Recently, in a landmark ruling, the South Korean Supreme Court affirmed a decision by the Seoul High Court ordering Hyundai Motor Co. to recognise four formerly-subcontracted employees as full-time employees. In 2014, the Seoul Central District Court had found that all in-house subcontracting arrangements at Hyundai Motor Co. were illegal. In this article, we examine the impact of these decisions on the long-standing practice in South Korea of subcontracting workers, and how this will affect employment arrangements going forwards.

The lure of in-house subcontracting

The concept of in-house subcontracting is not new to the South Korean employment scene. In the wake of the Asian financial crisis, and faced with significant resistance to redundancy exercises, companies began to increasingly rely on outsourcing arrangements with third party agencies, in which employees of these agencies are subcontracted to various companies. "In-house subcontracting" occurs where the employees are supervised by these companies, and not by the agencies themselves.

Pursuant to the Act on the Protection, etc. of Dispatched Workers, in-house subcontracting is only allowed in respect of 32 clearly-defined job classifications. If an employee has been subcontracted outside the scope of these job classifications, the subcontracting arrangement is an illegal one. In such circumstances, the employee will be entitled to become a regular or full-time employee, with all the rights and benefits conferred to full-time employees at law.

Subcontractors vs. full-time employees

The practice of in-house subcontracting, while increasingly common, is also attracting litigation.

In-house subcontracting arrangements in production lines are illegal

In September 2014, the Seoul Central District Court rendered back-to-back decisions recognising 1,058 subcontractors as full-time employees of Hyundai Motor Co. ("Hyundai"), and declaring that all in-house subcontracting arrangements with Hyundai were illegal. Another 121 subcontractors were given mandatory employment status, which legally entitles them to demand regular employment from Hyundai. In its decision, the District Court found that in-house subcontracting was illegal in all phases of automobile manufacturing, from processes involving the car body, painting and pressing, to production management, sub-assembly of engines and loading of cars for export. The District Court held that this was so even where subcontractors and full-time employees work together on the same process or phase.

A review of these decisions is pending the hearing of Hyundai's appeal; however, we are of the view that the findings by the District Court are legally sound, as they are consistent with the Act on the Protection, etc. of Dispatched Workers which explicitly forbids the use of in-house subcontractors in direct production lines in manufacturing industries.

Recognising former subcontractors as full-time employees

More recently, in February 2015, the South Korean Supreme Court affirmed a decision of the Seoul High Court ordering Hyundai to recognise four former subcontractors as full-time employees of the company. In finding that four of the subcontractors were full-time employees (and that the remaining three were not), the Supreme Court held that, if a company had used in-house subcontractors for more than two years, the subcontractors should be recognised as full- time employees of the company. The Supreme Court noted in this regard that the four subcontractors had worked for Hyundai for more than two years, whereas the remaining three had not.

Further, the Supreme Court also found that it was possible to distinguish between subcontractors and full-time employees based on who supervised them, whether the subcontractors' tasks were different from that of full-time employees and whether the subcontractors used their own equipment. Here, the Supreme Court noted that the four subcontractors were under the control of Hyundai's staff. Accordingly, the four subcontractors were de facto employees of the company.

The future of in-house subcontracting arrangements

The recent decisions certainly send a strong signal that the surreptitious use of illegal in-house subcontracting arrangements will not be tolerated. The landmark decision by the South Korean Supreme Court, in particular, is a binding precedent, and is sure to impact in-house subcontracting relationships across all industries in South Korea. We expect to see more litigation on this front by in-house subcontractors seeking recognition as full-time employees. In time, this may lead to an increased possibility of unionisation, and a decreased ability on the part of employers to differentiate (in stipulating wages or benefits, or otherwise) subcontractors from full-time employees.

We would therefore strongly recommend that employers reassess their employment structures and strategies to ensure that any in-house subcontracting arrangements do not fall foul of the law, and give rise to unintended consequences. Employers should especially note the Supreme Court's findings that in-house subcontractors who have worked for the employer for more than two years, and who are supervised by the employer, may well be considered full-time employees. Employers should also note the strict requirements on the use of in-house subcontracting arrangements that were emphasized by the decision of the Seoul Central District Court; such arrangements are only allowed in specified job classifications, and are illegal in direct production lines in manufacturing industries.