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Same Steel Mill, Different Conclusions: Criteria for Distinguishing In-House Subcontracting from Illegal Worker Dispatch

Bongsoo Jung, Korean Labor Attorney / KangNam Labor Law Firm

 

I. Introduction

Suppose that employees of two subcontractors are working inside the same steel mill. One group handles the unloading and transportation of raw materials, equipment-support work, and tasks linked to the production process. The sequence and timing of their work are determined according to the principal company's production plans and work standards, and situations arising at the worksite are handled in accordance with the principal company's production system and instructions. The other group packages finished cold-rolled steel products. Their employer is a specialized company that has performed packaging work for decades and possesses its own technology, patents, and equipment, while retaining a certain degree of discretion over shift scheduling and adjustment of workloads. On the surface, both groups work at the same steel mill under an in-house subcontracting arrangement, but the legal conclusions may not be the same.

In fact, in a series of 2026 cases involving in-house subcontractors at steel mills, the Supreme Court recognized a worker dispatch relationship for employees engaged in certain processes, while holding that employees engaged in packaging cold-rolled steel products could not readily be regarded as dispatched workers. In particular, Supreme Court Decisions 2022Da225590 and 2022Da225606, both rendered on April 16, 2026, reached different conclusions on the same day, and this distinction was reaffirmed in Supreme Court Decisions 2026Da201959 and 2026Da201960, rendered on July 16, 2026.

"Disguised subcontracting" is not a term separately defined by statute. Even when an arrangement is labeled a subcontract, it is commonly called disguised subcontracting if, in substance, it constitutes worker dispatch, or if the subcontractor has almost no substance as an independent employer and an implied employment relationship is therefore recognized between the principal company and the workers. Accordingly, what matters is not the title of the contract, but who actually selects the workers, who directs the performance of the work, who determines working hours and staffing levels, and whether the subcontractor completes the contracted work using its own independent technology, organization, and equipment.

In the past, "independence in personnel and labor management" and "independence in business operations," as presented in the Ministry of Labor guidelines of 2004 and 2007, were used as the principal framework for explanation. In current practice, however, the prevailing approach is to comprehensively examine the five factors established by Supreme Court Decision 2010Da106436, rendered on February 26, 2015, and the Supreme Court decisions issued in 2026 reaffirmed the same legal principles. The following discussion examines the boundary between lawful subcontracting and illegal worker dispatch, focusing on the latest 2026 cases.

II. Steel Mill In-House Subcontractor Cases Recognized as Illegal Worker Dispatch

1. Case Overview

Employees of several in-house subcontractors at a steel mill performed work closely connected to the mill's production, including ship berthing, unloading and transportation of raw materials, ladle management, slab conditioning and coil grinding, roll maintenance, and the production, transportation, and processing of blended raw materials. Although the workers formally entered into employment contracts with the subcontractors, they claimed that their actual work was performed in accordance with the principal company's production plans, work standards, technical standards, work specifications, and process operations, and they filed claims against the principal company seeking confirmation of employee status or performance of the direct-employment obligation.

The key issue in these cases was "whether the principal company merely required the subcontractor to deliver the result of the subcontracted work, or instead substantially directed the labor process of the subcontractor's employees." In manufacturing workplaces, it is common for a principal company and a subcontractor to share work standards, production information, quality standards, and safety standards. Therefore, the mere existence of documents or systems does not by itself establish a worker dispatch relationship. Conversely, if such documents and systems effectively compel workers to perform tasks at particular times, in a particular sequence, and by particular methods, while the subcontractor's supervisors merely relay those requirements without independent judgment, they may constitute indicators of direction and control.

