Unlawful In-house Subcontracting: Cases and Legal Standards
Bongsoo Jung (Korean labor attorney, KangNam Labor Law Firm)

I. Introduction
Issues surrounding the use of irregular workers in Korea began with the introduction of two legal provisions during the Asian economic crisis in 1998: ‘dismissal for managerial reasons’ in the Labor Standards Act and the Employee Dispatch Act. The increased use of irregular workers by companies hoping to save on labor costs and ensure flexibility in management of personnel has resulted in greater polarization of society. As this polarization has worsened, laws designed to protect and benefit irregular employees began coming into effect in July 2007, with the aim of encouraging employers to hire them as regular employees. The core content of the laws is to limit the use of irregular employees to two years, and eliminate any discrimination between them and regular employees doing the same work. Even though the laws have restricted the increase in the use of irregular workers, many companies have been using loopholes in the laws to continue hiring irregular employees. There have been two recent cases heard by the Supreme Court which provide good examples of this. In this article, I would like to look at the details of the Supreme Court rulings and review the criteria used in making their decisions.

II. A Case of In-house Subcontracting without Independence and Expertise
1. Summary
A Shipbuilding Company (the Shipbuilder) terminated its service contract with the Subcontractor when a labor union was established inside the Subcontractor. Right after termination of this contract, all 30 employees (hereinafter “the applicants”) of the Subcontractor were dismissed, and the company closed down on January 31, 2003. The applicants filed a “claim for confirmation of employee status” against the Shipbuilder. Busan Appellate Court rejected this claim on the grounds that the service agreement between the Shipbuilder and the Subcontractor could be recognized as an outsourcing contract, but the Supreme Court overturned the Appellate Court’s decision, stating that it was possible to recognize the Shipbuilder and the Subcontractor’s employees as having an implied employment contract (Supreme Court ruling on July 10, 2008, 2005da75088).

2. Confirmed facts
(1) The Subcontractor where the applicants had been employed had worked exclusively for the Shipbuilder as an outsourcing partner to inspect and repair marine engine heat exchangers, safety valves, etc. for the previous 25 years. The Shipbuilder required that employees who wished to work for the Subcontractor pass a skills test before being hired by the Subcontractor. They were then qualified to receive an additional allowance directly paid by the Shipbuilder. Furthermore, the Shipbuilder had substantive authority for employment and promotion of the Subcontractor’s employees, including the ability to demand disciplinary action or choosing candidates for promotion.
(2) The Shipbuilder directly monitored the applicants’ attendance (including if they left work early), leaves, overtime, hours worked, and their work attitude. The Shipbuilder also determined the volume of work, working methods, work orders, and when and how the applicants would cooperate, and directly assigned work duties or placed applicants for substantive work duties through the Subcontractor’s responsible manager. The Shipbuilder required the applicants to complete its own work assignments in addition to work given by the Subcontractor, paying a certain wage even when there was no work from the Subcontractor by assigning other duties such as receiving education, cleaning of the workplace, and assisting other departments in their work. The Shipbuilder directly supervised and managed the applicants.
(3) The Subcontractor was, in principle, supposed to receive a service fee calculated by multiplying each time unit by the volume received, to which the Shipbuilder added the wages paid when Subcontractor employees were engaged in other Shipbuilder-assigned work not directly related to the Subcontractor duties (such as fixing the marine engines). The Shipbuilder also paid bonuses and severance pay directly to the applicants.
(4) While the Subcontractor handled income tax deductions, income reports, and bookkeeping for its employees under its own business name and registration, it used offices provided by the Shipbuilder, as well as all required facilities such as rooms for its own employee education.

3. Court’s Judgment
Upon review of the confirmed facts in B above, and based on the legal principle mentioned in A, it can be determined that even though the Subcontractor had made a formal outsourcing contract with the Shipbuilder and had a formal structure in which its own employees (the applicants) performed the necessary labor service, the Subcontractor did not substantially manage itself in terms of work performance or management of its business. The Subcontractor worked just like a department of the Shipbuilder would, or as a labor management agency for the Shipbuilder. Rather, as it is assumed that the Shipbuilder received subordinate labor service from the applicants and decided their working conditions (including wages), an implied employment should be estimated to exist between employees of the Subcontractor and the Shipbuilder, just as if the Shipbuilder had hired the applicants directly.

III. A Case of In-house Subcontracting without Independence
1.        Summary
While the Subcontractor, an in-house outsourcing company of the automobile company, was engaged in assembling automobile parts, it dismissed its 15 employees (hereafter “the applicants”) on February 2, 2005, due to union activities. The applicants then filed for ‘remedy for unfair dismissal and unfair labor practices’ against the automobile company and the Subcontractor, immediately after the Subcontractor closed down. The applicants’ claims were not accepted in the lower courts, who determined that the Subcontractor, who had already closed down, was their real employer, and not the automobile company. While the Supreme Court did not determine an implied employment relationship existed between the automobile company and the Subcontractor, it determined that a dispatch relationship did. According to the Employee Dispatch Act before its revision, in cases where a dispatched employee has served more than two years, the applicant is determined to be a direct employee of the using employer.

