Considerations and Efficiency Measures for the Conversion of Delegated Contract Workers to Regular Employees

[HR Insight October 2020 Issue]

Labor Attorney / Consultant Choi Jung-wook

In 2017, President Moon Jae In pledged to usher in an era of zero non-regular workers during his term, and by the end of June 2020, 94.2% of the non-regular workers in the public sector had been converted to regular positions. With this, the first task of converting non-regular workers in the public sector into regular employees appears to have been settled, and the next task will likely be the establishment of systems and the development of detailed personnel standards to improve the quality of employment for those being converted. However, judging from the social conflict that followed the decision in June to regularize the security screening personnel at Incheon International Airport Corporation, it is expected that the path to carrying out the following tasks will not be entirely smooth.

After many twists and turns, the public sector has achieved tangible results, so it now appears that the government will focus its attention and resources on the regularization of non-regular workers in the private sector. As a result, the process of regularizing workers in the private sector may take on different forms, whereas in the public sector regularization mainly targeted fixed-term workers and workers employed by dispatch and service agencies, the discussion of regularizing workers in the private sector tends to focus on individual self-employed workers who perform their duties under so-called special-type employment contracts.

Due to technological advances, intensified competition among companies, diversification of consumer platforms, and changing job seekers’ perceptions of occupations, the demand for self-employed workers has increased across various industries such as finance, services, construction, manufacturing, and distribution due to technical, economic, and socio-cultural factors. As a result, the number of workers in special employment forms is estimated to reach at least 1.66 million (Korea Labor Institute), and some even estimate it to be around 2.5 million.

However, despite the emergence of new forms of employment, Korea’s labor law system has failed to regulate them comprehensively, and as a result the government protects them from a policy standpoint, such as through the application of the four major social insurances, while courts recognize the employee status of special-type workers and make up for the legal gaps. There have been cases where workers’ status under the Labor Union Act was recognized for golf caddies, home tutoring teachers, and door-to-door salespeople for rental companies, and more recently, cases where workers’ status was also recognized under the Labor Standards Act for department store sales clerks, insurance solicitors, and home appliance installation/after-sales service technicians.

This trend suggests that the private sector, which utilizes contract-based delegated workers, needs to proactively address the issue of regularization. This paper focuses on cases in which the private sector converts delegated contract workers into regular employees, and discusses various issues to consider during the conversion process as well as measures to improve internal efficiency after the conversion.

Issues to Consider in the Process of Regularization

The following are the aspects that should be taken into consideration in the process of converting non-regular workers in the private sector into regular employees.

Decision of the employer

When directly employing a contract employee, determining the subject of employment must be the foremost issue to be resolved. There are two main ways to determine the employer: ① the head office directly entering into the employment contract, and ② entering into the employment contract through the establishment of a subsidiary. If the headquarters directly enters into an employment contract, there may be (1) a plan to integrate job categories so that converted workers and existing regular workers operate under the same system, and (2) a plan to separate job categories so that converted workers operate separately.

When making decisions regarding the employer, the nature and difficulty of the tasks delegated workers have performed, their contribution to the organization, and the ease of producing results should be considered first. For example, if the job characteristics of converted employees differ from those of headquarters employees, it would be effective for performance creation to separate the subsidiary and operate it independently.

When establishing a subsidiary, it is also necessary to review matters such as the company’s articles of incorporation and board regulations, issues related to the transfer of permits and licenses, approval of self-dealing transactions, regulations under the Fair Trade Act, and taxation on preferential allocation of work under the tax law.

Resolution of Disputes Related to Statutory Allowances

If there is a dispute regarding the worker status of delegated contract workers under the Labor Standards Act and the payment of statutory allowances, it must be resolved and regular employment should be pursued. Recently, after receiving a court ruling that a delegated contract worker qualifies as an employee under the Labor Standards Act, Company A decided in labor-management agreement to directly employ the delegated contract worker at its headquarters and pay hundreds of billions of won in unpaid statutory allowances and severance pay. However, except in special cases where worker status was recognized before direct employment, free occupational income earners under a discretionary contract are not subject to the Labor Standards Act. Therefore, to prevent disputes, it should be made clear that the company is not obligated to pay statutory allowances and severance pay corresponding to the period of the discretionary contract upon conversion to a regular employee.

Establish R&R between conversion workers and existing workers

The division of duties, roles, and responsibilities between the converted workers and the existing workers must be clearly established. Since the scope of duties serves as the standard for determining working conditions, the determination of the scope of work must precede it.

If the duties of converted workers are clearly separated from those of the existing workers, working conditions may be set differently from those of the existing regular employees. However, even if converted workers perform part of the duties of the existing regular employees, causing overlapping R&R, if the working conditions are set differently, there is a possibility of an issue of equal treatment under the Labor Standards Act, so caution is required.

