[Exclusive] "Had to Sell Trucks at a Loss" ... Wage Arrears Hit LH-Commissioned Sites Too [Construction Crisis Report]

Wage Arrears at Public Sector Construction Sites
Illegal Re-subcontractors Pocket Workers' Pay
Controversy Over Exclusion from 'Subcontract Keeper' System
"Waste Disposal Not Subject to the System"
Delayed Payments Also at Busan Local Government Projects

Even public sector construction sites are not immune to the ongoing crisis in the construction industry. The inability to prevent illegal re-subcontracting practices has forced construction workers into financial hardship, a situation no different from that found at private construction sites. Recently, at a waste transport and disposal project in Busan Myeongji District commissioned by Korea Land and Housing Corporation (LH), about 20 dump truck drivers were not paid approximately 790 million won in construction equipment fees. This amount represents wages for work performed from November last year to January this year. Some drivers, unable to keep up with installment payments, were forced to sell their vehicles at a loss. Construction equipment operators typically purchase dump trucks under their own names and pay monthly installments of around 4 million won.

These workers met with officials from both LH and the Busan Regional Land Management Office of the Ministry of Land, Infrastructure and Transport two or three times, but to no avail. Both parties repeatedly stated that they "could not intervene." LH maintained that "since progress payments have already been made, there is no legal basis for the commissioning agency to get involved." The Ministry of Land, Infrastructure and Transport claimed, "the matter has been delegated to the Korea Construction Equipment Association," and stepped back. However, the association is merely a private organization and does not have the authority to enforce payment or demand administrative action.

In fact, the wages were withheld by an illegal re-subcontractor. Service provider C, which won the waste transport contract from LH, illegally re-subcontracted the work to two other companies. The company that actually performed the work reportedly disappeared without paying the workers. Some point out that this is a typical illegal transaction, where the contract states "equipment rental," but in reality, the transport work is re-subcontracted out.

"Not Construction Work"... Excluded from Electronic Payment System 'Subcontract Keeper'

It is difficult for LH to detect such illegal contractual relationships in advance. An LH official said, "It is virtually impossible to identify illegal contracts that service providers secretly sign in advance," adding, "While we recognize our significant social responsibility as a public corporation, there is no legal basis for us to pay the delayed wages in place of the contractor." LH is currently in the process of sanctioning company C as a disqualified contractor.

The fact that LH was the commissioning agency but did not apply the public works electronic payment system, known as 'Subcontract Keeper,' is a point of contention. Normally, in public construction projects, after the subcontract approval process, the commissioning agency directly checks payment status through Subcontract Keeper. Supervisors also make random calls to workers to check for wage arrears.

However, in this case, all these procedures were omitted because the work was classified as waste disposal. An LH official explained, "Waste disposal work is regulated under the Waste Management Act, not the Construction Act, so the system was not applied." In contrast, workers at the site argue that "it was clearly construction work involving excavators and dump trucks." One worker said, "If it wasn't a construction site, we would have used regular cargo trucks instead of dump trucks," adding, "At the time, the dump trucks were labeled as 'construction waste collection and transport vehicles.'"

As the construction market slumps, the practice of re-subcontracting is colliding with institutional blind spots, leading to further harm for workers, but there are few practical remedies. The chief supervisor at company A, with 30 years of experience, said, "The commissioning agency escapes responsibility by saying all payments have been made, and in the end, all that's left is criminal complaints and lawsuits," adding, "It's difficult for day laborers to handle civil litigation." He pointed out, "There are some protections for first-tier subcontracted workers, but once it goes to re-subcontracting, they fall into a legal blind spot," and "Cases exploiting these contractual practices keep recurring, but institutional responses at the national level remain inadequate."

