"Erase Unnecessary Dominance" Companies Hit by Labor Law... Reconsideration of Subcontracting and Outsourcing Strategies

[Financial News] With the passage of the Yellow Envelope Act (Amendment to Articles 2 and 3 of the Labor Union Act) in the National Assembly, companies' personnel and labor organizations have been hit hard. The amendment to the Labor Union Act recognizes the user status of the primary contractor based on the degree of dominance over subcontractor unions, even if there is no direct contractual relationship. This means that even without a direct employment contract between the primary and subcontractors, if 'indirect user status' is recognized, the primary contractor is obligated to negotiate with the subcontractor union.
 Some large companies have already sought consulting advice from law firms regarding this matter. This is to prevent the management environment from being constrained by the excessive expansion of user status to N-tier (more than first-tier) subcontractors, especially in the manufacturing and construction industries with multiple subcontractors in a multi-level format. If the existing main-subcontractor ecosystem is restructured, the impact on primary contractor partners is expected to be inevitable.


 According to the business and legal circles on the 25th, companies affected by the amendment to Articles 2 and 3 of the Labor Union Act have begun to review the substantial and specific dominance over existing subcontractors before the law takes effect. They are considering whether to respond to negotiations on a case-by-case basis while maintaining the current business structure by reviewing potential and indirect user status in the current business structure, or conversely, whether to diversify contract contents and clients.
 With about six months given until the law takes effect, the area that companies can realistically review in the short term is the reconsideration of subcontracting contracts.
 In a survey conducted by the Korea Chamber of Commerce and Industry in mid-month targeting 767 companies, 'changing the contract conditions with partner companies and diversifying clients (45%)' was the most frequently considered response plan by companies in case of the passage of the Yellow Envelope Act.
 The amendment to Article 2, Clause 2 of the Labor Union Act, passed by the National Assembly, defines a user as 'a person who can substantially and specifically dominate and decide on the working conditions of workers, even if they are not a party to the employment contract.' The legal community believes that this could recognize the user status of the primary contractor not only for in-house subcontracting but also for external subcontracting.
 The courts have already shown a tendency to judge that the primary contractor has an obligation to negotiate on a case-by-case basis if they exercise substantial and specific dominance over N-tier subcontractor workers.
 Depending on the presence and degree of substantial dominance, it is judged that there is a high possibility that holding companies and parent companies will be obligated to negotiate with affiliates or their subcontractors. If it is judged that the primary contractor's dominance extends to external subcontractors, the user status of the primary contractor may also extend to external subcontractors.
 The legal community believes that considering the court's precedents so far, △whether the main and subcontractors are engaged in the same type of work △the presence and degree of dominance in the contract (subcontract amount, wage calculation, work instructions, designation of working days, etc.) △whether and to what extent the primary contractor is involved in recruitment regulations and facility management of subcontractors △whether the primary contractor has established an IT system for subcontractors, etc., will be important indicators to determine substantial and specific dominance. To reduce future management uncertainty, unnecessary dominance factors need to be deleted or adjusted.



 Considering these points, the options available for companies to proactively respond during the grace period for the implementation of the amended Labor Union Act are limited. It is either to completely block the possibility of labor disputes or to reorganize the existing main-subcontractor ecosystem.
 A business community official said, "We have no choice but to consider whether it is inevitable to maintain the current user system or to resolve the user status by reviewing the existing decisions of the Labor Relations Commission or the courts."
 If the current outsourcing (external procurement) oriented domestic major business structure is converted and reorganized to insourcing (internal procurement) oriented, it is expected that the existing subcontractor ecosystem and companies will inevitably be impacted.
 An industry official said, "There are many inquiries from partner companies asking whether the intention of the law amendment is to prohibit existing outsourcing and induce insourcing," and "If this happens, jobs in management, personnel, and labor fields, where work overlaps between the main and subcontractors, may naturally decrease."
 Since the application of the Labor Union Act is not limited to specific industries, these concerns and considerations are likely to have a significant impact not only on the manufacturing and construction industries, where subcontractors are prevalent, but also on the finance and information technology (IT) industries.


jhyuk@fnnews.com Kim Jun-hyeok Reporter