Case law developments on outsourcing and contract labour in Indonesia and Korea

The ability to use atypical workers through outsourcing or labour hire as a device for employers to avoid employment costs and liabilities is becoming more limited in Asia through increased regulation and also through case law developments.

In Indonesia, outsourcing has been restricted by the Constitutional Court declaring the use of fixed term employment agreements by outsourcing providers as unconstitutional unless workers employment rights are guaranteed upon a change of service provider. The Korean Supreme Court has recently held that the common practice of ‘in-house sub-contracting’ was not a lawful means of avoiding employees’ entitlements to employment protection under Korean law.

Indonesia: outsourcing restrictions

In Constitutional Court Case No.27/PUU-IX/2011 it was claimed that the use of fixed term employment agreements by outsourcing service providers violated the Indonesian Constitution.

According to the petitioner in the case, the use of outsourcing and fixed term employment agreements effectively provided a means of avoiding the provision of employee benefits under Law No. 13 of 2003 Regarding Manpower (Manpower Law). As a result, it was claimed that this amounted to a breach of the constitutional rights to work and receive decent and fair benefits.

The court held upheld the claim but only as far as outsourcing arrangements were concerned. The courts findings have now been confirmed in a Circular Letter issued by the Director General of Industrial Relations and Labour Social Security dated 20 January 2012, which makes clear that an outsourcing company employer in Indonesia must either use:

• a permanent contract for its employees, or
• a fixed term employment agreement but only if it protects employees’ rights where the work is ongoing but there is a change in outsourcing service provider (ie the incoming service provider is obliged to continue employing the outgoing service providers employees).

Failure to include this protection in a fixed term agreement for workers involved in outsourcing projects can result in the engaging company being held to be the actual employer of the employees under a permanent employment agreement.

Korea: restrictions on the use of ‘in-house sub-contracting’

In Korea, the use of ‘worker dispatch’ is limited to certain industries and occupations which require professional knowledge and skills. It is not permitted in the manufacturing industry.

As a means of avoiding this prohibition, many manufacturing employers enter into indirect employment arrangements where workers are actually working for a contracting company but they have their employment contract with a subcontracting company, otherwise known as ‘in-house sub-contracting work’.

Earlier this year, the Supreme Court in Korea held that an ‘in-house sub-contractor’ worker, Mr Choi Byung-seung (CB) should, in fact, be regarded as an employee of Hyundai Motor Company (HMC) where he worked alongside HMC regular employees even though his employment contract was with the sub-contracting company. According to the court, the reality was that CB had been illegally dispatched to HMC. The court ignored the fact that worker dispatch was not permitted in the manufacturing industry and went on to apply employment protection rules for dispatched workers which require that, after two years, they are considered to be regular employees of the contracting company. As CB had worked for over two years with HMC, he was held to be a permanent employee.

Implications for employers

Employers should review their atypical working arrangements and ensure that they remain compliant with both local case law developments and legislative requirements. If not, they may be forced to adopt direct employment relationships with individual workers in any event. This should be carefully managed to minimise legal risks and associated costs.

This article was written by Celia Yuen and Lucy Twomey.