Recently, the management of humor in organizations has attracted increasing attentions and interests from business leaders and practitioner as means to enhance organizational effectiveness. Prior academic research on humor, however, have been restricted to such fields as nursery,psychology, education, and advertisement in which humor has typically been treated as a coping mechanism for stressful situations; relatively little research has been found in the management literature. The reasons for this paucity of research on humor in management can be twofold. First, humor as a theoretical construct lacks overt agreement on its definition because of its multifaceted and complex nature. Second, more importantly, humor has two faces (i.e., the good and bad), which makes it difficult to develop definitive arguments on the effects of the use of humor. Considering these issues as well as the need to expand our limited knowledge on the use of humor in organizations, we explore a boundary condition and underlying mechanism of the effect of leader’s use of humor. Drawing on the literatures of humor, trust, and positive psychological capital, we attempted to investigate when and how leader’s use of humor can influence employees’performance and happiness in the workplace. Specifically, we examined the moderating role of trust in leader and the mediating role of positive psychological capital in the relationship between leader’s use of humor and employee performance and happiness at work. This mediated moderation model was tested using a sample of 949 employees from a public enterprise in South Korea. The results indicated that when trust in leader is high, leader’s use of humor is positively related to employees’ work happiness as well as positive psychological capital. However, when trust in leader is low, the use of humor by leader is negatively related to employees’ performance, work happiness, and positive psychological capital. The results also showed that employees’ positive psychological capital mediated the interaction effect between leader’s use of humor and trust in leader on employees’ performance and happiness at work. Theoretical implications of this research are threefold. First, we extended the literature and contributed to a better understanding of the potential role of humor in organizations by focusing on leaders’ use of humor in the workplace setting. Second, we identified important moderating and mediating processes of the effects of leader's use of humor. The level of employees’ trust in their leaders functions as a critical boundary condition for the intended positive effects of the leader's use of humor to be translated to employees’ positive psychological capital, performance,and happiness at work. Moreover, employees' positive psychological capital can be an underlying mechanism through which the interactive effects between leader's use of humor and trust in leader ultimately operate on employees’ performance and happiness. Third, our findings based on a Korean sample corroborate to prior research conducted in the West that found the potential effects of use of humor, thus adding to the generalizability of the findings across cultures. Finally, the practical implications are as follows. First, our findings indicate that it is very important for leaders to earn trust from their followers in the first place. Leader's use of humor without trust can malfunction and even hurt employees’ feelings and outcomes. Leadership training and development programs should first and foremost focus on leaders’ development of trusting relationships with their followers; then, an emphasis on the use of humor can follow. Second, the findings reveal that positive psychological capital can be an essential intervening variable through which leader's use of humor leads to employees' performance and work happiness. Organizations could and should cultivate employees' positive psychological capital through various methods in that positive psychological capital is a state-like psychological resource that is sufficiently malleable for change and development.