Weekly Contributions

Justification for Dismissal Due to Poor Sales Performance

Bongsoo Jung (Korean labor attorney, KangNam Labor Law Firm)

I. Introduction

In every company there are employees who perform very well, and those who perform poorly. Companies pay incentives to good workers, while they apply disciplinary measures to poor employees to ensure better performance in the future. In some instances companies may dismiss poorly-performing employees, and in such cases, the labor laws have strict standards designed to protect employees. Generally, disciplinary dismissal requires justifications in 1) reason for dismissal, 2) the severity of disciplinary actions, and 3) disciplinary procedures in order to be justifiable dismissal. Justification for dismissing under-performing employees should be determined by considering not only the criteria required for normal disciplinary dismissal, but also occupational characteristics related to poor sales performance by the particular employee. In order to dismiss employees with poor sales records, a company needs to maintain a detailed checklist to verify that it has provided sufficient opportunities for improvement to these employees and that the poor sales have been ongoing for a long period of time.

II. A Case of Dismissal due to Poor Sales Performance

1. Summary

A company based in Germany (hereinafter referred to as “the Company”), which employs 30 local people in its Korean office, provides a standard authentication service for industrial machinery, electronics, automobiles, etc. The Company was introduced to a manager (hereinafter referred to as “the Employee”) of a competitor company through a recruiting agency, and this Employee submitted a written target sales plan in which he promised a yearly sales increase of 5 billion won, beginning with an increase of 2 billion won in sales in the first year. The Company, trusting the Employee’s submitted proposal, hired him as an executive director with an annual salary of 100 million won. The Company expected him to play a vital role in increasing sales, and assigned him to the head position of a new project, but his sales results were remarkably low, at only 2 percent of target for the first 6-month period. As a result, the Company abolished the new project team, and re-assigned him to the Sales team. Even as part of the Sales team his sales were very low, as a result of which the Company dismissed him. The Employee then applied for remedy to the Labor Relations Commission, claiming that he was dismissed unfairly.

2. Claims of Each Party

 (1) Employee’s Claim

The Employee joined the Company on January 11, 2023, where he worked as a managing director in charge of the new project team. The Employee was transferred to the Sales team on July 2, 2023, and was then dismissed unfairly on December 2, 2023.

1) The Company exercised its managerial (personnel) right in a one-sided manner without stipulated rules for disciplinary action or procedures in the rules of employment.

2) When notifying him of his dismissal, the Company did not define any specific reason for dismissal, and so violated Article 27 of the Labor Standards Act.

3) While dismissing the Employee due to his low sales results, there were no evaluation criteria, and the Company even ignored some sales achievements. As a result, this dismissal is an abuse of managerial rights. In addition, the Employee, along with other employees, had submitted a letter detailing the Company president’s unethical behaviors to the German headquarters, which was the real reason for the dismissal. Therefore, this dismissal is unfair.   

 (2) Employer’s Claim

The Company decided to pay this Employee an annual salary of 100 million won and assigned him to the new project team after trusting in his target sales plan, which described how the Employee would increase sales by 200 million won by the first quarter of 2023, and then increase sales by 2 billion won by December 2023. However, in reality, his sales only reached 36 million won (2 percent of the target) by June 30, 2023. After the abolition of the new project team, he was assigned to the Sales team in order to provide him with another opportunity. The Employee then proposed a new target, which was to bring in 400 million won by December 2023, but his actual sales were 3.6 million won in August 2023 and 700,000 won in September 2023. As his sales performance was significantly lower than what he promised in his target sales plan, the Company was justified in dismissing the Employee. The dismissal procedure was justified when the Company provided written notification of dismissal, stipulating the effective date of and reason for dismissal.

3. Actual Events

(1) The Employee submitted a business plan in which he stated that, based on his 17 years of experience with a competitor company, if the Company hired him, he would increase sales by 5 billion won every year through organization of the project team, to which plan he attached verification of his performance in his previous company. Trusting this target sales plan, the Company hired him in the position of managing director in charge of the new project team.

(2) At the ‘Kick-off meeting’ on January 18, 2023, the Employee announced his target sales plan in which he would hire 7 engineers by February 2023 and increase sales by 200 million won in the first quarter, increasing to sales of 2 billion won by December 2023.    

(3) The Employee’s new project team obtained only 2 percent (36 million won) of the targeted amount by the end of June 2023.
(4) In combination with 8 other employees, the Employee submitted a Letter of Request to the German headquarters, detailing the Korean branch’s negative working environment and irregularities within the Company.