Design of Working Conditions

1. The wage system must be designed to reflect the job characteristics of workers undergoing conversion. For example, if the job of conversion workers has a strong sales-oriented nature, it is desirable for the wage system to be composed mainly of performance-based incentives to motivate them in sales. However, when the tasks of conversion workers are routine and repetitive, and know-how accumulates as years of service increase, it is preferable to design a basic wage table first, then establish a system that determines wages based on competency evaluation reflecting years of service and the corresponding competency grade.

② Welfare benefits shall be provided at the same level as that of regular employees, except in special circumstances. This is because welfare benefits are more strongly provided for the purpose of stabilizing life and enhancing organizational commitment than as compensation for labor.

③ The <rank and promotion system> may be designed with a single rank or with multiple ranks depending on the nature of the job, but even if it is designed with a single rank, opportunities for promotion through titles must be provided to enhance a sense of recognition within the organization. In the case of Corporation B, there was no separate promotion system for converted public officials, and the title system was unclear, so the converted workers were not given the impression that they were being recognized and working within the organization. Although it may seem trivial, dissatisfaction with such systems can build up and escalate into labor-management conflict, so the initial design of these systems is important.

Ways to Improve Productivity After Regularization

Since the regularization of non-regular workers has made it impossible to utilize workforce flexibility, productivity must be improved through changes in management paradigms, redesigning work processes, and addressing the grievances of workers undergoing transition.

The Need for Discussion on Improving Productivity

Before regularizing, companies’ workforce utilization models were to respond to rapidly changing business environments based on the flexibility of employing non-regular workers. However, since regularizing workers has made it impossible to utilize workforce flexibility any longer, we must seek other measures to cope with economic fluctuations, and for that, the first thing that should be discussed is how to improve organizational productivity.

Change in the Management Paradigm

Considering issues such as illegal dispatch and disguised subcontracting, the question of worker status under the Labor Standards Act, and discrimination against non-regular workers, the administrators avoided direct oversight and supervision of delegated contract workers. However, once employees are converted to regular positions, direct command and orders become inevitable, and management techniques to enhance motivation have become necessary.

The role of the HR team is important for shifting the management paradigm. The head office HR team should establish and distribute a management manual to provide guidance to managers, and the training team should plan and conduct training on management methods. It may also be considered to add labor management indicators to the position KPI.

Review and redesign business processes

Since the work processes established in the early stages are difficult to correct later due to employees’ inertia, inefficiencies that occurred during the execution of existing outsourced tasks in the early transition period must be identified and eliminated, and new work processes should be designed.

To improve Company C’s operational efficiency, McKinsey analyzed existing operations, identified wasteful tasks, and worked to improve them. First, individual tasks were classified according to the degree of correlation with customer value, and then the time and content of each individual task were entered into the computerized system. From the perspective of creating customer value, they identified the proportion, content, and time of tasks and derived a list of unnecessary tasks unrelated to customer value. Finally, through team meetings, they eliminated wasteful tasks and improved inefficiency. In this way, it is also possible to redesign business processes from the perspective of customer value.

Establish a channel to collect the grievances of workers transitioning to new employment

There are significant differences between the regular employment working arrangement and the working arrangement under the discretionary contract system in terms of working hours and location, the content and method of work, and the scope of discretion, so the converted workers are likely to face difficulties at work. There is also a possibility that internal unfairness may be perceived if converted workers are operated separately under different job categories. Labor-management conflict can be prevented only by bringing the aforementioned grievances to light and addressing them, so a communication channel for gathering the difficulties and complaints of converted workers is an essential element in the early stages of regular employment conversion.

The communication channel should be designed as an official channel to encourage active participation from stakeholders and transparent disclosure of information, and it may also be operated by utilizing a labor-management council or by forming and operating an informal consultative body.

Development into a relational contract model

Industrial psychologist Rousseau, D. M., introduced the concept of the Psychological Contract, which refers to the implicit expectation of the reciprocal exchange relationship between an organization and its members, and explains the forms of the transactional contract, which emphasizes only the fulfillment of rights and obligations under the mutual employment contract, and the relational contract, which places greater importance not only on the rights and obligations under the employment contract but also on human relational aspects such as trust and support. Until now, companies have operated delegated contract workers under a transactional contract form and paid fees as compensation for the labor they received.

Resolution of Disputes Related to Statutory Allowances

If there is a dispute regarding the worker status of delegated contract workers under the Labor Standards Act and the payment of statutory allowances, it must be resolved and regular employment should be pursued. Recently, after receiving a court ruling that a delegated contract worker qualifies as an employee under the Labor Standards Act, Company A decided in labor-management agreement to directly employ the delegated contract worker at its headquarters and pay hundreds of billions of won in unpaid statutory allowances and severance pay. However, except in special cases where worker status was recognized before direct employment, free occupational income earners under a discretionary contract are not subject to the Labor Standards Act. Therefore, to prevent disputes, it should be made clear that the company is not obligated to pay statutory allowances and severance pay corresponding to the period of the discretionary contract upon conversion to a regular employee.

