Violation of the Fair Transactions in Subcontracting Act | The Supreme Court Holds That Social Insurance Premiums Must Also Be Included in the Subcontract Amount

This is the Supreme Court's determination on the scope of the subcontract portion amount in connection with a violation of the Fair Transactions in Subcontracting Act.

The defendant, a provincial governor, relied on the results of an audit by the Board of Audit and Inspection concerning public construction projects within the province and confirmed that several construction companies (hereinafter the plaintiffs), in the course of submitting subcontracting notification forms, had artificially reduced the "subcontract portion amount" so that the "subcontracting ratio" was recorded at 82 percent or higher.

Accordingly, the defendant governor issued administrative dispositions, including penalty surcharges, against the plaintiff construction companies.

The Board of Audit and Inspection determined that, in calculating the "subcontract portion amount," the construction companies had excluded or understated various cost items that should have been included, thereby artificially adjusting the reported subcontracting ratio to 82 percent or higher.

This was because it determined that, although the subcontracting ratio had to be 82 percent or higher under the Framework Act on the Construction Industry, the plaintiff construction companies had artificially reduced the subcontract portion amount and recorded a subcontracting ratio higher than the actual figure.

Accordingly, the defendant governor issued administrative dispositions, including the imposition of penalty surcharges, against the plaintiffs, and the dispute arose when the plaintiffs, refusing to accept those dispositions, filed a lawsuit seeking their revocation.

With respect to the violation of the Fair Transactions in Subcontracting Act, the lower court accepted the arguments of some plaintiffs but determined that the imposition of penalty surcharges was lawful for the majority.

The court determined that, because the plaintiffs had falsely recorded the subcontracting ratio as 82 percent or higher in their notification forms even though the actual ratio was below 82 percent, the penalty surcharge dispositions were lawful.

The subcontracting ratio refers to the ratio obtained by dividing the subcontract amount by the subcontract portion amount.

■ Plaintiff companies 1, 2, 4, and 6 and others: false notification found

When preparing their subcontracting notification forms, these plaintiffs omitted items such as indirect labor costs, the amount of payment guarantee certificates issued for construction equipment rental, general administrative expenses, other expenses, and profit from the subcontract portion amount.

The lower court found that these items were cost items that must be included in the subcontract portion amount under the Framework Act on the Construction Industry and its subordinate statutes, and that omitting them constituted a false notification that was intentional or that the plaintiffs could at least have sufficiently recognized.

It therefore held that the defendant governor's penalty surcharge dispositions against them were lawful.

■ Plaintiff company 5 and plaintiff company 3: part of the dispositions unlawful

By contrast, as to the social insurance premium items that plaintiff company 5 and plaintiff company 3 had excluded from their notifications, the lower court determined that "because those costs are items that are settled after the fact, they may be excluded from the subcontract portion amount."

It found that their actual subcontracting ratios were 82 percent or higher and ruled that the penalty surcharge dispositions against them were unlawful.

On the violation of the Fair Transactions in Subcontracting Act, the Supreme Court upheld part of the lower court's determination and reversed and remanded another part.

The core of the Supreme Court's judgment was the question of whether social insurance premiums must be included in the subcontract portion amount.

In connection with the violation of the Fair Transactions in Subcontracting Act, this was a precedent in which the Supreme Court set a clear standard on the issue of falsely reporting the subcontracting ratio.

It held that the matters subject to notification of a subcontract are not merely the total amount but include all items, such as the "subcontract portion amount," the "subcontract amount," and the "subcontracting ratio," and that each item must be calculated accurately.

It was a case confirming that the subcontract portion amount must include not only indirect labor costs, general administrative expenses, profit, and other expenses but also social insurance premiums, such as national pension and health insurance, and that omitting them may constitute a violation of the notification obligation.

Under this precedent, a construction company must, when giving notice of a subcontract, accurately calculate and record not only the simple amount but also the detailed items in accordance with the relevant statutes.

Such subcontracts are legally complex and are connected to administrative dispositions, so it can be helpful to respond with the assistance of an attorney experienced in this area.

Daeryun Law Firm LLP analyzes complex regulations such as the Framework Act on the Construction Industry, the lawfulness of administrative dispositions, and the criteria for imposing penalty surcharges, and provides strategies tailored to the situation.

🔗Attorneys handling corporate matters who have handled numerous subcontracting cases provide ▲establishing strategies for responding to administrative dispositions, ▲reviewing subcontracting notification forms and analyzing cost items, ▲representation in lawsuits to revoke penalty surcharges, and ▲follow-up advice to prevent recurrence.