1. Introduction
Over the past few decades, Korean labour law has gradually moved toward a broader and more practical understanding of employer responsibility. While the existence of a formal employment contract remains the starting point of legal analysis, courts and labour authorities increasingly focus on who actually controls the work and determines working conditions in practice.
This shift reflects the structural characteristics of the Korean labour market, where dismissal of regular employees is strictly regulated and workforce reductions require the employer to meet demanding substantive and procedural requirements. Because termination is difficult and disputes often lead to lengthy proceedings before labour commissions and courts, companies have long relied on indirect employment structures to maintain flexibility and manage risk.
Subcontracting, outsourcing, service agreements, and dispatch arrangements are widely used across many industries. In these structures, workers are formally employed by a contractor but perform their duties at the principal company’s workplace, often under the principal’s operational direction. As disputes increased, workers and unions began to challenge the formal separation between contractor and principal, arguing that the entity exercising real control should bear legal responsibility.
Korean courts responded by adopting a substance-based approach, first in individual employment disputes such as illegal dispatch cases, and more recently in collective labour relations. The amendments to the Trade Union and Labour Relations Adjustment Act, commonly referred to as the “Yellow Envelope Act,” should be understood as part of this broader trend.
For companies operating in Korea, the key question is no longer only how the contract is drafted, but whether the legal structure, actual operation, and decision-making authority are consistent.
2. Employer Responsibility in Individual Employment Law
In individual employment law, the concept of employer has traditionally been linked to the entity that pays wages and exercises direction and supervision over the employee. However, Korean courts do not rely solely on the formal employment contract when determining employer status. Instead, they examine the substance of the working relationship, considering who gives work instructions, who manages working hours and attendance, who evaluates performance and exercises disciplinary authority, whether the worker is integrated into the organisation, and who actually controls the manner and method of work.
These criteria have been applied across a wide range of disputes, including working-time cases, wage claims, dismissal disputes, managerial exemption issues, and worker status determinations. The distinction between lawful subcontracting and illegal dispatch has been particularly significant. Even where the parties describe the arrangement as a subcontract or service agreement, the relationship may be recharacterised as illegal dispatch if the principal company directly supervises the workers, controls the order and method of work, manages attendance, or effectively exercises personnel authority.
Where illegal dispatch is found, the principal company may be required to hire the workers directly, resulting in significant consequences such as liability for wages, application of working-time regulations, dismissal protection, and other obligations under the Labor Standards Act. Korean case law contains many examples in which principal companies were treated as employers despite the existence of subcontracting agreements.
Through these decisions, the courts have established that employer responsibility cannot be determined solely by the wording of the contract but must be assessed based on the actual degree of control and organisational integration. This development in individual employment law later became the foundation for debates over employer responsibility in collective labour relations.
3. Expansion into Collective Labour Relations
As the determination of employer liability in individual employment relationships gradually shifted toward a substance-based approach focusing on actual direction and control, similar arguments began to emerge in the field of collective labour relations. The issue became particularly visible in industries where indirect employment structures such as subcontracting, outsourcing, and service agreements are widely used, and where workers formally employed by contractors began to organise unions and demand collective bargaining not only with their direct employer but also with the principal company.
Unions representing subcontracted workers increasingly argued that the entity exercising real influence over working conditions should be treated as the employer for purposes of collective bargaining, even if the employment contract had been concluded with a contractor. They pointed out that in many industrial settings the principal company determines production schedules, staffing levels, safety standards, work methods, and operational rules, while the contractor has limited discretion in setting the actual terms under which workers perform their duties.
Employers, on the other hand, have traditionally maintained that the obligation to engage in collective bargaining arises only with respect to the party to the employment contract. Under this view, the principal company should not be required to negotiate with workers who are not its employees, and any expansion of bargaining obligations would create uncertainty in subcontracting and outsourcing arrangements.
In recent years, however, the Labor Relations Commission and some court decisions have taken a broader approach to the concept of employer in collective labour law. It has been increasingly recognised that the concept of employer under the Trade Union and Labor Relations Adjustment Act does not necessarily coincide with the concept of employer under the Labor Standards Act. Accordingly, even where the principal company is not considered the employer for purposes of individual employment obligations, it may still be required to assume certain responsibilities in collective labour relations if it exercises substantial and concrete influence over working conditions.
In assessing whether such responsibility may arise, recent discussions have focused less on formal contractual arrangements and more on whether the principal company exercises substantial and concrete influence over the determination of working conditions. The key question is whether the principal has the ability, directly or indirectly, to determine or significantly affect matters such as work organisation, staffing, working conditions, or operational rules, even if the workers are formally employed by a contractor.
Under the approach reflected in recent legislative discussions and administrative practice, the existence of such practical control may be sufficient to raise issues of bargaining responsibility in collective labour relations, even where the level of supervision would not be enough to establish illegal dispatch or direct employment under individual employment law.
