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This study examines the relationship between internal labour markets (ILMs) and the transition from temporary to permanent employment, particularly following the legislative changes regarding the use of temporary workers in Korea. We test our research model based on data gathered during two different periods from 619 and 616 Korean companies respectively. The results show that ILMs help companies turn temporary employees into permanent ones. Furthermore, environmental dynamism increases the need for temporary workers, which prohibits the transition from temporary to permanent employment, particularly when seniority-based pay is tightly implemented within a firm. The effects of ILMs on the transition from temporary to permanent employment become pronounced as companies internalize institutional changes. The current study demonstrates that the features of the employment system shape and establish organizational norms and traditions and play a critical role in achieving the intended effects of institutional change.