Guidelines for Determining if Subcontracting is Actually Illegal Dispatch and Related Cases
Bongsoo Jung, a Korean labor attorney at KangNam Labor Law Firm
I. Introduction
Dispatched workers are used for the flexibility and reductions to labor costs they entail for companies. However, as dispatched workers can only be used for 2 years and only for a limited range of jobs, companies have been looking for a way to make use of workers in a similar way. In-house subcontract workers are one way to gain the continuous benefit that dispatch employment cannot provide. In-house subcontracting requires independence and expertise. However, many companies in Korea do not outsource these specialized tasks, but often make use of in-house subcontracting for simple work or to increase their manpower for lower costs. If a company directs and orders subcontract workers in their work, this will be judged illegal dispatch and the employer will be subject to criminal punishment and an obligation to directly employ the in-house subcontract worker (Article 6-2 of the Dispatch Act).
To prevent illegal dispatch, on April 19, 2007, the Ministry of Employment and Labor has provided “Guidelines on Determining ‘Dispatch Workers’ to Distinguish between Dispatch and Subcontracting.” Nevertheless, the use of illegal dispatch and disguised subcontracting have expanded across all industries. Accordingly, on December 30, 2019, the Ministry of Employment and Labor began emphasizing the criteria through its “Guidelines on Criteria for Determining Dispatch Workers.”
II. Determining Illegal Dispatch
1. Understanding Illegal Dispatch
The term “worker dispatch” means a system in which a sending employer, while maintaining employment relations with a worker after hiring, has the worker work for a using employer under the direction and order of the using employer in accordance with a worker dispatch contract (Article 2 of the Dispatch Act). Whether or not it is a worker dispatch is judged based on the facts rather than the name or form of the contract between the using and sending employers.
A contract for work becomes effective when one of the parties has agreed to perform a certain job and the other has agreed to pay remuneration for such work (Article 664 of the Civil Act). This means that the subcontractor, at his own discretion and responsibility, uses his own employed workers to complete the work. In-house subcontracting refers to having a subcontractor perform some of the work in the contractor’s workplace. When a subcontractor worker receives commands and control from the contractor at the contractor's workplace and provides work to the contractor, a dispatch relationship is established. In this case, it is illegal because the contractor does not meet the legal requirements for dispatch workers.
2. Procedures for Determining Disguised Subcontracting and Illegal Dispatch
First, whether the subcontractor is a substantive company needs to be verified. If there is no substantive employer entity, the subcontractor workers are given direct employment instructions. When a subcontract employer entity is recognized, the next step is to judge whether disguised subcontracting is occurring or not.
(i) Determining the substantive employer entity: When engaged in subcontracting using external personnel within the company, first review whether the subcontractor is recognized as an employer entity. If the subcontractor entity is not recognized as the employer, the subcontract workers are deemed to have a direct labor contract relationship with the contractor company.
(ii) Determining whether a subcontract worker is dispatched: When a subcontractor is recognized as the substantive employer entity, next to be determined is whether the contractor actually exercises command and control over the subcontract workers, and whether a subcontract worker is in fact a dispatch worker.
III. Criteria for Determining Disguised Subcontracting and Related Cases
1. Whether a Subcontractor is the Substantive Employer Entity
The Supreme Court provides the following criteria in relation to a subcontract to hide the employment relationship in a contract. “As a person hired by the original employer provides labor service for a third party at the third party’s location, to be regarded as an employee of the third party, his employment shall satisfy the following: 1) The original employer does not have independence in management and works as an agent of the third party in managing employees; 2) The original employer’s business entity is nothing more than formal and nominal, and the employee shall be subordinate to the third party in reality; 3) The party that actually pays wages to the employee is the third party; 4) The party to which the person provides labor service is the third party. Based on these criteria, it should be concluded that there was already an implicit employment contract made between the employees and the third party.”
Whether the subcontractor is recognized as a substantive employer entity is determined by considering whether the subcontractor has an entity and independence as employer regardless of the type and name of the contract between the subcontractor and contractor. However, if the subcontractor has some degree of entity and independence as a business owner, it is judged that there is a substantive entity as employer.
