Surcharge Cap for Repeat Violations of Subcontract and Franchise Acts Raised from 50% to 100%

Subcontract and Franchise Act Enforcement Ordinances Approved by Cabinet

Upper Limit on Additional Surcharges for Repeat Violations Raised from 50% to 100%

The Fair Trade Commission is significantly increasing the penalties for companies that habitually violate laws in the subcontracting and franchise business sectors. The agency will double the upper limit of additional surcharges imposed for repeated unfair practices, raising it from the current 50% to as much as 100%. In addition, key energy costs such as electricity and gas will be newly added to the scope of costs that must be reflected in subcontract payment adjustments, in addition to raw material prices.

Double Surcharges for Repeat Violators... Significant Strengthening of Subcontracting Safety Nets

The Fair Trade Commission announced on July 28, 2026, that the amended enforcement ordinances of the “Act on the Fairness of Subcontracting Transactions (Subcontract Act)” and the “Act on Fairness in Franchise Business Transactions (Franchise Act),” which include these measures, have been approved by the Cabinet.

The main focus of the new enforcement ordinances is to strengthen deterrence against habitual unfair business practices. The upper limit for additional surcharges, calculated based on the number of past violations, will rise from 50% to up to 100%. As a result, principal contractors or franchise headquarters that repeatedly violate the law will face much more severe financial penalties than before. This provision raising the surcharge cap will take effect immediately upon promulgation of the amended ordinance following presidential approval.

The safety net for small subcontractors in construction and manufacturing sites will also be significantly expanded. Previously, payment adjustment only covered increases in raw material prices, but this will be expanded to include costs of energy such as fuel, heat, and electricity, as defined under the “Energy Act.” When a principal contractor provides a written contract to a subcontractor, the baseline indicators for major energy costs and the time point for calculating fluctuation rates must now be explicitly stated.

The payment guarantee system for construction subcontracting will also become more rigorous. All previously allowed exemptions from payment guarantee obligations for the principal contractor—such as direct payment agreements with the project owner or use of electronic payment systems—will be eliminated. Except for small projects worth 10 million won or less, guarantees will become mandatory for all construction subcontracting transactions. However, even if the payment is increased during the course of construction, should the “remaining payment” amount to 10 million won or less, the principal contractor’s guarantee obligation will be relaxed.

Moreover, even if a subcontractor is the damaged party, the company will be eligible for a reward if it is the first to submit evidence of unlawful acts by the principal contractor related to other subcontractors. To further foster voluntary compliance, companies that use 100% of the standard subcontract agreements will now receive an increased deduction (2.5 points) from penalty points.

Preventing “Blind” Entrepreneurship... Disclosure of Private Equity Ownership and Penalty Fees Now Mandatory

In the franchise market, a major revision of disclosure statements is being pursued to ensure prospective entrepreneurs and franchisees have the right to information and to close information gaps. Under the amendment, franchise headquarters will be required to list in their disclosure statements whether they are owned by a private equity fund (PEF), the long-term viability of franchise outlets, and key details such as the average business penalty incurred if a contract is terminated early. The intent is to prevent losses for prospective entrepreneurs stemming from abrupt commission increases or short-term profit-driven management practices, which have recently become issues at franchise brands acquired by private equity funds.

Additionally, the frequency with which franchise companies must update changes in the number of stores and directly-operated outlets per region—a critical indicator for deciding whether to open a new franchise—will be changed from once per year to once every quarter. This will allow market information to be provided in near-real time. The table of contents for disclosure statements will also be reorganized to follow the franchise lifecycle (opening-operation-closure), and summaries will be newly introduced.

The amended enforcement ordinance of the Subcontract Act will take effect from August 11, 2026. The amendments to the Franchise Act enforcement ordinance, establishing changes to disclosure statement forms and structures, will be implemented from January 1, 2028, following system upgrades.

This content was produced with the assistance of AI translation services.