These criteria resemble those applied when determining disguised dispatch or illegal dispatch in individual employment disputes, but the threshold is not necessarily the same. In collective labour relations, it is not always required to establish a level of direct supervision sufficient to trigger an obligation of direct employment. Instead, the existence of substantial influence over the formation of working conditions may be sufficient to raise the question of bargaining responsibility.
This issue has been particularly significant in industries such as shipbuilding, automotive manufacturing, construction, and logistics, where multiple contractors often operate within the same workplace and where the principal company typically retains control over production planning, safety rules, work processes, and staffing levels. In such settings, limiting collective bargaining strictly to the formal employer has increasingly been criticised as inconsistent with the economic reality of the workplace.
These developments eventually led to legislative debate, culminating in proposals to amend the Trade Union and Labor Relations Adjustment Act, widely referred to as the “Yellow Envelope Act”.
4. The Yellow Envelope Act and the Expansion of Employer Responsibility in Collective Labour Law
The so-called Yellow Envelope Act does not refer to a single provision but to a series of proposed amendments to the Trade Union and Labor Relations Adjustment Act. The legislative discussion originally arose from controversy over large-scale damage claims filed by employers against unions and individual workers following industrial action. In several high-profile disputes, companies sought substantial compensation for losses caused by strikes, and labour groups argued that such claims placed excessive financial pressure on workers and discouraged the exercise of the right to collective action.
Public campaigns in support of workers facing large damage claims became known as the “Yellow Envelope” movement, referring to donations collected in yellow envelopes to help cover compensation liabilities. The social debate surrounding these cases led to broader legislative proposals addressing not only the issue of damages but also the scope of employer responsibility and the definition of labour disputes.
One of the central issues in the proposed amendments has been the definition of employer under collective labour law. The legislative discussions have reflected the view that the obligation to engage in collective bargaining should not necessarily be limited to the entity that formally concluded the employment contract. Where a principal company exercises substantial and concrete influence over the determination of working conditions, it may be appropriate to recognise that company as a party responsible for collective labour relations, even in the absence of a direct employment relationship.
This approach does not introduce a system of automatic joint employment, nor does it alter the existing legal framework governing dispatch and subcontracting. The rules under the Act on the Protection of Dispatched Workers remain unchanged, and the obligation of direct employment continues to arise only where illegal dispatch is established. However, the proposed amendments indicate that, in the context of collective labour relations, responsibility for bargaining and labour disputes may extend beyond the formal employer where actual control over working conditions exists.
Another important aspect of the legislative debate concerns the scope of lawful labour disputes. Traditionally, labour disputes have been understood to relate primarily to the formation of working conditions. The proposed amendments suggest a broader interpretation that may include disputes concerning the interpretation, application, or modification of working conditions, as well as certain managerial decisions that have a direct impact on workers. As a result, issues such as outsourcing, restructuring, reduction of production volume, changes in staffing levels, or reallocation of work may increasingly be treated as subjects of collective bargaining or industrial action.
The proposals have also addressed the scope of civil liability arising from industrial action. The intention has been to limit excessive damage claims against unions and individual workers, particularly where the dispute concerns matters closely connected to working conditions or collective bargaining. If such limitations are adopted, employers may need to reconsider their strategy in labour disputes, as the ability to rely on large damage claims as a deterrent could be reduced.
Taken together, the legislative discussions surrounding the Yellow Envelope Act do not aim to prohibit subcontracting or outsourcing as such. Rather, they reflect a policy trend toward recognising that entities exercising real influence over working conditions may bear certain responsibilities in collective labour relations, even without a formal employment contract. This trend has significant implications for companies operating through subcontracting arrangements, multi-layered corporate structures, or multinational management systems, where the distinction between the formal employer and the entity exercising actual control is not always clear.
5. Likely Dispute Scenarios Under Expanded Employer Liability
As the concept of employer responsibility continues to expand in collective labour law, companies operating in Korea should anticipate that disputes involving subcontracted or indirectly employed workers may increasingly involve the principal company, even where no direct employment relationship exists.
One common scenario arises when workers employed by a contractor form a union and demand collective bargaining not only with their formal employer but also with the principal company. Where the principal exercises substantial influence over production schedules, staffing levels, safety standards, or work procedures, the union may argue that meaningful bargaining cannot take place without the participation of the principal. In such cases, the Labor Relations Commission may examine whether the principal has sufficient control over working conditions to justify recognising bargaining responsibility.
Another scenario may arise during restructuring or outsourcing decisions. If a principal company decides to reduce production volume, terminate a service agreement, or transfer certain operations to another contractor, workers may claim that such decisions directly affect their working conditions and therefore fall within the scope of collective bargaining. Under a broader interpretation of labour disputes, unions may attempt to challenge managerial decisions through collective action, even where those decisions formally concern contractual arrangements between companies rather than employment relationships.