(1) Rights to hire, dismiss, etc.: Review whether the subcontractor decides on the working conditions and personnel affairs of the worker.
(2) Responsibility to raise funds and make the necessary expenditures: Review whether the subcontractor raises its own money for establishing a business, renting an office, and other tasks.
(3) An employer’s legal responsibilities: Review whether the subcontractor has withheld earned income tax, whether or not its workers have been subscribed to the four social insurance plans, and whether rules of employment have been established and enforced.
(4) Responsibility for providing machinery, facilities, tools and instruments: Review whether the subcontractor possesses the machinery, facilities, and legal documentation necessary to do business independently.
(5) Professional skills and experience: Review whether the subcontractor plans the business independently, exercises management decision-making power and has the professional skills or experience necessary for the business.
2. Related Cases
(1) Cases of substantive employer entity recognized
① ① A subcontractor established a separate company away from the contractor, acting as an independent business entity, and registering the business; ② joined the 4 social security insurances; and ③ prepared separate employment rules and controlled working status.
① Subcontractors have separate employment rules, control working status, and exercise disciplinary rights; ② They signed service contracts with other companies besides this contractor, and hired 2,730 workers assigned to several companies.
(2) Cases of a substantive employer entity denied
① The contractor instructs the subcontractor’s employees to work without distinction from its own employees, and performs all personnel management directly; ② The subsidiary of the contractor holds 100% of the stock of the subcontractor, and this subcontractor carries out the contractor’s work.
The contractor only used the subcontractor’s business registration in order to take advantage of workers in the form of disguised subcontract. However, in reality, there is an employment contract relationship as if they’d been hired directly.
① The subcontractor has been contracted for about 25 years handling assigned tasks from the contractor, who notified the subcontractor of hiring, disciplinary requests, and a list of eligible persons for promotion; ② The contractor decides working hours and overtime work for the subcontractor workers, and assigns them to work other than the contracted work; ③ The contractor pays the bonus, severance pay, etc. directly to the subcontractor workers.
Actually, without having independence in business performance or in business management, the subcontractor functions as a business unit of the contractor or as a worker provision agency.
IV. Criteria for Determining Illegal Dispatch and Related Cases
The Supreme Court set the standard precedent for illegal dispatch as follows. “Whether employment is employee dispatch or not shall, regardless of the formal and nominal contract made between the two parties, be determined by collectively considering the purpose of the contract or job characteristics, specialty and technology, business registrations of the contracting parties and managerial independence, and the using employer’s actual command and control.”
1. Substantial Contractor Command and Control
Whether the contractor directly or indirectly instructs the subcontractor workers on the specifics of the work to be performed is reviewed, and whether the subcontractor workers are significantly controlled by these instructions and commands from the contractor. Even if the subcontractor's field manager gives specific instructions and orders to the subcontractor workers, it can be a sign of dispatch employment if the subcontractor’s field manager only conveys decisions not made by the subcontractor. However, if ① the contractor only determines such things to an appropriate extent for a contractor, such as specifying the scope of the subcontractor's work, while specific work details are determined and instructions on such are conveyed by the subcontractor's field manager and ② the contractor does not order subcontractor workers on a regular basis, but instead it instructs only in emergencies or only in temporary situations, then requiring subcontractor workers to follow the contractor's safety and health instructions as required in accordance with Article 63 of the Occupational Safety and Health Act does not, in itself, mean the subcontract workers are actually dispatch workers.
ㅇIn cases where the contractor has decision-making authority to assign work to the subcontractor’s workers, and decides the place and time.
ㅇIn cases where the contractor prepares a work manual or work instructions with work methods and details, etc., and issues it to the subcontractor’s workers, and they have to perform the work accordingly.
< Examples of when command and control do not determine dispatch employment>
ㅇWhen the subcontractor establishes its own work plans to execute the contract, and accordingly and independently determines the number of workers to be put to the work, the work arrangement and changes, and work time.
