Various industries are facing a labour shortage in Japan as the inevitable consequences of a declining birthrate and ageing population become increasingly pronounced. This clearly poses a challenge for companies, since securing personnel is of crucial importance.
Yusaku Akasaki
Partner
Chuo Sogo
Osaka
Tel: +81 6 6676 8839
Email: akasaki_y@clo.gr.jp
When workers are hired based on an employment contract, the strict provisions of Japanese labour-related laws – such as regulations on working hours and stringent restrictions on dismissal – naturally apply. Consequently, to utilise personnel more flexibly, many companies consider staffing through arrangements such as outsourcing agreements rather than employment contracts.
Because Japan’s labour-related laws are employee-friendly, determining whether an individual qualifies as a “worker” under the Labour Standards Act (LSA) is of particular significance for companies. Even in contracts with freelancers, companies may bear various legal responsibilities under certain circumstances.
This article provides an overview of legal criteria governing the classification of an individual as a “worker” under the LSA, and also outlines the recently enacted Freelance Act.
Determining worker status
Whether an individual qualifies as a “worker” under the LSA – such as rules governing wages, working hours and related protections – is not determined by the form or title of the contract, whether it is styled as an employment or outsourcing agreement, subcontract or entrustment such as an outsourcing contract.
Takeshi Osawa
Partner
Chuo Sogo
Kyoto
Tel: +81 75 257 7411
Email: osawa_t@clo.gr.jp
Rather, such determination is made on a case-by-case basis, taking into account the contract’s substantive provisions, how services are provided, the nature of remuneration and other relevant factors.
The prevailing criteria are:
whether the labour is performed under the direction and supervision of another; and
whether remuneration is paid in consideration for the work or service under such supervision.
Relevant considerations for determining whether work is performed under supervision include: whether the individual in question has the freedom to accept or decline assignments and instructions; whether the performance of work is supervised; whether there are constraints on the workplace and working hours; and whether there are available replacement workers for the worker in question.
As for remuneration, the decisive question is whether compensation is recognised as consideration for the provision of services under another’s direction and supervision.
Additional factors may also determine the analysis, such as whether individuals bear business risks by providing their own equipment, whether individuals may work for other companies, and whether individuals enjoy the freedom to transact with other entities.
Ongoing policy discussions
Daigo Kawano
Associate
Chuo Sogo
Osaka
Tel: +81 6 6676 8839
Email: kawano_d@clo.gr.jp
As mentioned, merely labelling a contract as an outsourcing agreement does not preclude the possibility of it being deemed an employment contract in fact. Once the individual in question is considered a worker, the LSA will apply, including possible stringent restrictions on dismissal.
The Ministry of Health, Labour and Welfare has established a study group that is reconsidering criteria for defining a “worker” under the LSA, on the ground that the current framework may no longer be adequate amid evolving and diversifying work styles.
Any eventual reformulation of these criteria is likely to exert a profound impact on the Japanese labour market, and warrants close attention going forward.
The Freelance Act
Legislative background and enactment. The 2024 Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators, otherwise known as the Freelance Act, was enacted last year in response to diversification of work arrangements in Japan – most notably the rapid spread of freelance engagements, particularly in the digital economy where gig workers have become increasingly prevalent.
Freelancers frequently suffer from issues such as delayed or unpaid remuneration, and face disparities in bargaining power and access to information relative to corporate clients. The Freelance Act aims to provide a more secure working environment. Companies falling within the Freelance Act’s scope must therefore comply with its obligations and prohibitions.
Relevant entities and transactions. The Freelance Act applies mainly when a specified entrusting business operator (as described below) engages a specified entrusted business operator to perform entrusted business.
Business entrustment (article 2, par 3): This is defined as an enterprise entrusting the manufacture (including processing) of goods or creation of an information-based product to another enterprise for its business, or an enterprise entrusting the provision of services to another enterprise for its business (including having another enterprise provide services to itself).
Specified entrusted business operator (article 2, par 1): This category includes:
individuals who do not employ workers; and
corporations with only one representative, no other officers, and no employees. Employment of “workers” for this purpose refers to engaging persons expected to work at least 20 hours per week for a period exceeding 31 days. When sole proprietors employ only cohabiting relatives, these are not deemed to be employed workers. Notably, even “one-person corporations” fall within this category.
Entrusting business operator and specified entrusting business operator (articles 2, pars 5 and 6): An entrusting business operator is any business operator entrusting to a specified entrusted business operator. It should be noted that the question of whether a party is deemed to be outsourcing to a specified contracting entity is determined on a substantive basis; the mere fact that a party has entered into an outsourcing agreement with such an entity does not, in and of itself, suffice to classify it as a commissioning entity.
Furthermore, attention must be paid to the fact that even sole proprietors and so-called one-person corporations may fall within the scope of entrusting business operators. Whenever such an entrusting business operator employs workers or has multiple officers, it qualifies as a specified entrusting business operator. Unlike the Subcontracting Act, the Freelance Act applies even to entrusting business operators that are individuals or corporations with capital under JPY10 million (USD68,000).
Principal obligations of entrusting business operators. (a) Disclosure of transaction terms (article 3): These terms must be promptly disclosed, in writing or electronically, specifying the nature of the work, remuneration, and payment deadlines on outsourcing.
Payment deadlines (article 4): Payment must be made within 60 days of receiving performance from a specified contracting entity, or within 30 days of receiving payment from an upstream client in cases of re-outsourcing.
Prohibited practices (article 5): In relation to outsourcing lasting one month or longer, specified entrusting business operators are prohibited from:
i. Refusing acceptance without fault attributable to the specified entrusting business operator;
ii. Reducing remuneration without cause attributable to the specified entrusting business operator;
iii. Unjustly stipulating remuneration markedly below prevailing market rates;
iv. Forcing the purchase of goods or use of services without legitimate reason; and
v. Engaging in any other acts that unjustly harm the specified entrusted business operator’s interests.
Improvement of working environment. specified entrusting business operators must also:
Ensure accurate recruitment information (article 12): Ensure that recruitment information is accurate and up to date, refraining from any false or misleading representations;
Consider balancing childcare and nursing care (for contracts of six months or longer) (article 13): In the case of outsourcing arrangements lasting six months or more (including those extended by renewal beyond six months), if a specified entrusting business operator requests consideration for balancing work with childcare or nursing care responsibilities, appropriate accommodation must be made;
Establish measures against harassment (article 14): Specified entrusting business operators are obliged to establish systems for consultation and support addressing harassment directed at specified entrusting business operators; and
Give advance notice of termination or non-renewal (contracts of six
months or longer) (article 16): Where an outsourcing arrangement continues for six months or longer, any ter-mination or non-renewal must, in principle, be preceded by at least 30 days’ prior notice.
Conclusion
The utilisation of human resources is indispensable to conducting business. Companies operating in Japan must inevitably secure personnel in Japan. While reliance on outsourcing contracts may present difficulties in a seller’s labour market, the need for flexibility in responding to fluctuations in business demand continues to motivate companies to consider such arrangements.
Even where outsourcing contracts are validly maintained, companies must be aware of their obligations under the Freelance Act, including the duty to improve working conditions.
CHUO SOGO LPC
Osaka Dojimahama Tower 15th Floor
1-1-27 Dojimahama, Kita-ku
Osaka, 530-0004 Japan
Tel: +81 6 6676 8834
Fax: +81 6 6676 8839
www.clo.jp/english
AloJapan.com