Yellow Envelope Act Guidelines: Employer Status Determined by Control, Layoffs Also Subject to Dispute

Government Issues Guidelines for Determining Employer Status
Employer Status Recognized When Principal Contractor Restricts Subcontractor Autonomy Over Working Conditions
Structural Control Considered as Basis for Employer Status
Managerial Decisions Affecting Working Conditions Subject to Dispute
Job Reassignments Due to Restructuring Also Included
"Applicable When Substantial and Specific Changes Occur"

As concerns continue to arise in the field regarding the Yellow Envelope Act (Amendments to Articles 2 and 3 of the Labor Union and Labor Relations Adjustment Act), which will take effect in March next year, the government has issued interpretation guidelines. When determining whether a principal contractor is considered an employer in negotiations with subcontractors, the decision is based on whether there is structural control over working conditions. If there are substantial and specific changes to working conditions, such as layoffs or restructuring-related job reassignments, these can become subjects of labor disputes.

On December 26, the Ministry of Employment and Labor announced that it would issue an administrative notice for the "Draft Guidelines for the Interpretation of Article 2 of the Revised Labor Union Act" to enhance predictability in the field and support the stable implementation of the Yellow Envelope Act. The guidelines provide specific criteria and examples regarding the expanded definition of "employer" (Article 2, Item 2) and the broadened scope of labor disputes (Article 2, Item 5) under the revised law. The administrative notice period runs until January 15 of the following year.

Employer Status Recognized by 'Structural Control'

The revised Labor Union Act has expanded the definition of employer to include those who must negotiate with subcontractor unions. Even if an entity is not a direct party to the employment contract, a principal contractor who can substantially and specifically control or determine workers' working conditions is interpreted as an employer. In response to growing confusion and concern in the field, the Ministry has presented "structural control over working conditions" as the standard for determining employer status.

For example, if a principal contractor structurally restricts the ability of a subcontractor to determine working conditions-thereby fundamentally and continuously limiting the subcontractor's discretion or autonomy-this constitutes structural control. The Ministry explained that "structural control can be examined even if it involves only some working conditions." This also applies if the work of the principal contractor and subcontractor is interconnected or if work processes are mutually dependent.

However, the mere existence of a subcontracting contract does not automatically mean that there is structural control over the working conditions of employees belonging to the contracting party. In general subcontracting relationships, if the principal contractor requests or negotiates delivery deadlines, quality standards, or other contract performance details or procedures to achieve the contract's objectives, this does not necessarily constitute structural control.

A Ministry official stated, "In typical subcontracting relationships where independent facilities are used for production and delivery, it is common for the principal contractor to request production by a certain time or to certain quality standards, but this is difficult to regard as structural control," adding, "This is the case for most supply relationships." The official continued, "(Structural control) applies in cases of in-house subcontracting or when core tasks are performed together and the subcontractor has very little autonomy."

Factors previously used by courts to determine employer status-such as "integration into the principal contractor's business" and "economic dependence"-will now be considered as supplementary indicators of structural control over working conditions. For example, this applies if the labor of subcontracted workers is directly integrated into the principal contractor's business system, or if the subcontractor's continued existence becomes uncertain upon termination of an exclusive contract, indicating economic dependence.

The guidelines also include examples to help determine employer status for each working condition, such as occupational safety, work environment, employee welfare, working hours, wages, and allowances. In the case of occupational safety, if the principal contractor controls the overall safety and health management system, including work processes and safety procedures, employer status is likely to be recognized. The exercise of decision-making authority over safety budgets and concentration of authority regarding structural safety improvements are also grounds for recognition.

For wages and allowances, if the principal contractor effectively determines labor costs based on the number of workers or working hours, or directly sets wage increase rates or allowance standards, thereby fundamentally limiting the subcontractor's discretion, employer status is recognized. Conversely, if the principal contractor sets the total contract amount based on average wages and the subcontractor autonomously pays wages within that amount, employer status may not be recognized.

Kim Younghoon, Minister of Employment and Labor, giving a briefing on the Yellow Envelope Act (Amendments to Articles 2 and 3 of the Labor Union and Labor Relations Adjustment Act) at the Government Seoul Office in Jongno-gu, Seoul, last July.

Layoffs and Job Reassignments Also Subjects of Dispute

The revised Labor Union Act newly includes the following as subjects of labor disputes: ▲ managerial decisions that affect working conditions ▲ disagreements regarding the determination of employee status ▲ clear violations of collective agreements by the employer. Employer organizations have also expressed concerns regarding these changes. The guidelines provide criteria that reflect actual conditions in industrial settings.

Managerial decisions may involve a combination of actions that appear as a series of events. Among these, whether a matter becomes a subject of labor dispute should be determined based on whether it results in substantial and specific changes to working conditions. If the impact on employees' working conditions at the time of the decision remains abstract or potential, it is difficult to consider it a subject of labor dispute.

Managerial decisions for organizational changes such as mergers, splits, transfers, or sales are not, in themselves, considered to have a substantial and specific impact on working conditions. However, layoffs or job reassignments resulting from restructuring during the implementation process, which cause substantial and specific changes to employee status or working conditions, become subjects for collective bargaining.

A Ministry official stated, "A company's decision to invest in overseas facilities does not, in itself, have a substantial or specific impact on working conditions," adding, "It is difficult to consider this a subject for collective bargaining that could lead to a labor dispute. We plan to consult with the Labor Relations Commission using these guidelines and provide legal judgments and guidance at the government level."

If employment adjustments such as layoffs are objectively anticipated due to decisions on mergers, splits, transfers, or sales, labor unions may demand collective bargaining for employment guarantees, such as "no layoffs" or "prior union agreement before layoffs." The Ministry explained that this is to ensure timely and effective bargaining for employee protection.

Disagreements regarding the determination of employee status refer to disputes over the establishment or modification of principles, standards, or procedures related to changes in employment type, disciplinary action, or promotion between labor relations parties. Under the revised law, interest disputes over the conversion of non-regular to regular positions, as well as the establishment or modification of disciplinary or promotion standards, are included as subjects of labor disputes.

A clear violation of a collective agreement by the employer occurs when the employer fails to fulfill the agreement without just cause, even though there is no room for interpretive dispute over the wording of the agreement. This also applies if the employer acknowledges the violation but does not comply, or if the violation is objectively confirmed during labor dispute mediation by the Labor Relations Commission or during labor-management bargaining guidance by the local employment and labor office.