The Korea Fair Trade Commission is tightening sanctions against so-called "gapjil" — abusive business practices — in the subcontracting, franchise and dealership sectors. The commission will raise the base rate used to calculate fines while adding surcharges of up to 100% for companies with repeat violations over the past five years.

The Fair Trade Commission said Tuesday it is putting into effect revised fine guidelines under the Subcontracting Act, the Franchise Business Act and the Dealership Act.

Franchise restaurant signs line a street in Myeong-dong, Jung-gu, Seoul. [Herald DB]
Franchise restaurant signs line a street in Myeong-dong, Jung-gu, Seoul. [Herald DB]

The core changes raise the base rates and reference amounts used to calculate fines and expand the severity-assessment framework from three tiers to four.

Fines are calculated by applying a base rate — which reflects the nature and degree of the violation — to a statutory reference amount; where that reference amount is difficult to determine, a fixed reference amount is used instead. The commission said the revisions address longstanding criticism that previous base rates were too low to serve as an effective deterrent.

Under the Subcontracting Act and the Dealership Act, the base rate applied to the most serious violations rises from 60–80% to 90–100%. The maximum base rate under the Franchise Business Act is also adjusted upward, from 1.6–2.0% to 1.8–2.0%.

The maximum reference amounts are raised as well. Under the Subcontracting Act, the ceiling goes from a range of 900 million to 2 billion won ($645,000 to $1.4 million) to a range of 1.8 billion to 2 billion won. Under the Franchise Business Act and the Dealership Act, the ceiling rises from a range of 400 million to 500 million won to a range of 450 million to 500 million won.

The commission also revised the severity-assessment criteria for the franchise and dealership sectors. For franchise businesses, the sales benchmark used to gauge the size of a franchisor will now be measured as of the fiscal year immediately before the violation ended, rather than the year before it began. For dealerships, the type of violation and the supplier's size have been added as assessment factors to allow more precise evaluation of the degree of wrongdoing.

Penalties for repeat offenders are also being stiffened. For a company with one prior violation in the past five years and a weighted score of two points, the surcharge range expands from 10–20% to 40–50%.

For companies with four or more violations over the same period and a weighted score of seven points or higher, the surcharge range rises from 60–80% to 90–100%.

Sanctions for retaliation against business partners who file complaints or request dispute mediation are being strengthened as well. In the dealership sector, the maximum surcharge for retaliatory conduct rises from 20% to 30%. The franchise sector, which previously had no separate provision, will now be subject to an additional surcharge of up to 30% for such conduct.

At the same time, the conditions for fine reductions are becoming stricter. Previously, companies could receive a reduction of up to 20% for cooperating with either an investigation or a review hearing. Going forward, a reduction of up to 10% will be available only when a company cooperates with both. A separate provision in the franchise sector allowing reductions of up to 10% for minor negligence is also being eliminated.

"These revisions will help deter violations by businesses in the subcontracting, franchise and dealership sectors and establish a fairer trading order," the commission said.


y2k@heraldcorp.com