With the amendments to Articles 2 and 3 of the Trade Union and Labor Relations Adjustment Act (known as the yellow envelope law, a new labor law aimed at strengthening the bargaining rights of subcontract workers) taking effect on the 10th, unions of subcontractors are expected to step up bargaining demands against prime contractors at construction sites nationwide. If labor disputes (strikes) by subcontractor workers increase, extensions of construction deadlines and higher construction costs appear unavoidable.
◇ Exposed to a flood of bargaining demands
The core of the yellow envelope law, a new labor law aimed at strengthening the bargaining rights of subcontract workers is ▲ strengthening prime contractors' employer responsibility for subcontractor workers ▲ broadening the scope of labor disputes ▲ limiting damages for unlawful strikes. The Ministry of Employment and Labor (MOEL) reviewed and approved the amended enforcement decree at a Cabinet meeting on Feb. 24 and finalized the "guidelines for interpreting the amended Trade Union and Labor Relations Adjustment Act" the same day.
Strengthening employer responsibility of prime contractors for subcontractor workers means that even if a prime contractor has not directly hired a subcontractor's workers, it must fulfill its responsibilities to those workers if it effectively appears to have employed them. This is called "employer status," and under the yellow envelope law, a new labor law aimed at strengthening the bargaining rights of subcontract workers, subcontractor workers' employer status claims against prime contractors are expected to expand.
The interpretation guidelines divide employers into "contract employers" and "non-contract employers." A contract employer is an employer (such as a subcontractor) in a direct contractual relationship with a worker, while a non-contract employer is a third party with no contract with the worker but who, by virtue of its relationship with the contract employer, can substantially and specifically control or determine the working conditions of the contract employer's workers. Prime contractors can be interpreted as non-contract employers.
Cho Nam-hong, head of labor law firm Daebo, said, "The government has presented guideline criteria for determining employer status, but many parts are unclear. Ultimately, the final determination of employer status will be made through court trials, which could take considerable time."
The government's interpretation guidelines also present work methods as a major criterion for determining employer status. If a non-contract employer (prime contractor) substantially and specifically controls or determines the composition of work processes, work speed, and work standards and procedures, there is a strong likelihood that employer status will be recognized.
These criteria are also likely to work against construction companies as prime contractors when determining employer status. Yoo Il-han, senior research fellow at the Construction & Economy Research Institute of Korea, said, "Each project within a worksite is carried out individually by subcontractors, but the overall site's process, safety and quality are obligations that the prime contractor must manage and supervise," adding, "It is a structure in which the prime contractor cannot avoid involvement in the work methods of individual projects."
◇ Delays in construction period not recognized as force majeure
What the construction industry fears most is subcontractor workers waging dispute (strike) actions against prime contractors that lead to work stoppages. If this extends the construction period and the promised completion date with the client is missed, the prime contractor bears all responsibility. The penalty for delay, a fine imposed for late completion, is charged after the scheduled completion date, typically at 0.05% of the contract amount per day. For a 100 billion won project, the penalty for delay amounts to 50 million won per day.
According to the Construction & Economy Research Institute of Korea, major countries recognize construction delays caused by disputes as force majeure and exempt penalties for delay. The U.S. Federal Acquisition Regulation (FAR) lists labor disputes (strikes), transportation shutdowns and freight embargoes as force majeure events. However, in Korea, even if a job site is temporarily shut down due to unforeseeable labor disputes, transportation shutdowns or freight embargoes, such events are rarely recognized as force majeure. The damage from an increase in national or regional disputes following the introduction of the yellow envelope law, a new labor law aimed at strengthening the bargaining rights of subcontract workers is passed squarely onto construction companies.
Jun Young-jun, head of the research center at the Construction & Economy Research Institute of Korea, said, "For situations such as spring or summer wage negotiations that unfold nationwide or at the level of metropolitan governments and are beyond the control of prime contractors, it is time to consider, as done overseas, recognizing them as force majeure to reduce the burden on prime contractors."
In the long term, impacts such as rising construction costs are also a concern. Shin Bo-yeon, a professor in the Department of Real Estate AI Convergence at Sejong University, said, "Large construction companies are expected to become the main targets of subcontractor worker disputes," adding, "Increases in construction periods due to disputes and higher cost ratios will also worsen the business viability of maintenance projects such as redevelopment and reconstruction."