No 'Direct Payment System' Despite Two Wage Delays? ... Gap Between Law and Reality at Public Sites

Asia Economy DB

The impact of the crisis is also being passed on to workers at local government construction projects. In Busan city government projects, there were two instances of unpaid construction equipment fees in 2023 and last year. According to current law, if the primary contractor at a public sector site delays subcontract payments twice or is unable to pay, the commissioning agency may pay the subcontractor directly upon request. However, the legally mandated 'direct payment system' was not implemented.

The site where wage arrears occurred was the 'Deokcheon(Hwamyeong)~Yangsan Road Improvement Project' commissioned by the Busan City Construction Headquarters. The project began in 2022, when construction costs were soaring. The initial estimated cost was 18 billion won, but after competitive bidding, the contract was awarded at 14.7 billion won. Bumyang Construction, ranked 182nd in the industry, won the contract at about 81% of the estimated price. Concerns about insufficient construction costs arose immediately after the contract was awarded, and these concerns soon became reality.

Wage arrears began to occur, centered on subcontractor S. The initial arrears were settled once, but starting in March last year, wage delays resumed. As of now, the officially confirmed amount of unpaid construction equipment fees?including for dump trucks and excavators?totals 1.67 billion won. For example, one worker, Mr. Lee, who operated a forklift at the site, is owed 25.5 million won. The site hires individuals who own construction equipment for the work.

Despite more than two instances of wage arrears, the 'direct payment system,' where the commissioning agency pays the subcontractor directly, was not implemented. Article 35 of the Framework Act on the Construction Industry stipulates that if the primary contractor at a public sector site delays subcontract payments twice or is unable to pay, the commissioning agency may pay the subcontractor directly upon request.

However, Busan city did not implement the direct payment system, citing the reason that "no direct payment request was received from S." By law, the commissioning agency can only pay the subcontractor in place of the primary contractor if the subcontractor requests it. An official from the Busan City Construction Headquarters said, "We cannot preemptively spend the budget if the subcontractor does not make a claim," adding, "Other than urging the primary contractor to fulfill its obligations, there are no realistic countermeasures." According to the official, S's bank accounts are already under multiple seizures, so even if direct payment were made, the funds would likely be deposited with the court and distributed to other creditors. He said, "S is aware of this situation, which is probably why no direct payment request has been made."

On July 17, Bumyang Construction requested an increase in the construction budget from Busan city. According to the revised design plan submitted to the city, the total project cost increased from the original 14.7 billion won to 17.4 billion won. Although the increased amount includes work performed by subcontractors, it is unclear whether payment will be made. In May, Bumyang Construction sent a contract termination notice to S.

An industry insider commented, "Typically, responsibility for such problems is shifted onto the subcontractor," adding, "We need to examine whether the commissioning agency or supervisors managed the process properly in the first place." According to the Ministry of Employment and Labor, unpaid wages in the construction industry last year totaled 478 billion won, nearly double the 292.5 billion won recorded in 2022. The construction industry's share of total unpaid wages also rose from 19% to 23%.

'Construction Crisis Report' Series Order

<1-1> Construction Sites at a Standstill, Collapsed Lives of Day Laborers
<1-2> "Three to Four More Bankruptcies Expected"... Mid-sized Builders on the Chopping Block
<2-1> PF, Once a Lifeline, Now a Trap
<2-2> Eased Multi-homeowner Regulations, Key to Regional Real Estate Recovery
<3-1> "Drying Up Day by Day": Shaken Subcontractors and Downstream Industries
<3-2> Even Major Builders Cannot Avoid Wage Arrears
<3-3> LH and Local Governments Also Failing to Pay Wages
<3-4> Even the President Steps In... Urgent Need for Vertical Structure Reform
<3-5> The Company That Survived Without Illegal Re-subcontracting
<3-6> Joined Hands at Collapsed Sites
<4-1> Foreign Construction Labor, Encroaching on Domestic Jobs
<4-2> 'Protecting Locals' Rather Than 'Regulating Foreigners'
<4-3> Repeated Re-construction: The Root Cause of Declining Profitability