The government unveiled a comprehensive plan to strengthen franchisees' rights and interests from startup through operation to closure. First, for startup, it will revise procedures so that franchisees receive up-to-date information such as franchise fees and interior expense, and for operation, it will raise franchisees' bargaining power vis-à-vis headquarters. For closure, if business losses persist due to reasons attributable to headquarters, the plan allows franchisees to terminate the contract without paying penalties even before the franchise term ends.
Chairperson Joo Byung-gi of the Fair Trade Commission held a "franchise industry on-site meeting" on the 23rd at the Mom's Touch Mapo Daeheung Station branch in Seoul. At the event, Joo said, "We have prepared a comprehensive plan to dramatically improve the structural imbalance between headquarters and franchisees across the entire transaction process, including franchise startup, operation, and closure."
Joo said, "Franchisees have weaker bargaining power than headquarters and face structural difficulties that make it hard to fully know the necessary information," adding, "Correcting this will be the first step to improving franchisees' rights and interests."
The plan is divided into the following: ▲ startup stage: strengthen startup safety ▲ operation stage: enhance franchisees' bargaining power and toughen law enforcement ▲ closure stage: ensure the autonomy of closures by franchisees at the limit.
For startup, the Fair Trade Commission will change the review system for the disclosure document from prior review to post review. A disclosure document is a paper that compiles information on the franchise business, listing burdens on franchise operators such as franchise fees, deposits, and interior expense.
Currently, disclosure documents are provided to prospective founders after prior review, but because the review takes a considerable time, the necessary information has not been provided in a timely manner. In response, the Fair Trade Commission will allow disclosure documents to be provided quickly under the responsibility of the franchise headquarters without prior review. At the same time, once provided to prospective founders, the commission will scrutinize them, and if the headquarters made false disclosures, it will impose strict sanctions.
The current upper limit for fines for false or unimplemented changes in the disclosure document is 10 million won. After switching to post review, the Fair Trade Commission plans to set the upper limit for fines higher than the current level. However, it will use fine-reduction provisions for simple erroneous disclosures.
It will also add items important to startup decision-making to the disclosure document. With this measure, items such as the equity ratio of private equity funds (PEFs) and the average business penalty burden when a franchise contract is terminated mid-term will be included in the disclosure document.
Furthermore, it will expand the obligation to operate a directly managed store, which is currently imposed only "at the time of new registration" of a disclosure document, to also apply "when changing business type." The obligation to operate a directly managed store is a system that allows registration of a disclosure document only if a directly managed store in the same business type as the franchise launch category has been operated for at least one year. With this change, the Fair Trade Commission will fundamentally block cases where a headquarters without business know-how circumvents the rules and launches a franchise by changing business type.
At the operation stage, the Fair Trade Commission will introduce a registration system for franchisee organizations. Although the current Franchise Business Act stipulates franchisees' rights to form organizations and to request collective consultations, headquarters have often refused consultation requests on the grounds that the franchisee organization lacks representativeness. In response, the commission will grant public representativeness by registering franchisee organizations that meet certain requirements with the commission. The requirements under discussion include membership by at least 30% of all franchisees.
To enhance the effectiveness of franchisee organizations' rights to request consultations, it will establish a basis for sanctions against headquarters that do not respond to consultations. However, to prevent abuse of consultation requests by franchisee organizations, it will limit the number of requests per organization, such as once per quarter. It will also create rules allowing refusal of consultations if there are legitimate reasons, such as when a franchisee organization makes repeated requests after already consulting with headquarters.
At the final closure stage, the right to terminate contracts will be codified to allow franchisees to end franchise contracts mid-term without excessive penalties. The Fair Trade Commission will specify detailed reasons and procedures in the Franchise Business Act to define the right to terminate, allowing franchisees to terminate contracts without penalty burdens in unavoidable cases. However, the grounds for termination will be strictly limited.
It will also improve "tacit contract renewal," under which a contract is automatically renewed unless a change in contract terms or an intention not to renew is indicated by 90 days before expiration. To prevent contracts from being renewed against a franchisee's intent, headquarters will be obligated to notify franchisees in advance of the scheduled contract renewal.
Joo said, "We ask for the support and cooperation of industry workers as we push forward with the comprehensive plan."