Ⅴ. Disguised Outsourcing Cases and Criteria for Judgment

1. Introduction

The greater utilization of dispatched employees has benefited companies in maintaining labor flexibility and in reducing labor costs. However, the ban of hiring dispatched employees for more than two consecutive years has consequently forced companies to seek internal outsourcing. Although the company may offer an outsourcing contract, it treats the employee like a dispatched employee in practice. Addressing this issue, the Supreme Court clearly distinguished the difference between a dispatched employee and outsourcing employee with its judicial ruling. The following will review the main contents from the rulings that outlined dispatch and outsourcing and the criteria for ‘worker dispatch’. There have been two recent cases heard by the Supreme Court which provide good examples of this. In this article, I would like to look at the details of these rulings and review the criteria used in making their decisions.




2. Case of Disguised Outsourcing by Hyundai Mipo Shipbuilding Company (1/2)

(1) Summary

Hyundai Mipo Shipbuilding Company(hereinafter “the Shipbuilder”) terminated a service contract with Yongin Company(hereinafter “the Subcontractor”) when a labor union was established inside the Subcontractor. Right after termination of this contract, all 30 employees(hereinafter “the applicants”) of the Subcontractor were dismissed, and the company closed down on January 31, 2003. The applicants filed a claim for confirmation of employee status against the Shipbuilder. Busan Appellate Court rejected this claim on the grounds that the service agreement between the Shipbuilder and the Subcontractor could be recognized as an outsourcing contract. However, the Supreme Court overturned the Appellate Court’s decision, stating that it was possible to recognize the Shipbuilder and the Subcontractor’s employees as having an implied employment contract.

(2) Supreme Court Ruling

1) Legal principles for implied employment

As a person hired by the original employer provides labor service for a third party at the third party’s location, to be regarded as an employee of the third party, his employment shall satisfy the following: ① The original employer does not have independence in management and works as an agent of the third party in managing employees; ② The original employer’s business entity is nothing more than formal and nominal, and the employee shall be subordinate to the third party in reality; ③ The party that actually pays wages to the employee is the third party; ④ The party to which the person provides labor service is the third party. Based on these criteria, it should be concluded that there was already an implicit employment contract made between the employees and the third party.

2) Confirmed facts
The Subcontractor where the applicants had been employed had worked exclusively for the Shipbuilder as an outsourcing partner to inspect and repair marine engine heat exchangers, safety valves, etc. for the previous 25 years. The Shipbuilder required that employees who wished to work for the Subcontractor pass a skills test before being hired by the Subcontractor. They were then qualified to receive an additional allowance directly paid by the Shipbuilder. Furthermore, the Shipbuilder had substantive authority for employment and promotion of the Subcontractor’s employees, including the ability to demand disciplinary action or choosing candidates for promotion.
In addition, the Shipbuilder directly monitored the applicants’ attendance(including if they left work early), leaves, overtime, hours worked, and their work attitude. The Shipbuilder also determined the volume of work, working methods, work orders, and when and how the applicants would cooperate, and directly assigned work duties or placed applicants for substantive work duties through the Subcontractor’s responsible manager. The Shipbuilder required the applicants to complete its own work assignments in addition to work given by the Subcontractor, paying a certain wage even when there was no work from the Subcontractor by assigning other duties such as receiving education, cleaning of the workplace, and assisting other departments in their work. The Shipbuilder directly supervised and managed the applicants.
Furthermore, the Subcontractor was, in principle, supposed to receive a service fee calculated by multiplying each time unit by the volume received, to which the Shipbuilder added the wages paid when Subcontractor employees were engaged in other Shipbuilder-assigned work not directly related to the Subcontractor duties(such as fixing the marine engines). The Shipbuilder also paid bonuses and severance pay directly to the applicants.
While the Subcontractor handled income tax deductions, income reports, and bookkeeping for its employees under its own business name and registration, it used offices provided by the Shipbuilder, as well as all required facilities such as rooms for its own employee education.

