Expansion of Subcontract Payment Adjustment Applications Through SME Cooperatives and Comprehensive Improvement of the Penalty Point System

Fair Trade Commission Announces Legislative Notice for Amendment to Subcontracting Act Enforcement Decree

[Sejong=Asia Economy Reporter Joo Sang-don] In the future, the scope of original contractors eligible to apply for subcontract payment adjustments through small and medium enterprise cooperatives will be expanded to "large corporations or all mid-sized enterprises." Previously, mid-sized enterprises were limited to those with annual sales of 300 billion KRW or more.

The Fair Trade Commission announced on the 26th that it has prepared a "Subcontracting Act Enforcement Decree Amendment" containing these details and will open it for public comment until May 6.

First, to activate subcontract payment adjustments through small and medium enterprise cooperatives, the application requirements have been relaxed. The current law restricts the eligible original contractors to "companies belonging to a mutual investment restriction business group or mid-sized enterprises with annual sales of 300 billion KRW or more," and the application period to "after 60 days have passed since the contract was signed." Accordingly, the scope of applicants who can apply through small and medium enterprise cooperatives has been expanded to "companies belonging to a mutual investment restriction business group or all mid-sized enterprises," and applications can be made "immediately without any elapsed period."

The penalty point system will also be improved. The current law imposes penalty points on businesses violating the law, and if accumulated beyond a certain level, sanctions such as requests to restrict participation in bids can be applied. Additionally, up to 3 points can be reduced for eight mitigation reasons, including the use of standard contracts.

The amendment deletes education completion, award receipt, and electronic bidding ratio items from the current penalty point mitigation reasons. It also relaxes or rationalizes mitigation requirements related to the use of standard contracts and direct payment of subcontract payments.

Along with this, new penalty point mitigation reasons related to damage relief have been introduced. If the original contractor voluntarily remedies the damages of the subcontractor, up to 50% of the penalty points for the relevant case can be reduced. Model subcontract transaction companies can reduce 3 points, excellent companies in the Fair Trade Compliance Program up to 2 points, and construction companies with a high disclosure rate of competitive bidding results (lowest bid amount, winning bid amount) up to 1 point.

The timing for judging penalty point mitigation reasons is unified to "the business year immediately preceding the most recent corrective action date." However, cases under appeal procedures or those where requests to restrict bid participation have already been made are, in principle, excluded from cumulative penalty point calculations. Also, penalty points imposed for reporting four acts, including unfair subcontract payment decisions, have been lowered from 5.1 points to 3.1 points. The scope of small and medium enterprises exempt from the Subcontracting Act has been raised from annual sales of less than 2 billion KRW to less than 3 billion KRW for manufacturing and repair consignment, and from construction capability evaluation amount less than 3 billion KRW to less than 4.5 billion KRW for construction consignment.

A Fair Trade Commission official said, "Once the enforcement decree amendment is finalized and implemented, it is expected to enhance the bargaining power of subcontractors through the subcontract payment adjustment system and induce businesses to voluntarily improve transaction practices through various incentives." He added, "During the public comment period, we will collect opinions from stakeholders and related ministries, and after regulatory review, legal affairs review, and Cabinet meeting, we plan to complete the amendment promptly."