"Penalty Surcharges Alone Up to 360 Billion Won" OSHA and Construction Safety Act Bear Down on Builders [Construction Firms Shaken by Overlapping Surcharges]

Existential Threat from Excessive Financial Penalties
Fairness Concerns as Larger Builders Face Structural Disadvantages

As bills imposing penalty surcharges on companies for fatal industrial accidents are being passed or discussed one after another, the construction industry has gone into emergency mode. Even when companies are making efforts to prevent industrial accidents, they will still have to pay a certain portion of their operating profit as a penalty surcharge if a fatal accident occurs, and the risk of being punished multiple times under different laws is growing. Following the recent passage of an amendment to the Occupational Safety and Health Act (OSHA) by a National Assembly standing committee, the Special Act on Construction Safety has also been introduced and is expected to be discussed in the National Assembly. All of these bills include provisions on the imposition of penalty surcharges.

According to the National Assembly on the 23rd, the Land, Infrastructure and Transport Committee is reviewing the Special Act on Construction Safety, led by the ruling party. The bill was proposed by Democratic Party lawmaker Moon Jinseok. Its core content is to impose either a business suspension of up to one year on a construction business operator whose negligence in safety management obligations results in a fatality, or a penalty surcharge within 3% of annual sales, up to a maximum of 100 billion won. For small and mid-sized construction companies with no sales or where sales are difficult to calculate, the bill would impose a penalty surcharge of up to 1 billion won. Once the schedule for the bill subcommittee of the Land, Infrastructure and Transport Committee is set, the bill is highly likely to be reconsidered within March.

This comes after an amendment to the OSHA, which would allow the authorities to impose a penalty surcharge of up to 5% of operating profit if three or more people die in industrial accidents in a year, recently passed the plenary session of the Climate, Energy and Environment Committee, meaning yet another bill containing penalty surcharges is preparing to cross the parliamentary threshold.

The construction industry is voicing concerns about overlapping penalty surcharges. Given that the construction sector’s operating margin in 2024 is 3.15%, the penalty surcharges stipulated in the bills currently on the table are seen as excessive to the point of threatening corporate survival. Based on an example of “Construction Company A,” where three fatal accidents occurred every year between 2022 and 2024, this newspaper made a simple calculation of the penalty surcharge under the OSHA amendment: the company would have to pay 28.7 billion won in 2022 and then another 39.2 billion won the following year. Over two years alone, the penalty surcharges would total around 60 billion won. In 2024, the company recorded an operating loss, but under the amendment, if a company is in the red or its operating profit cannot be calculated, a penalty surcharge of up to 3 billion won may be imposed. On top of this, if the Special Act on Construction Safety is applied, the company could be subject to an additional penalty surcharge of up to 300 billion won over three years.

An industry official said, “If penalty surcharges are imposed concurrently like this, they could reach up to 360 billion won,” adding, “If administrative sanctions such as business suspension are also imposed, even large construction companies could face a situation where they cannot survive.”

Lawmaker Moon’s office also agrees that concerns about overlapping penalty surcharges need to be addressed. A staff member from his office said, “There is certainly a possibility that both the OSHA amendment and the Special Act on Construction Safety could be passed,” but added, “There is a risk that penalty surcharges could be excessively imposed in duplicate, so discussion on this aspect seems necessary.” One idea being discussed is to add a provision stating that “the penalty surcharge provisions of the Special Act on Construction Safety shall take precedence.”

"Penalty surcharge bombs mainly hit large builders... The irony that losses are better"

With both the OSHA amendment and the Special Act on Construction Safety including provisions to impose penalty surcharges for fatal industrial accidents, the construction industry now finds itself worrying about its very survival. This has even led to bitter jokes that it might actually be better to be in the red. The bills respectively stipulate penalty surcharges of “5% of sales” and “3% of operating profit,” but when a company with an operating loss has a fatal accident, its penalty surcharge is capped at 3 billion won.

If three workers die at a large construction company that posted 653 billion won in operating profit, the company would have to pay a penalty surcharge of 32.6 billion won under the OSHA amendment. By contrast, if the company recorded an operating loss, the penalty surcharge would be reduced to less than 3 billion won, which is less than one-tenth of that amount. A construction industry official said, “Even when construction companies are similar in scale, a company with no operating profit can end up paying far less in penalty surcharges, creating the ironic situation where being in the red is actually better.”

The so-called “penalty surcharge bomb” is highly likely to fall mainly on large construction firms. This is because the OSHA amendment imposes penalty surcharges based on the number of accidents, which puts larger construction companies at a disadvantage. Large builders that operate around 150 construction sites have tens of thousands of workers on-site each day and are far more exposed to accidents, making them inevitable primary targets of sanctions. A construction industry official pointed out, “If you look at the fatal accident rate per ten thousand workers at large construction companies, it is actually lower than the industry average,” adding, “Yet they are still becoming targets of sanctions that require them to pay excessive penalty surcharges.” According to the Construction Association of Korea, the fatal accident rate per ten thousand workers at the top 10 construction companies is 0.69%, which is about half the industry average of 1.59%.

For construction companies that experience fatal accidents, the burden does not end with a penalty surcharge bomb. They also face longer construction periods and increased financing costs resulting from the accidents. The average operating margin of Korea’s top 10 major construction companies is around 3%, and when an accident occurs on a construction site, project delays and additional input costs alone are enough to drag down performance. GS Engineering & Construction shifted into the red after fully recognizing 550 billion won in losses for the complete reconstruction costs following the collapse of an underground parking lot at an apartment complex in Incheon’s Geomdan New Town in 2023. HDC Hyundai Development Company set aside 337.7 billion won in provisions after two accidents in Gwangju in 2021 and 2022. POSCO E&C recorded an operating loss of 452 billion won last year after one-off costs stemming from construction suspensions were reflected.

A construction industry official said, “When a serious accident occurs, credit rating agencies downgrade the company,” adding, “That inevitably makes it more difficult to raise funds.” When a company’s credit rating is downgraded, its interest costs rise when issuing bonds, worsening its funding conditions.

For small and mid-sized construction companies in particular, a penalty surcharge often means they have no choice but to shut down. According to the Construction Association of Korea, 14,880 companies, or 86.9% of the 17,188 general construction contractors, have operating profits of less than 500 million won. A representative of a small construction firm said, “For small companies, a penalty surcharge of up to 3 billion won is beyond their capacity to pay, so closure will be inevitable,” adding, “Given that small construction companies mainly operate in regional areas, this could lead to a downturn in local economies.”

For this reason, there is also a view that lawmakers need to take into account the efforts companies are making to prevent fatal accidents at the corporate level. In the case of POSCO E&C, where five workers died in accidents last year, the company halted work at all sites, pledging to completely overhaul its safety management system. It then conducted a comprehensive inspection of safety management, including whether safety plans were being implemented and whether there were any illegal subcontracting practices. At the group level, POSCO also established a safety-specialized subsidiary called “POSCO Safety Solution” and launched company-wide safety enhancement measures.

The Ministry of Land, Infrastructure and Transport, which has jurisdiction over the construction industry, is said to have submitted an opinion to the National Assembly that the penalty surcharge provisions in the draft Special Act on Construction Safety are “excessive.” This took into account the fact that the OSHA amendment had already been introduced to the Environment and Labor Committee. However, since the OSHA amendment passed the plenary session of the Environment and Labor Committee, the ministry has not shown any particular change in its stance.