3) Judgment
Upon review of the confirmed facts in B above, and based on the legal principle mentioned in A, it can be determined that even though the Subcontractor had entered into a formal outsourcing contract with the Shipbuilder and had a formal structure in which its own employees(the applicants) performed the necessary labor service, the Subcontractor did not substantially manage itself in terms of work performance or management of its business. The Subcontractor worked just like a department of the Shipbuilder would, or as a labor management agency for the Shipbuilder. Rather, as it is assumed that the Shipbuilder received subordinate labor service from the applicants and decided their working conditions(including wages), an implied employment should be estimated to exist between employees of the Subcontractor and the Shipbuilder, just as if the Shipbuilder had hired the applicants directly.

3. Case of Disguised Outsourcing by Hyundai Motor Company (2/2)

(1) Summary

While Yesung Company(hereinafter “the Subcontractor”), an in-house outsourcing company of the Hyundai Motor Factory – Ulsan(hereinafter “HMC”), was engaged in assembling automobile parts, it dismissed its 15 employees(hereafter “the applicants”) on February 2, 2005, due to union activities. The applicants then filed for remedy for unfair dismissal and unfair labor practices against HMC and the Subcontractor, immediately after the Subcontractor closed down. The applicants’ claims were not accepted in the lower courts, who determined that the Subcontractor, who had already closed down, was their real employer, and not HMC. While the Supreme Court did not determine an implied employment relationship existed between HMC and the Subcontractor, it determined that a dispatch relationship did. According to the Employee Dispatch Act before its revision, in cases where a dispatched employee has served more than two years, the applicant is determined to be a direct employee of the using employer.

(2) Supreme Court Ruling

1) Legal principles for employee dispatch
Whether employment is employee dispatch or not shall, regardless of the formal and nominal contract made between the two parties, be determined by collectively considering the purpose of the contract or job characteristics, specialty and technology, business registrations of the contracting parties and managerial independence, and the using employer’s actual command and control.

2) Confirmed facts
Of the work processes directly and indirectly necessary to produce cars, assembly on the conveyer belt system does not require the Subcontractor to possess much in the way of technological or specialized skills, and the Subcontractor can give few instructions to its employees in this process.
The applicants were placed on either side of the conveyor belt assembly line together with regular employees of HMC, carrying out simple and repetitive tasks according to the various instructions prepared and distributed by HMC, and using HMC’s own facilities, parts, and supplies. In this manufacturing process, the Subcontractor did not supply its own unique technology or invest its own capital.
HMC possessed the general rights to give the applicants their work duties and change their work area, and determined the volume of work to be finished, working methods and working procedures. HMC directly managed the applicants or indirectly gave them substantial work orders through an on-site manager of the Subcontractor. In considering the characteristics of the applicants’ work, the responsibility of the on-site manager was simply as the messenger of HMC orders to the applicants.
HMC decided the starting and finishing times of each work shift, recess hours, overtime and night work, shift duties, the pace of manufacturing, etc., for the applicants, and in cases where HMC’s regular employees were absent due to occupational accidents or leaves, the applicants would fill in.

3) Judgment
The Appellate Court ruled that, based upon legal principles for employee dispatch and the confirmed facts, the employees were, inactuality, working under HMC’s direct supervision after hiring by the Subcontractor and dispatch to HMC.

4. Conclusion

The two cases in this article are typical examples of disguised outsourcing. The first, with Hyundai Mipo Shipbuilding, shows the most common disguised subcontract where, despite the fact that an outsourcing service contract has been entered into by the two parties, an implied employment relationship existed, in light of the lack of Subcontractor independence in personnel management or management of business. The second, with Hyundai Motor Company, deals with an illegal employee dispatch. Even though a service contract was evidently recognized between the two parties, the Contractor was the one who directed and supervised both its own and the Subcontractor’s employees while they worked together in the conveyor belt assembly line, which, again, means there was no subcontractor independence.