President Lee Jae Myung Steps In on 'Construction Subcontracting Issue'...Seeking Solutions [Construction Crisis Report]

Urgent Need for Vertical Structure Reform
'Subcontractor Payment Guarantee System' Exists,
But Becomes Ineffective When Project Owner, Main Contractor, and Subcontractor Agree
No Guarantee Required in Three-Party Agreement
Calls to Expand the Electronic Payment System

There are growing calls for structural changes in the construction industry to prevent the current construction crisis from spreading into a wave of subcontractor bankruptcies and widespread wage arrears. Reform is needed in the vertical structure that extends from project owners down to secondary subcontractors. However, changing this structure in a short period is difficult. In response, the government and the National Assembly are seeking to modernize the subcontracting system through gradual changes, such as enhancing the effectiveness of payment guarantee systems for subcontractor payments and establishing mechanisms to penalize employers who delay wage payments.

"How can we ask the main contractor for a guarantee?"

Ensuring the effectiveness of the 'subcontractor payment guarantee system' is considered one such protective measure. Kim Dongwan, head of the Fair Trade Team at the Korea Specialty Contractors Association, said on the 31st, "If the main contractor collapses, subcontractors who have not received their payments also go under one after another," and added, "The requirements for issuing payment guarantees for subcontractor payments must be strengthened to prepare for main contractor bankruptcy or contract termination." Although the system is designed so that a guarantor pays on behalf of the main contractor if they fail to pay the subcontractors on time, in reality, it is often ineffective.

Under current law, the main contractor must issue a guarantee to the subcontractor within 30 days of signing the subcontract. The subcontractor payment must also be made within 60 days of the project delivery date. However, in practice, construction projects often do not follow these legal requirements. If the project owner, main contractor, and subcontractor agree to direct payment, the main contractor is not required to issue a guarantee, and this loophole is frequently exploited to avoid providing guarantees.

Direct payment system powerless against the dominant position of large main contractors

From the subcontractor's perspective, it is difficult to request a guarantee due to the dominant position of large main contractors. According to an emergency inspection by the Fair Trade Commission last year, there were 551 cases of non-compliance with payment guarantees, involving a total amount of 178.8 billion won. If the main contractor fails to pay the subcontractor within the deadline, they are required by law to pay statutory late interest. However, cases where this interest is paid voluntarily are rare. Without a lawsuit or a report to the Fair Trade Commission, it is virtually impossible to receive it.

The direct payment system, in which the project owner pays the subcontractor directly, does not fit the realities of the industry. Under the Subcontract Act, if payment is delayed more than twice, the project owner can pay the subcontractor directly. However, it is common for subcontractors to go bankrupt due to cash flow problems even after just one delayed payment.

The National Assembly is taking action to address these structural problems. Kang Junhyun, a member of the Democratic Party of Korea on the National Policy Committee, and Lee Heonseung, a member of the People Power Party, each introduced bills in March and May, respectively. Kang's bill would allow direct payment requests after just one missed payment, and Lee's bill would make payment guarantees mandatory for all construction projects exceeding 10 million won.

The bills also stipulate that direct payment can be made even when non-cash payments such as promissory notes are delayed, and that subcontractors' payment claims are protected from seizure, transfer, or exemption to a certain extent. Kang's bill prohibits the seizure of the entire amount of the construction payment owed to the subcontractor, while Lee's bill protects up to half of the amount.

President Lee targets 'construction subcontract wage arrears'

President Lee Jae Myung. Photo by the Presidential Office Press Photographers Group

The new administration is also pushing strongly for institutional reforms. At his first cabinet meeting last month, President Lee Jae Myung said, "I am aware that non-payment of wages and other payments to subcontractors is a serious problem at construction sites," and requested cooperation to address staffing shortages at the Fair Trade Commission so that fair trade cases can be handled more smoothly. He made it clear that resolving the 'gapjil' issue, which directly affects people's livelihoods, is a core policy priority. The Fair Trade Commission has also made 'strengthening the stability of subcontractor payments' a key task for this year and has formed a task force to develop countermeasures.

On the ground, there are calls to expand the use of electronic payment systems to prevent wage arrears. Currently, the 'Subcontract Keeper' system operated by the Public Procurement Service is mandatory only for public construction projects worth 30 million won or more. Private construction projects are not required to use it and instead may voluntarily use 'Nomubee.com,' a system run by private companies. As a result, there are discussions about making the system mandatory for private construction projects worth 5 billion won or more, or expanding the scope of public projects to which it applies.

This system uses an escrow method, where the project owner deposits labor and material costs for the subcontractor into the system in advance, and the funds are then paid directly to workers or material suppliers. This can prevent wage arrears or payment leaks at intermediate stages. Currently, related bills (partial amendments to the Framework Act on the Construction Industry) proposed by bipartisan lawmakers including Moon Jinseok of the Democratic Party, Um Taeyoung of the People Power Party, and Yoon Jongoh, floor leader of the Progressive Party, are pending in the National Assembly's Land, Infrastructure and Transport Committee.

Kim Yoonduk, the nominee for Minister of Land, Infrastructure and Transport, also stated in a written response submitted ahead of his recent parliamentary confirmation hearing that he would push to make the electronic payment system mandatory for private construction projects as part of efforts to eliminate wage arrears in the construction sector. Kim said, "If I am appointed as minister, I will work to ensure the swift implementation of the revised Framework Act on the Construction Industry at construction sites," and added, "I will pursue a variety of policies to eradicate payment arrears."

There are also calls for a dedicated national body to enable victims of delayed subcontractor payments or wage arrears to report cases quickly and receive immediate relief. The system should not merely mediate disputes but should also ensure prompt payment and take legal action against employers responsible for arrears. An anonymous site supervisor said, "The state should first pay out of the national treasury and then pursue the legally responsible party to the end. Employers who withhold wages should face prison sentences in serious cases so that no one dares to attempt wage arrears in the future." In this regard, the Fair Trade Commission is reportedly considering establishing a dedicated department for gapjil-related issues and complaint handling.

'Construction Crisis Report' Series Order

<1-1> Construction Sites at a Standstill, Day Laborers' Lives Collapsing
<1-2> "Three or Four More Bankruptcies"...Mid-sized Builders on the Chopping Block
<2-1> PF, Thought to Be a Lifeline, Became a Trap
<2-2> Easing Multi-home Regulations, the Key to Reviving Regional Real Estate
<3-1> "Every Day Is Nerve-wracking": Subcontractors and Downstream Industries Shaken
<3-2> Even Major Companies Not Immune to Wage Arrears
<3-3> LH and Local Governments Also Face Wage Arrears
<3-4> Even the President Steps In...Urgent Need for Vertical Structure Reform
<3-5> The Company That Endured Without Illegal Re-subcontracting
<3-6> United at a Collapsing Site
<4-1> Foreign Construction Workers Encroaching on Domestic Jobs
<4-2> From 'Regulating Foreigners' to 'Protecting Locals'
<4-3> The Fundamental Cause of Profitability Deterioration: Frequent Rework