With the enforcement of 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, starting on the 10th, subcontractor unions at construction sites nationwide are expected to increasingly demand talks with prime contractors. If labor disputes (strikes) by subcontractor workers rise, extensions of construction deadlines and increases in construction costs appear inevitable.
◇ 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 subcontract workers ▲expanding the scope of labor disputes ▲and limiting damages for illegal strikes. The Ministry of Employment and Labor (MOEL) reviewed and approved the amended enforcement decree at a Cabinet meeting on Feb. 24, and on the same day finalized the "interpretive guidelines for the amended Trade Union and Labor Relations Adjustment Act."
Strengthening the employer responsibility of prime contractors for subcontract 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 hired 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, the employer status of prime contractors toward subcontract workers is expected to expand.
The interpretive guidelines divide employers into "contract employers" and "non-contract employers." Contract employers are employers (such as subcontractors) who have a direct contractual relationship with workers, while non-contract employers are third parties who do not have a contractual relationship with workers but, through their 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, "Although the government has presented criteria and guidelines for determining employer status, there are many unclear parts. Ultimately, the final determination of employer status will be made through court trials, and it could take considerable time."
The government's interpretive guidelines also present work methods as a key criterion for determining employer status. If a non-contract employer (prime contractor) substantially and specifically controls or determines the composition of work processes, work pace, work standards and procedures, there is a high likelihood that employer status will be recognized.
These criteria are also likely to work disadvantageously for 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 task at a single business site is performed individually by subcontractors, but the overall site's schedule, 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 intervening in individual work methods."
◇ Delays in the construction period do not qualify as force majeure
What the construction industry fears most is subcontract workers taking dispute (strike) actions against prime contractors, leading to construction stoppages. For this reason, if the construction period is extended and the agreed completion date with the client is missed, the prime contractor, the construction company, must bear all responsibility. The penalty for delay, a fine for late completion, is imposed after the scheduled completion date, and usually 0.05% of the contract amount must be paid daily. For a 100 billion won project, a penalty for delay of 50 million won is imposed per day.
According to the Construction & Economy Research Institute of Korea, major countries recognize construction delays due to disputes as force majeure and exempt penalties for delay. The U.S. Federal Acquisition Regulation (FAR) specifies labor disputes (strikes), stoppages of transportation, and freight embargoes as force majeure. However, in Korea, even if a temporary suspension occurs at a construction site due to labor disputes, stoppages of transportation, or freight embargoes that the contracting party could not have anticipated, it is rarely recognized as force majeure. The damage from an increase in nationwide 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 directly shifted onto construction companies.
Jeon Young-jun, head of the research center at the Construction & Economy Research Institute of Korea, said, "For situations like spring or summer wage negotiations that unfold nationwide or at metropolitan local government levels and are beyond the prime contractor's control, it is time to consider recognizing them as force majeure, as overseas, to reduce the burden on prime contractors."
There are also concerns about long-term effects such as increases in construction costs. Shin Bo-yeon, professor at Sejong University's Department of Real Estate AI Convergence, said, "Large construction companies are expected to become the main targets of subcontractor worker disputes," adding, "Increases in construction periods and higher cost ratios due to disputes will also worsen the profitability of maintenance projects such as reconstruction and redevelopment."