and business closures. The legislative intent to expand the protection of labor rights could, paradoxically, end up reducing jobs and failing to protect even the workers it was meant to help.

Major countries overseas also take the realities of small and medium-sized enterprises into account at the institutional design stage. The EU reviews the impact on SMEs first before introducing regulations through its “Think Small First” principle, and the OECD likewise conducts prior assessments to prevent excessive burdens. In Australia, there have been cases where SMEs experienced major confusion after labor law revisions because of inadequate preparation. This shows that expanding regulation must be accompanied by support.

Policy must ensure not only fairness but also sustainability. Unless realistic measures such as labor cost subsidies, social insurance premium support, and reduced energy costs are implemented alongside it, the system will have difficulty taking root in the field. As in other major countries, mechanisms and support measures to minimize the burden on SMEs must be prepared from the institutional design stage.

Excessive regulation creates other side effects as well. Instead of legally expanding employment, business owners may turn to automation, outsourcing, or informal employment, producing results directly contrary to the purpose of the policy. Moreover, there is distrust that the support measures promised by the government may remain only temporary. Concerns that support will be short-lived while regulation remains permanent make it even harder for the system to take root.

At a time when the business conditions facing small merchants have already reached their limit, there is an urgent need for carefully designed policies that take into account both workers’ rights and the survival of very small businesses. Blanket regulation based solely on fairness may undermine market vitality. The cause of guaranteeing labor rights must not erode market vitality. True protection is possible only through sustainable institutions.

Sang-yeop Kim, Researcher, Center for Free Enterprise (CFE)

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Original title: 근로기준법 전면 적용, 영세사업자에게 과중한 짐

Author: Sang-yeop Kim

Date: 2025-09-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28025