ㅇEven if the contractor is involved in the work of subcontractors, such as by placing a work manual, etc., in cases where the subcontractor workers carry out their work in accordance with their own field manager’s work instructions.
2. Subcontractor's Actual Engagement in the Contractor’s Business
① Subcontractor workers can consist of groups working with the contractor's workers, ② groups performing work besides the contractual work, and ③ those who substitute for contractor workers in the event of the latter’s absence. In these cases, it will be reviewed whether the subcontractor workers have actually been transferred to engagement in the contractor’s own business.
If a subcontractor worker performs the same work in the same space as a contractor worker, there is a high chance it will be deemed dispatch employment. Even if the workplaces are the same, it is difficult to assume that the individual workers are included in the contractor's business when they perform the work independently according to the contract purpose of the subcontractor.
ㅇ(Same workplace) When subcontractor and contractor workers are placed in the same group and perform the same tasks together.
ㅇ(Different workplace) When subcontractor and contractor workers are spatially separated, but subcontractor workers participate in one of a series of processes or subdivided work steps in one process and are closely linked.
ㅇ(Same workplace) Even if subcontractor workers work together in the same space as contractor workers, when the details of the work are different and the work is done independently and has no relation to the work of the contractor workers.
ㅇ(Different workplace) When subcontractor workers do not perform the same tasks when mixed with contractor workers.
3. Personnel and Labor-related Decisions
Reviewing who makes decisions related to personnel and labor determines whether the subcontractor exercises management authority independently.
Examples of the subcontractor being unable to exercise personnel rights>
ㅇNew placements of subcontractor workers must be approved by the contractor, and subcontractor workers must be replaced if the contractor requests it.
ㅇThe contractor decides the subcontractor’s working hours and whether overtime is to be performed, etc.
< Examples of the subcontractor being able to exercise personnel rights>
ㅇWhen subcontractors provide training necessary to perform their jobs at their workplace, and have basic authority on recruiting and disciplinary action to directly manage the work time and worker attendance.
4. Subcontractor Expertise and Technology
Whether the work to be performed by the subcontractor worker(s) is specifically determined shall be reviewed, as well as whether it is distinct from the work of contractor workers and whether the subcontractor has the necessary expertise and technology.
ㅇWhen the subcontractor’s scope of work is undefined and it simply carries out the work assigned by the contractor.
ㅇWhen the subcontractor's work is the same as that of the contractor and is not clearly classified.
ㅇIn cases where the subcontractor's work is performed independently from the contractor's work.
ㅇWhen subcontractor workers perform only the work specified in the contract, but do not perform additional work under direction of the contractor.
5. Company Organization and Facilities
It is reviewed whether the subcontractor has an independent business organization, equipment, or equipment necessary to achieve the purpose of the contract as a party to the contract.
ㅇIf the subcontractor has not invested its own technology or capital.
ㅇIf the subcontractor does not have separate human and material facilities, does not have specific expertise and consists simply of a large number of workers.
ㅇThe subcontractor has an organization to achieve the purpose of the contract, and is actually working for a number of companies besides the relevant contractor.
IV. Conclusion
Recently, the Korean subsidiary of a foreign automobile company consulted with me about correcting illegal dispatch. In addition to a diagnosis of the situation, I suggested measures for correction of illegal dispatch in accordance with the related labor law, court rulings, and Ministry of Employment and Labor Guidelines. While consulting with the company, it was surprising to learn that the company was like a body where only the head and chest were managed directly, while the torso and limbs were outsourced to subcontractors. These subcontractors ran the company's car sales, car deliveries, its car parts warehouse, customer call center and in-house training, while they also managed the in-house computers and vehicles, as well as quality.
Such subcontract management is used as a way for companies to reduce costs and adjust their employment situation in a globally competitive system. However, such subcontracting is possible only through strict management of subcontractors. In other words, subcontractors must maintain their independence and possess the expertise needed by the contract. It is easy for an employment situation to be deemed illegal dispatch unless thorough and continuous action is taken to avoid these and other examples of it.
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