2. Confirmed facts
(1) Of the work processes directly and indirectly necessary to produce cars, assembly on the conveyer belt system does not require the Subcontractor to possess much in the way of technological or specialized skills, and the Subcontractor can give few instructions to its employees in this process.
(2) The applicants were placed on either side of the conveyor belt assembly line together with regular employees of the automobile company, carrying out simple and repetitive tasks according to the various instructions prepared and distributed by the automobile company, and using the automobile company’s own facilities, parts, and supplies. In this manufacturing process, the Subcontractor did not supply its own unique technology or make capital investment.
(3) The automobile company possessed the general rights to give the applicants their work duties and change their work area, and determined the volume of work to be finished, working methods and working procedures. The automobile company directly managed the applicants or indirectly gave them substantial work orders through an on-site manager of the Subcontractor. In considering the characteristics of the applicants’ work, the responsibility of the on-site manager was simply as the messenger of the automobile company orders to the applicants.
(4) The automobile company decided the starting and finishing times of each work shift, recess hours, overtime and night work, shift duties, the pace of manufacturing, etc., for the applicants, and in cases where the automobile company’s regular employees were absent due to occupational accidents or leaves, the applicants would fill in.

3. Court’s Judgment
The Appellate Court ruled that, based upon legal principles for employee dispatch and the confirmed facts, the employees were, in actuality, working under the automobile company’s direct supervision after hiring by the Subcontractor and dispatch to the automobile company.

IV. Criteria for Determining Employee Dispatch and Contracting
1. Employee Dispatch
'Employee dispatch' refers to a business situation where the 'Sending Employer', who acts as an employee dispatch agency, hires an employee and sends him/her to a third party (the ‘Using Employer’) according to the employee dispatch contract. The dispatched employee carries out his/her duties in accordance with the using employer’s directions at the using employer’s workplace.



The sending employer has authority over the following items: ① Rights to hire, dismiss, etc.; ② Responsibility to raise funds and make the necessary expenditures; ③ An employer’s legal responsibilities (the four social security insurances, corporate taxes, etc.); ④ Responsibility for providing machinery, facilities, tools and instruments; and ⑤ Responsibility and authority to make plans related to professional skills and experience.
The using employer has authority over the following items for a dispatched employee: ① Decision-making regarding work assignments and transfers; ② Directing and supervising work; ③ Monitoring sick leaves and other types of leave etc. and the right to take disciplinary action; ④ Evaluating work performance; and ⑤ Decision-making regarding assignment of overtime, holiday and night work.

2.         Contracting (Outsourcing)
Outsourcing is a business situation where one party promises to complete a particular work, and the other party promises to pay compensation in return for completing that work (Civil Law, Article 664). Internal outsourcing (subcontracting) is a type of outsourcing where a company (the Contractor) assigns a certain task or tasks at its workplace to a Subcontractor, who is to complete the work.




In-house subcontracting must have independence in personnel and labor management as well as expertise in business operations. “Independence in personnel management” refers to the Subcontractor being the source of work instructions to its employees and being the exclusive manager of the following items: ① Hiring, dismissing etc.; ② Decision-making regarding work assignments and transfers; ③ Directing and supervising work; ④ Jurisdiction over working methods and evaluation of work performance; ⑤ Whether the Subcontractor’s employees work with the Contractor’s employees, and the difference of work between them; ⑥ Monitoring sick leave and other forms of leave, etc.; ⑦ Decision-making regarding assignment of overtime, holiday and night work; ⑧ Other conditions determining status as an employer according to the Labor Standards Act and the Labor Union Act.
“Expertise in business operations” refers to the Subcontractor carrying out its work duties independently from the Contractor in terms of the following: ① Responsibility to raise funds and make the necessary expenditures; ② Retention of an employer’s legal responsibilities; ③ Responsibility for providing machinery, facilities, tools and instruments; and ④ Planning, professional skills and experience.

V. Review Opinion
Two of the most representative cases of unlawful in-house subcontracting were mentioned. First, the Hyundai Shipbuilding case was a typical disguised subcontracting case in which, although the contractual relationship was in the form of contracting, it was recognized as a de facto employment relationship due to the lack of independence in personnel and labor management and the absence of business expertise. Second, in the Hyundai Motor illegal dispatch case, although a clear contractual relationship between the principal company and the subcontractor was acknowledged, the principal company, acting as the actual employer, issued work instructions and exercised supervision. Since the subcontracted workers worked side by side with the principal company’s employees on the conveyor system, the subcontractor was deemed to have lost its independence as a contractor, and the arrangement was recognized as an illegal dispatch.