Disputes may also arise in situations where the contractor has limited economic independence. Where the contractor depends heavily on a single principal and has little discretion in determining wages, working hours, or staffing, unions may argue that the contractor cannot function as an independent bargaining party. In such cases, pressure may be directed at the principal company to participate in negotiations or to assume responsibility for resolving the dispute.
Multinational companies may face additional complexity where instructions are given by regional or global headquarters rather than by the local legal employer. If decisions affecting working conditions are made outside the local entity, unions may argue that the entity exercising real authority should be involved in bargaining, raising difficult questions about the allocation of responsibility within global corporate structures.
These scenarios suggest that the risk is no longer limited to findings of illegal dispatch or joint employment. Even where the formal structure remains lawful, companies may still face bargaining obligations, unfair labour practice claims, or involvement in industrial disputes if they are perceived to exercise substantial influence over working conditions.
6. Implications for Subcontracting and Contractor–Principal Negotiation Strategy
The expansion of employer responsibility in collective labour law has important implications for how companies manage subcontracting and outsourcing relationships. In the past, companies often assumed that maintaining a formal separation between the principal and the contractor would be sufficient to limit legal exposure. However, recent developments indicate that formal separation alone may not be enough if the principal retains significant control over the actual operation of the work.
In practice, this means that companies should not only review contractual terms but also examine how work is actually managed on site. Direct instructions to contractor employees, participation in personnel decisions, or involvement in setting wages or working hours may increase the risk that the principal will be treated as a responsible party in collective labour relations.
At the same time, companies should recognise that disputes involving contractor employees often cannot be resolved solely at the level of the contractor. Where the contractor lacks the authority or financial capacity to respond to union demands, negotiations may inevitably involve the principal, even if this is not formally required. In such situations, it becomes important to coordinate negotiation strategy between the principal and the contractor in advance.
This coordination should not be understood as creating joint employer status, but rather as a practical necessity in managing industrial relations risk. The principal and the contractor should ensure that their positions are aligned, that communication channels are clearly defined, and that decisions affecting working conditions are made in a consistent manner. Failure to coordinate may lead to conflicting statements, weakened bargaining positions, or findings that the principal effectively controls the contractor.
From a risk management perspective, it may in some cases be safer to maintain a genuinely independent contractor structure rather than a highly integrated outsourcing arrangement. Where the contractor has real managerial authority and economic independence, the likelihood of being treated as the responsible party in collective labour relations may be reduced. Conversely, where the contractor functions only as a nominal employer and most decisions are made by the principal, the risk of expanded liability becomes significantly higher.
7. Compliance Considerations for Multinational and Complex Corporate Structures
In global organisations, key decisions on staffing, compensation, performance evaluation, or restructuring are often made at the regional or headquarters level. While such arrangements may be efficient from a business perspective, they may create legal risk under Korean law if the entity formally designated as the employer appears to lack genuine decision-making authority. In the event of a dispute, unions or employees may argue that the entity exercising real influence over working conditions, rather than the entity that signed the employment contract, should bear responsibility in collective labour relations.
Accordingly, companies should review internal reporting lines, approval procedures, and decision-making structures to ensure that the legal employer retains sufficient authority over employment matters. Written policies, organisational charts, and actual practice should be consistent. If the formal employer appears to function only as an administrative entity while substantive decisions are made elsewhere, the risk of expanded employer responsibility increases.
Similar risks may arise in subcontracting arrangements where the contractor lacks genuine independence. Where a contractor is heavily dependent on a single principal, or has limited discretion in determining wages, staffing, or working conditions, it may be difficult to treat the contractor as an independent bargaining party. In such circumstances, unions may seek to involve the principal company directly in collective bargaining or labour disputes. Companies should therefore ensure not only formal contractual separation but also practical independence, including diversified business relationships and real managerial authority at the contractor level.
8. Conclusion
Korean labour law is gradually moving toward a broader concept of employer responsibility, particularly in the area of collective labour relations. Although the formal distinction between employer and non-employer remains, courts, labour authorities, and recent legislative discussions increasingly focus on which entity actually determines or substantially influences working conditions rather than which entity is named in the contract.
The developments associated with the Yellow Envelope Act should be understood in this context. They do not prohibit subcontracting or outsourcing, nor do they automatically create joint employment. However, they indicate that in collective labour disputes responsibility may extend to entities that exercise substantial and concrete influence over working conditions, even without a direct employment relationship.
For companies operating in Korea, this means that indirect employment structures must be reviewed not only under dispatch and subcontracting rules but also from the perspective of collective labour relations risk. Even where the legal structure itself is valid, a principal company may still become involved in bargaining, labour disputes, or unfair labour practice issues if it is regarded as exercising real control.
Effective risk management therefore requires more than formal contractual separation. Companies should ensure genuine independence of contractors, consistency between the legal structure and actual decision-making authority, and a carefully coordinated approach to labour relations in subcontracting and multi-entity arrangements.