 

2. Supreme Court Decision (Supreme Court Decision 2022Da225590, Apr. 16, 2026)

a. Legal Standard: The Supreme Court held that whether a worker dispatch relationship exists must be determined according to the substance of the working relationship, rather than the name or form of the contract. Specifically, the following factors must be considered comprehensively: (1) whether the principal company exercises substantial direction and control over the workers, including directly or indirectly issuing binding instructions concerning the performance of their work; (2) whether the workers are substantially integrated into the principal company's business, such as by working together with the principal company's employees as a single work group; (3) whether the subcontractor independently exercises authority over matters such as selection of personnel, education and training, work and break times, leave, and work discipline; (4) whether the scope of the subcontracted work is specifically defined, distinguishable from the principal company's work, and characterized by specialization or technical expertise; and (5) whether the subcontractor maintains an independent business organization or equipment.

b. Facts: The subcontractors' work standards were prepared based on standards previously used by the principal company or were subject to the principal company's conformity review, and technical standards and work specifications prepared by the principal company were directly used in actual operations. In addition, the work of the subcontractor employees was temporally and functionally interlocked with the principal company's production process, and the specific tasks were often simple and repetitive, leaving relatively little room for the subcontractors' own technology to be applied. In many cases, the principal company also owned the major facilities and equipment essential to the performance of the work.

c. Holding: Considering these circumstances as a whole, the Supreme Court affirmed the lower court's determination that the workers in the relevant processes were in a worker dispatch relationship because they worked for the principal company under its direction and control. Importantly, direction does not necessarily have to take the form of a manager of the principal company giving verbal instructions directly to the workers. Indirect direction and control may also be recognized where the principal company's production plans or work standards are conveyed in a binding manner and the subcontractor's on-site supervisors merely transmit them without the authority to modify them or exercise independent judgment.

This approach continued in Supreme Court Decisions 2026Da201959 and 2026Da201960, rendered on July 16, 2026. The Supreme Court upheld the lower court's findings that a worker dispatch relationship existed for numerous employees of in-house subcontractors at the steel mill. These decisions show that neither the contractual form of in-house subcontracting nor a multi-tier subcontracting structure itself precludes application of the Worker Dispatch Act; rather, the determination focuses on the actual degree of direction and control and integration into the principal company's business.

 

III. Cold-Rolled Steel Product Packaging Case in Which Worker Dispatch Was Rejected

1. Case Overview

The case involving subcontractor employees who packaged cold-rolled steel products at the same steel mill reached a different conclusion. Through its Manufacturing Execution System (MES), the principal company transmitted information on the types of coils produced and the applicable packaging specifications, and work standards and work specifications also existed. At first glance, this might appear similar to the preceding cases, with the principal company determining work details through its systems and standards. The Supreme Court, however, held that it was necessary to distinguish whether the information constituted "instructions binding the workers' method of performing the work" or merely "information communicating the specifications of the contracted result and customer requirements."

The subcontractor had accumulated its own experience and technology through many years of packaging steel products and held numerous patents relating to packaging equipment. The principal company was not itself a company that had directly performed the packaging work, and the subcontractor had room to reflect its own experience and technology in the preparation and revision of work standards. The subcontractor also maintained a substantial independent business organization and directly owned, supplied, or installed a significant portion of the packaging equipment.

 

2. Supreme Court Decision (Supreme Court Decision 2022Da225606, Apr. 16, 2026)

a. Direction and Control: The Supreme Court held that the mere fact that the principal company transmitted packaging specifications through the MES was insufficient to conclude that it had issued binding work instructions to the subcontractor's employees. A party commissioning work may determine the specifications and quality of the finished result, and not all communications of information necessary to secure that result can be regarded as direction and control over the workers.

b. Integration into the Principal Company's Business and Independence in Personnel and Labor Management: The subcontractor had discretion, within a certain range, to adjust the volume and speed of work, and the work of the principal company's employees and the subcontractor's employees was functionally separated rather than mutually substitutable. It was also recognized that the subcontractor independently determined major personnel and labor-management matters, including shift schedules, the number of workers, education and training, and work and break times.

c. Expertise and Independence: The subject of the subcontract was limited to the specific task of packaging cold-rolled steel products, and the subcontractor possessed its own technology and equipment for that work. This differed from a labor-supply company that merely recruits workers and sends them to the principal company. Considering these circumstances as a whole, the Supreme Court held that a worker dispatch relationship between the principal company and the workers could not readily be established, and it reversed and remanded the relevant portion of the lower court judgment that had recognized such a relationship.

