After the financial crises 1997, many Korean corporations have restructured their organizations from centralized decision-making toward decentralized structures and production networks. Many large firms in Korea have achieved a more decentralized structure by splitting their production facilities. For example, large automotive manufacturers subcontract major parts of their operations to smaller supplier firms. Some firms increasingly turn to contract manufacturing, using contracting partners who have their own facilities, others utilize production facilities with the form of in-house subcontract.
The trend toward decentralized production has changed at the same time firms" employment practices and the changing nature of employment relationships raise numerous issues for Korean employment laws.
In Korea there is no specific rule for the employment relationship between the contractor and the employees of the in-house subcontracting company. Therefore the Korean Supreme Court established ex-post the standard of legitimate and illegitimate in-house subcontracting: i) if the in-house subcontracting company does not exist in substance and the contractor has the right to direct and supervise the employees of the in-house subcontracting company, the contractor is regarded as the substantial employer of the employees of the in-house subcontracting company: it is regarded that the implied employment relationship exists between the contractor and the employees of the in-house subcontracting company. ii) if the in-house subcontracting company does exist in substance and the contractor has the right to direct and supervise the employees of the in-house subcontracting company, the subcontractor functions merely as a temporary work agency. Hence the contractor as a using company has to employ the employees directly after the term of a contract of 2 years according to the Temporary Work Agency Act. It is assumed that the purpose of an artificial transaction is to escape the duties of the employer toward its employees.
Although the Korean Supreme Court has established the such principles for the employment relationship between the principal contractor and the employees of the in-house subcontracting company, it bases its protective techniques on a mostly ex-post approach. Furthermore it does not cover all of the cases, because the individual forms of the in-house subcontractings are different case by case.
In this regard it is necessary to establish the liability rule of principal contractor in case of the in-house subcontracting concerning work conditions and unfair dismissal remedies. The rule must recognize the right of employees of in-house subcontractings to prove the existence of a joint employer relationship, where the primary employer would be responsible for paying the lost wages and remedying for unfairly dismissed employees.