Subcontracting Risks in Korea: Court Rules Subcontractor Arrangement is an Illegal Worker Dispatch Agreement

The Suwon District Court in Korea recently ruled that a subcontracting arrangement between Company B and its subcontractor, Company C, constituted an illegal worker dispatch and ordered Company B to compensate the employees of Company C for the discrepancies in wages between workers working for Company B and workers at Company C.

The lawsuit was filed by former employees of Company C and highlights the legal implications and risks of Korean subcontracting arrangements in violation of Korean labor laws and Korean court precedence.

For an article on the criteria to be deemed a dispatched worker in Korea please see: Korean Dispatched Worker Law. For an article on the statute of limitations in employment dispatch cases in Korea please see: Korean Statute of Limitations for Unpaid Wages in Illegal Worker Dispatch Cases in Korea

Subcontracting Risks in Korea:
Dispatched Workers under Korean Law

Korean Illegal Worker Dispatch

The Suwon District Court in December of 2024 ruled on a case involving 60+ plaintiffs including Mr. A, who had been employed by Company C to assemble vehicle navigation parts at Company B’s factory. The Korean court determined that Company B must pay approximately 4.3 billion won in damages to the plaintiffs. This amount represents the difference between the wages and severance pay received by the workers from Company C and the wages and severance pay the dispatched workers should have received as employees of Company B.

The lawsuit was filed after Mr. A and other plaintiffs claimed that their work at Company B, under the direction and supervision of Company B, was akin to a dispatched worker agreement and was, therefore, not a subcontracting agreement. As such, the employees of Company C are entitled to receive the same wages and benefits as Company B’s direct employees.

Facts

1. Company B is a manufacturer of electronic and mechanical devices.
2. Company B established Company C.
3. Company C manufactured electronic components for Company B.
4. Company B hired Company C to assemble vehicle navigation systems for Company C with Company C’s employees being managed and directed by Company B employees
5. Company B’s employees were paid more and received more benefits than Company C employees.
6. Company C terminated its subcontract with Company B and ceased operations.
7. Employees of Company C were terminated.
8. Company B agreed to cover redundancy and other costs for Company C.
9. Former employees of Company C sued Company claiming that the agreement between Company B and Company C was akin to a worker dispatch agreement and the former employees should receive the same benefits as Company B employees.

Test in Determining if a Worker in Korea is a Dispatched Worker or Subcontracted Worker

The Supreme Court of Korea set out a detailed, yet still vague, set of standards/criteria in determining if a worker is a Dispatched Worker. The Korean Supreme Court noted that the lower Korean courts should consider the following in determining if a worker is a Dispatched Worker:

• if the Worker was integrated into the Company alongside other workers.
• if the Company exercised “substantial supervision” over the Worker via direct and indirect orders.
• if the work of the Worker was limited in scope via a Subcontracting Agreement.
• if the Company, in reality, managed the hiring, training, firing, and education of the Worker.
• if the Outsourcing Company has a separate legal entity, an office, and separate staff from the Company.
• if the work of Worker is distinguishable from the work of the workers directly employed by the Company. For example, the Worker has specialized skills that the workers directly employed by the Company do not have.

Korean Court Ruling on Dispatched Workers

The Suwon Court in Korea found in favor of the plaintiffs, determining that the arrangement between Company B and Company C was, in substance, an illegal worker dispatch agreement. The court emphasized, noting the Supreme Court precedent, that Company B exercised significant control over the work performed by Company C’s employees, including providing specific instructions on product design, assembly methods, and safety precautions, the plaintiffs’ work was directly integrated with that of Company B’s employees, and the employee’s used Company B’s facilities, tools, and materials.

The court further noted that Company C’s personnel management was controlled by Company B’s production schedule, and Company C lacked the independence to manage its own employees.

Additionally, the court observed that Company C received significant resources from Company B, including the use of production facilities and human resources manpower. Ultimately, the court concluded that Company C functioned as a manpower agency that provided workers to Company B, and thus the subcontracting arrangement was essentially an illegal worker dispatch.

Legal Implications

This Korean court’s decision on dispatched Korean workers serves as a reminder to employers that subcontracting arrangements that amount to worker dispatch can expose them to significant legal risks, including potential liability for wage discrepancies, fines, and other damages. IPG Legal advises all companies utilizing subcontractors to have a proactive and experienced attorney in Korea review all agreements and the situation on the ground. In many cases, risks can be substantially mitigated with the assistance of proactive counsel.

Sean Hayes is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of the only non-Korean lawyers as a Top Attorney by AsiaLaw, and IPG Legal is consistently ranked Top Dispute Resolution Law Firm for our litigation services.

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