(5) The new project team which the Employee was in charge of was abolished, after which the Employee was assigned to the Sales team on September 1, 2023. Again, compared to his new sales projections, the Employee’s sales performance was remarkably low.

(6) On October 2, 2023, the Company provided notification of dismissal to the Employee with a letter advising him of his dismissal, which would become effective on December 1, 2023, and which stipulated that the two-month period from October 2 to December 1 would be his period of advance notice for dismissal and that he was not required to come to work. The Employee was then dismissed as scheduled on December 2, 2023.

4. Judgment Criteria[1]

(1) Justification for Disciplinary Action

The Company dismissed the Employee because of his extremely poor sales performance, not because of any misconduct on his part, and therefore the point under consideration is whether this dismissal because of poor sales can be construed as reason for dismissal. The Company hired the Employee after trusting in the target sales plan that the Employee had submitted, but the Employee achieved only 2 percent of the target amount in sales, and although the Company provided sufficient time and opportunity for improvement, the Employee’s sales results remained extremely low. Considering that the Company hired the Employee based on his business plan, which he was so profoundly unable to fulfil, this is the reason for the disciplinary action. 

 (2) Justification for the Severity of Disciplinary Action

The Supreme Court ruled regarding the severity of disciplinary action, “Dismissal can be accepted as justifiable when the cause attributable to the employee is too severe to allow for the continuance of employment according to social norms. Determination of whether or not the employment can be sustained according to social norms shall take into consideration the employer’s business goals and characteristics, workplace conditions, the employee’s position and job description, motivation for and details of misconduct, disorders caused by his/her misconduct, their influence on the company, and the company’s past decisions in similar situations.” (Supreme Court ruling on October 12, 2007, 2005du10149)

Considering the Employee’s position and salary level and comparing the sales results he achieved, which were drastically lower than was expected at the time of hiring, and much lower than is generally accepted for someone in his position and salary range, relations were broken due to causes attributable to the Employee, which made it hard to maintain the employment relationship.

(3) Justification for Disciplinary Procedures  

In cases where the procedures for disciplinary action are not stipulated in the rules of employment, the Supreme Court has ruled: “The rules of employment are composed of rules regarding service regulations and working conditions like wages regardless of what they are called. If the individual employment contract contains rules regarding the aforementioned working conditions, this can also become the rules of employment. In cases where such individual employment contract corresponding to the rules of employment does not contain any procedural rules regarding the holding of a disciplinary action committee or offering an opportunity for the employee concerned to account for him or herself, disciplinary action is not invalid even if the employer skipped such procedures.” (Supreme Court ruling on November 27, 1998, 97nu14132)

The Company did not have rules of employment regarding disciplinary action, but in a situation where the employment contract stipulates: “the termination of this employment contract may be conducted by either party informing the other in writing at least two months in advance”, without reference to a rule regarding disciplinary action committees, etc., it is hard to see the disciplinary action as invalid even if the Company conducted the dismissal without following such procedure.

III. Conclusion

(1) This is a typical case where an employee’s extremely low performance can be cause for dismissal even though the employee was not guilty of any misconduct. In a situation where the employee proposed an exaggerated sales target and the employer hired him based on that proposal, if the employee is not able to achieve the proposed sales target, he can be subject to disciplinary action. Generally, this kind of situation is ideally resolved by adjusting the employee’s annual salary or assigning him to a different position, thereby providing him with another opportunity. However, the failure in the aforementioned case was so extreme that the Company could not accept an employment relationship any longer due to the Employee’s remarkably dismal performance in contrast to his annual salary, authority, position and pre-employment claims.    

(2) When an employer intends to dismiss an employee, there should be justifiable reason as stipulated by Article 23 (1) of the Labor Standards Act. In particular, in cases where the employer intends to dismiss the employee due to his/her poor performance, the employer must pay careful consideration to satisfying the conditions required for justifiable dismissal. With this in mind, the checklist in section 2 of this article (“Meeting the Requirements for Justifiable Dismissal of Poor Performers”) is designed to meet these requirements for dismissing poor performers, and contains five items which should be applied when considering dismissal due to poor performance: 1) Objective selection of appropriate employees; 2) Procedure for impartial evaluation; 3) Provision of opportunity to improve poor performance; 4) Related Company employment regulations; and 5) The degree of poor performance. Accordingly, this checklist not only provides criteria to minimize the occurrence of unfair dismissal, but also suggests good reference points which an employer can consider essential for introduction into the personnel system regarding the termination of poor performers.