Establish R&R between conversion workers and existing workers

The division of duties, roles, and responsibilities between the converted workers and the existing workers must be clearly established. Since the scope of duties serves as the standard for determining working conditions, the determination of the scope of work must precede it.

If the duties of converted workers are clearly separated from those of the existing workers, working conditions may be set differently from those of the existing regular employees. However, even if converted workers perform part of the duties of the existing regular employees, causing overlapping R&R, if the working conditions are set differently, there is a possibility of an issue of equal treatment under the Labor Standards Act, so caution is required.

Design of Working Conditions

1. The wage system must be designed to reflect the job characteristics of workers undergoing conversion. For example, if the job of conversion workers has a strong sales-oriented nature, it is desirable for the wage system to be composed mainly of performance-based incentives to motivate them in sales. However, when the tasks of conversion workers are routine and repetitive, and know-how accumulates as years of service increase, it is preferable to design a basic wage table first, then establish a system that determines wages based on competency evaluation reflecting years of service and the corresponding competency grade.

② Welfare benefits shall be provided at the same level as that of regular employees, except in special circumstances. This is because welfare benefits are more strongly provided for the purpose of stabilizing life and enhancing organizational commitment than as compensation for labor.

③ The <rank and promotion system> may be designed with a single rank or with multiple ranks depending on the nature of the job, but even if it is designed with a single rank, opportunities for promotion through titles must be provided to enhance a sense of recognition within the organization. In the case of Corporation B, there was no separate promotion system for converted public officials, and the title system was unclear, so the converted workers were not given the impression that they were being recognized and working within the organization. Although it may seem trivial, dissatisfaction with such systems can build up and escalate into labor-management conflict, so the initial design of these systems is important.

Ways to Improve Productivity After Regularization

Since the regularization of non-regular workers has made it impossible to utilize workforce flexibility, productivity must be improved through changes in management paradigms, redesigning work processes, and addressing the grievances of workers undergoing transition.

The Need for Discussion on Improving Productivity

Before regularizing, companies’ workforce utilization models were to respond to rapidly changing business environments based on the flexibility of employing non-regular workers. However, since regularizing workers has made it impossible to utilize workforce flexibility any longer, we must seek other measures to cope with economic fluctuations, and for that, the first thing that should be discussed is how to improve organizational productivity.

Change in the Management Paradigm

Considering issues such as illegal dispatch and disguised subcontracting, the question of worker status under the Labor Standards Act, and discrimination against non-regular workers, the administrators avoided direct oversight and supervision of delegated contract workers. However, once employees are converted to regular positions, direct command and orders become inevitable, and management techniques to enhance motivation have become necessary.

The role of the HR team is important for shifting the management paradigm. The head office HR team should establish and distribute a management manual to provide guidance to managers, and the training team should plan and conduct training on management methods. It may also be considered to add labor management indicators to the position KPI.

Review and redesign business processes

Since the work processes established in the early stages are difficult to correct later due to employees’ inertia, inefficiencies that occurred during the execution of existing outsourced tasks in the early transition period must be identified and eliminated, and new work processes should be designed.

To improve Company C’s operational efficiency, McKinsey analyzed existing operations, identified wasteful tasks, and worked to improve them. First, individual tasks were classified according to the degree of correlation with customer value, and then the time and content of each individual task were entered into the computerized system. From the perspective of creating customer value, they identified the proportion, content, and time of tasks and derived a list of unnecessary tasks unrelated to customer value. Finally, through team meetings, they eliminated wasteful tasks and improved inefficiency. In this way, it is also possible to redesign business processes from the perspective of customer value.

Establish a channel to collect the grievances of workers transitioning to new employment

There are significant differences between the regular employment working arrangement and the working arrangement under the discretionary contract system in terms of working hours and location, the content and method of work, and the scope of discretion, so the converted workers are likely to face difficulties at work. There is also a possibility that internal unfairness may be perceived if converted workers are operated separately under different job categories. Labor-management conflict can be prevented only by bringing the aforementioned grievances to light and addressing them, so a communication channel for gathering the difficulties and complaints of converted workers is an essential element in the early stages of regular employment conversion.

The communication channel should be designed as an official channel to encourage active participation from stakeholders and transparent disclosure of information, and it may also be operated by utilizing a labor-management council or by forming and operating an informal consultative body.

Development into a relational contract model

Industrial psychologist Rousseau, D. M., introduced the concept of the Psychological Contract, which refers to the implicit expectation of the reciprocal exchange relationship between an organization and its members, and explains the forms of the transactional contract, which emphasizes only the fulfillment of rights and obligations under the mutual employment contract, and the relational contract, which places greater importance not only on the rights and obligations under the employment contract but also on human relational aspects such as trust and support. Until now, companies have operated delegated contract workers under a transactional contract form and paid fees as compensation for the labor they received.