Major Overhaul of Illegal Subcontracting Regulations... How Has the Enforcement Decree Amendment Changed the Legal Standards on Construction Sites?

- Legal column by Kim Hyung-jin, attorney of Daeryun LLC (Limited)

Recently, as the Ministry of Land, Infrastructure and Transport resolved an amendment to the "Enforcement Decree of the Framework Act on the Construction Industry" at a cabinet meeting, regulation of illegal subcontracting on construction sites has been further strengthened. The core of this amendment lies in △raising the standards for business suspension and penalty surcharge imposition for illegal subcontracting △strengthening the direct disposition authority of the Minister of Land, Infrastructure and Transport and the heads of regional construction management administrations △enhancing the effectiveness of sanctions by reorganizing the reporting reward system. Specifically, the business suspension standard rose from the previous 4–8 months to 8 months–1 year, and the penalty surcharge rate rose significantly from 4–30% of the subcontract amount to 24–30% respectively (Article 80(1), Attached Table 6). Accordingly, the possibility of much heavier administrative dispositions being imposed than before when illegal subcontracting is caught has increased, and the need for construction businesses to manage risk proactively has also grown.

What is particularly noteworthy is the speed of the enforcement system following the reorganization of the disposition enforcement structure. Previously, even when the Ministry of Land, Infrastructure and Transport caught illegal subcontracting, it had to request a disposition from the competent local government, causing delays in administrative enforcement. However, with this amendment, as the Minister of Land, Infrastructure and Transport and the heads of regional construction management administrations can now issue administrative dispositions directly under delegated authority, the structure has changed so that the procedure from detection to disposition is carried out swiftly.

As powerful sanctions are enforced without delay, even a single violation can deal a serious blow to a company's management. To prepare against unlawful dispositions in which the administrative agency deviates from or abuses its discretion by misunderstanding or entirely failing to consider grounds for mitigating the business suspension (Supreme Court ruling 2014Du45956, etc.), construction companies must systematically manage, on a routine basis, materials that can objectively prove the circumstances of contract conclusion and the details of construction performance from the early stage of an investigation.

In addition, the mechanism for inducing internal whistleblowing has also been dramatically strengthened. The misconduct reporting reward system based on Article 86-2 of the Framework Act on the Construction Industry has been changed through this amendment so that the reward cap is entirely abolished and the reward is calculated within a range of up to 30% of the imposed penalty surcharge. For example, if a penalty surcharge of 1 billion won is imposed, the reporter can receive a reward of up to 300 million won. As the requirements for paying rewards are eased and the expected returns grow, the possibility of a surprise investigation being launched through internal whistleblowing is also expected to become much higher than before. As the potential internal whistleblowing risk within companies has substantially increased, construction businesses must prepare a self-inspection system in advance and always secure supporting materials that can objectively explain the facts during an investigation.

Even amid the government's strong regulatory stance, the "substance-over-form principle" of the administrative agency and the judiciary in judging illegal subcontracting is applied consistently. The Supreme Court judges illegality by comprehensively considering all circumstances—the actual performer of the construction, the location of command/supervision authority, the party bearing labor and material costs, the object of the construction, and the circumstances of contract division—regardless of the name or form of the contract (Supreme Court ruling 2018Do3821).

It also holds that when a contract is concluded to collectively subcontract all or most of the main part of a construction project that was contracted for, the offense has already been completed at that point (Supreme Court ruling 2021Do15681). In the current situation where administrative disposition standards have been strengthened, since whether the actual construction structure and contract content match is more important than cleverly dressing up the contract structure on paper, it is essential to manage documents and on-site operations so that they substantively correspond.

Amid this harsher regulatory environment, an institutional exit through which a company can voluntarily correct an unlawful state has also been newly established. Grounds have been created to mitigate administrative dispositions when a company voluntarily reports the fact of illegal subcontracting and submits a corrective plan. If the possibility of illegality is confirmed during internal inspection, actively utilizing the voluntary reporting system after swiftly reviewing the facts and legal issues can also be an effective response measure.

As a result, this enforcement decree amendment requires that companies manage not merely the drafting of paper contracts but also on-site operation materials—work logs, personnel access records, and progress payment execution details—so that they exactly match the actual construction content. Meticulously reviewing whether restriction provisions are complied with before concluding a subcontract and building a proactive compliance system is the surest way to protect a company from judicial risk.

Reporter Lee Dong-oh (canon35@mt.co.kr)

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