"Payment Squeezing and Shifting Safety Costs onto Subcontractors"...Korea Fair Trade Commission Begins Sanctions against Four Builders Including POSCO E&C

Unfair special contract terms uncovered, including non-payment of safety facility costs and shifting of liability
"Payment squeezing" also detected, with more than 700 million won cut from the lowest bid

The Korea Fair Trade Commission has initiated sanctions against four construction companies, including POSCO E&C, for shifting industrial safety costs and responsibilities onto subcontractors and unfairly cutting subcontract payments.

Exterior view of POSCO Engineering & Construction's Songdo building. POSCO Engineering & Construction.

On the 25th, the Secretariat of the Korea Fair Trade Commission announced that it had sent an examination report on suspected violations of the Subcontracting Act by four companies - POSCO E&C Co., Ltd., KR Industry Co., Ltd., Dasan Construction Engineering Co., Ltd., and NC Construction Co., Ltd. - to each of them and submitted it to the Commission, thereby commencing the deliberation process. In prosecutorial terms, the examination report is equivalent to an indictment. The examiner recommended a corrective order, the imposition of surcharges, and a criminal referral to the prosecution for these companies.

Yoo Sunguk, Investigation Management Officer at the Korea Fair Trade Commission, explained, "As multiple fatal accidents occurred at construction sites last year, we conducted a focused investigation into the practice of setting unfair special contract terms related to industrial safety." In the case of POSCO E&C, where five people died in four accidents at construction sites last year, the Commission received a tip-off alleging unfair subcontracting practices and conducted an on-site investigation in August last year. The investigation found that the company either did not reimburse the cost of installing protective devices for construction equipment out of safety management expenses, or entered into special contract terms that shifted all responsibility for safety accidents onto subcontractors on the grounds of non-compliance.

It was also found that POSCO E&C, even after conducting competitive bidding, forced subcontractors to sign contracts at an amount that was 775 million won lower than the lowest successful bid without just cause, and engaged in a textbook case of "payment squeezing" by failing to issue written contracts before construction commenced.

The other three construction companies that were brought before the Commission for deliberation were also caught setting unfair special contract terms that bled subcontractors dry. Dasan Construction Engineering, KR Industry, and NC Construction forced subcontractors to bear entirely all costs, including compensation for damages, and all civil and criminal liability in the event of a safety accident. KR Industry and Dasan Construction Engineering shifted the costs arising from civil complaints onto subcontractors, while NC Construction was found to have set unfair special contract terms that fundamentally blocked the payment of advances.

Once the Korea Fair Trade Commission’s examination report is delivered to the respondent, the respondent can exercise its right of defense by submitting a written opinion. The final decision on whether to impose sanctions and at what level is then made at a full Commission meeting, reflecting the respondent’s arguments. In the case of surcharges, the basic calculation standard is determined within the range of the base amount for imposition (less than 2 billion won), depending on the seriousness of the case, and the final surcharge is imposed after taking into account aggravating and mitigating factors.

Meanwhile, as the competent authority responsible for establishing order in subcontracting transactions, the Korea Fair Trade Commission is continuously pursuing institutional improvements targeting practices such as "shifting safety costs," which have been identified as one of the causes of serious industrial accidents. In December last year, it raised the surcharge imposition standards for unfair special contract terms related to industrial accidents. It also reflected the obligation for principal contractors to bear industrial safety and health measures and industrial safety and health management expenses in standard subcontract contracts across all 59 business categories.

The Korea Fair Trade Commission stated, "We will conduct constant monitoring of unfair practices related to industrial accidents and periodically carry out ex officio investigations into companies with frequent industrial accidents by analyzing statistics on serious accidents and anonymous reports," adding, "We will rectify unfair special contract terms and unfair payment reductions under which principal contractors improperly shift industrial safety responsibilities and costs onto subcontractors, and thereby eradicate safety accidents in industrial workplaces."