Later, in Supreme Court Decision 2026Da201960, rendered on July 16, 2026, no worker dispatch relationship was recognized for certain workers who performed cold-rolled steel product packaging work. Thus, although illegal worker dispatch was recognized in other processes at the same steel mill, worker dispatch was rejected for the packaging work. This contrast clearly demonstrates that no conclusion can be reached based solely on any one fact, such as that the workers "work inside the principal company's premises," "use the principal company's MES," or "are subject to work standards."

 

IV. Criteria for Distinguishing In-House Subcontracting from Worker Dispatch

1. Three Legal Relationships Must First Be Distinguished

First, lawful subcontracting is a relationship in which the subcontractor directs its own employees and completes the agreed work or result using its own independent organization, technology, and equipment (Article 664 of the Civil Act). The principal company may require a specified result, quality, delivery deadline, safety standards, and similar requirements, but it must not directly control the subcontractor employees' day-to-day work methods or personnel and labor management.

Second, illegal worker dispatch exists when, even though the subcontractor has some substance as the workers' employer, the workers in practice perform work for the principal company under its substantial direction and control. In such cases, whether the contract is labeled "subcontract," "outsourcing," or "service agreement" is not decisive.

Third, if the subcontractor has almost completely lost its distinctiveness or independence as an employer and functions merely as the principal company's labor-management agent, an implied employment relationship may be deemed to have been directly formed between the workers and the principal company. This legal doctrine, which was at issue in the Hyundai Mipo Dockyard case (Supreme Court Decision 2005Da75088, July 10, 2008), is a direct-employment doctrine distinct from "worker dispatch."

 

2. Five Core Factors Currently Applied by the Supreme Court

(1) Substantial Direction and Control: The most important question is whether the principal company controls the work process itself, rather than merely the result of the work. If the principal company effectively determines the work sequence, method, speed, staffing, and specific work instructions, either directly or through a system or on-site supervisors, this is a strong indicator of worker dispatch. By contrast, providing information necessary to complete the contracted result, such as product specifications, delivery deadlines, and safety or quality standards, does not in itself constitute direction and control.

(2) Substantial Integration into the Principal Company's Business: Relevant considerations include whether the subcontractor employees are mixed with the principal company's employees as a single work group, whether they substitute for one another, and whether the subcontractor's work is integrated in real time as part of the principal company's process. However, the mere fact that production processes are interconnected does not establish worker dispatch; the functional separation and independent completeness of the subcontracted work must also be examined.

(3) Independence of the Subcontractor's Personnel and Labor Management: Relevant considerations include who hires the workers, determines how many workers will be assigned, and decides shift schedules, work and break times, leave, training, work discipline, and disciplinary action. If the principal company effectively fixes the required staffing levels and working hours and the subcontractor merely follows those determinations, the likelihood of worker dispatch increases.

(4) Specificity, Distinctiveness, and Expertise of the Subcontracted Work: The question is whether the contract is defined in terms of a specific scope of work or a deliverable, rather than merely "providing a certain number of workers"; whether the subcontracted work is distinguishable from the work of the principal company's employees; and whether the subcontractor contributes its own experience and technology. In the 2026 packaging decision, the subcontractor's specialized technology and patents were treated as important circumstances.

(5) Independent Business Organization and Equipment: The inquiry considers whether the subcontractor has its own capital, managers, equipment, facilities, and technological assets and bears business risks, or whether it merely supplies workers to facilities and an organization provided by the principal company. Merely having the outward form of an independent business is insufficient. However, if the subcontractor actually possesses specialized equipment and an independent organization and performs the contracted work independently, this is an important indicator of lawful subcontracting.

These five factors are not a checklist under which any one factor determines the outcome. For example, use of the principal company's computer system may still be consistent with lawful subcontracting if the system merely transmits product specifications. Conversely, even if instructions are conveyed through a subcontractor supervisor, worker dispatch may be found if that supervisor merely passes on the principal company's instructions and has no independent authority to make decisions. Ultimately, the critical question is: "Who substantially controls the workers' labor process?"

 

3. Legal Effects under the Worker Dispatch Act as of September 2026

The current Act on the Protection, etc. of Temporary Agency Workers defines "temporary agency work" as a system in which a dispatching employer, while maintaining an employment relationship with a worker, has that worker perform work for a user company under the direction and control of the user company (Article 2(1)). Direct production work in the manufacturing industry is, in principle, excluded from the categories of work for which worker dispatch is permitted, and other dispatch-eligible work is also limited to the scope prescribed in the attached table of the Enforcement Decree (Article 5).

The partial amendment that took effect on May 26, 2026 mainly reorganized the provisions in Article 19 concerning administrative enforcement; it did not change the substantive criteria for determining worker dispatch or the structure of the direct-employment obligation under Article 6-2. Accordingly, as of September 2026, the Supreme Court's comprehensive five-factor test and the current direct-employment obligation framework under Article 6-2 continue to apply.

In particular, under current law, a direct-employment obligation does not always arise only "after two years" merely because an arrangement is found to constitute illegal worker dispatch. Where dispatched workers are used in work that is not eligible for dispatch, in work for which dispatch is prohibited, or through an unlicensed dispatching agency, the direct-employment obligation under Article 6-2(1) may arise once the unlawful condition occurs. By contrast, where workers are lawfully dispatched to dispatch-eligible work but the statutory dispatch-period limit is violated by exceeding two years, the passage of more than two years becomes a requirement for the direct-employment obligation.

If the user company fails to perform its direct-employment obligation, a dispatched worker may bring a civil claim against the user company seeking a declaration of intent to employ the worker. When the worker is directly employed, if the user company has employees performing the same or similar work, the working conditions under the rules of employment and other applicable provisions for those comparable employees must be applied. Even if there is no comparable employee, the worker's existing working conditions may not be reduced (Article 6-2(3)).

Criminal liability may also arise where a party conducts a worker dispatch business or receives worker dispatch services in violation of the Worker Dispatch Act, and an administrative fine may be imposed if the user company fails to perform the direct-employment obligation under Article 6-2. Companies therefore need to review legality not only when entering into contracts, but also continuously during actual operations to ensure that practices do not develop in which managers of the principal company directly instruct subcontractor employees or manage their attendance and work discipline.

 

V. Conclusion

The key to distinguishing in-house subcontracting from illegal worker dispatch lies not in the title of the contract, but in the substance of the actual work arrangement. Until around 2012, the Hyundai Mipo Dockyard and Hyundai Motor cases were commonly cited as representative examples, but the 2026 steel mill decisions provide far more concrete guidance on the relevant criteria. The mere fact that workers are in the same workplace and within the same production system does not make every arrangement illegal worker dispatch. Conversely, the fact that the subcontractor is an independent corporation and has executed employment contracts with the workers does not by itself establish lawful subcontracting.

The most important message of the 2026 precedents is that "the transmission of information" must be distinguished from "direction over the labor process." If the principal company sets product specifications and completion standards and the subcontractor produces the required result through its own technology and workforce management, the arrangement is closer to the essence of subcontracting. However, if the principal company effectively determines the sequence, method, speed, staffing, and hours of the work and the subcontractor merely relays those instructions, the arrangement is highly likely to be characterized as worker dispatch regardless of the contractual form.

Accordingly, companies operating in-house subcontracting arrangements should: (1) clearly define the scope and deliverables of the subcontracted work; (2) allow the subcontractor to make independent decisions regarding workforce management and work methods; (3) functionally separate the work of the principal company's employees from that of the subcontractor employees; (4) ensure that the subcontractor's specialized technology and independent organization and equipment are actually used in performing the work; and (5) limit instructions from the principal company to result- and quality-focused requests directed to the subcontractor's responsible manager. Ultimately, lawful subcontracting can be maintained only when the basic structure of a contract for work under the Civil Act - not "borrowing people to work," but "entrusting defined work to an independent business and receiving the completed result" - is actually implemented at the workplace.

 

※ Key Authorities: Act on the Protection, etc. of Temporary Agency Workers (effective May 26, 2026); Supreme Court Decision 2010Da106436, Feb. 26, 2015; Supreme Court Decisions 2022Da225590 and 2022Da225606, Apr. 16, 2026; Supreme Court Decisions 2026Da201959 and 2026Da201960, July 16, 2026.