Worker Dispatch and Disguised Contracting: When the Worker Dispatch Act Applies Even Though the Contract Says "Outsourcing"

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

The view that "the Worker Dispatch Act does not matter because the contract is titled a service agreement" is not accurate. The Worker Dispatch Act determines whether it applies based on how the work is actually performed on site, not on the formal name of the contract. In on-site SES (system engineering service) arrangements and service agreements, even if the contract describes the relationship as a quasi-mandate or a contract for work, the parties face the risk of being found to engage in so-called disguised contracting if the actual operation is held to constitute worker dispatch.

Article 2, item 1 of the Act on Securing the Proper Operation of Worker Dispatching Undertakings and Protecting Dispatched Workers (the Worker Dispatch Act) defines worker dispatch as "having workers employed by oneself engage in work for another person under that person's instructions, while maintaining the employment relationship." The statutory definition does not include the name or form of the contract. The central question is whether the company's employees work under the instructions and orders of the business partner. However clearly a contract states that it is outsourcing, if the reality matches this definition, it is treated as worker dispatch under the law.

Worker Dispatch Is Determined by Reality, Not by the Name of the Contract

The term "disguised contracting" itself does not appear in the text of the statute. In practice, it refers to a situation in which the contract takes the form of a contract for work or a service agreement, but the arrangement actually constitutes worker dispatch, in a way that avoids obtaining a worker dispatch business license and the legal obligations of a client receiving dispatched workers.

Guidance on this distinction is provided by Ministry of Labour Notice No. 37 of 1986 (Notice No. 37). Article 3 of the Notice expressly states that, even if an arrangement appears formally to satisfy the requirements of a contract for work, where it has been intentionally disguised to evade the regulations of the Worker Dispatch Act and the true purpose of the business is worker dispatch, the business operator cannot escape its responsibility as an operator of a worker dispatch business. Liability cannot be avoided merely by putting the contract into the right form.

Notice No. 37's Criteria for Distinguishing Contracts for Work from Worker Dispatch

Article 2 of Notice No. 37 provides that a business operator that has its own workers engage in work under the form of a contract for work is, in principle, treated as a worker dispatch business operator unless it meets each of the listed criteria. Substantively, the assessment turns on the following two points.

The first point is that the contractor directly uses the labor of the workers it employs. Specifically, the contractor itself must give the instructions on how the work is to be done and how it is evaluated, instructions on start and end times, breaks and days off, instructions on overtime, maintenance of workplace discipline, and decisions on and changes to staffing. If the client assigns tasks directly to on-site staff or manages their attendance and shifts, the arrangement falls outside this requirement.

The second point is that the contractor processes the contracted work as its own business, independently of the client. The requirements are that the contractor procures and bears all funds necessary for the work on its own responsibility, bears the legal responsibilities of a business operator, and either uses machinery and equipment it prepares at its own responsibility and expense or carries out the work based on its own planning or specialized skills and experience. If staff are stationed at the client's office, use only computers lent by the client, and simply carry out the tasks they are told to do, the arrangement is unlikely to be regarded as independent processing of a business.

On-site SES and development support engagements are where this distinction tends to blur. If the client's project manager gives instructions directly to individual staff members through a ticket management tool or similar, or directly assigns the day's work at a morning meeting, it is likely to be found that the client is the one giving instructions and orders. As for attendance management, if the client goes beyond confirming hours worked and approves leave or orders overtime, that can also give rise to suspicion of disguised contracting.

The Risk of Direct Employment When Disguised Contracting Is Found

Where an arrangement is operated as disguised contracting even though it is in reality worker dispatch, the deemed offer of employment system creates a serious legal risk.

Article 40-6, paragraph 1, item 5 of the Worker Dispatch Act provides that, where a client enters into a contract under the name of a contract for work or similar for the purpose of evading the application of the Worker Dispatch Act or related laws and receives the provision of dispatched services without setting out the statutory matters listed in the items of Article 26, paragraph 1 of the Act, the client is deemed, at that point, to have offered an employment contract to the dispatched worker. When this deeming provision applies, the client is treated as having offered direct employment on the same working conditions as those the worker had with the dispatching employer. If the worker accepts this offer, a direct employment contract is formed between the client and the contractor's staff member. This places a significant business burden on the client, which may have to directly employ outside staff with whom it believed it had no contractual relationship.

Under the proviso to paragraph 1 of the same Article, the provision does not apply where the client did not know, and was not negligent in not knowing, that the arrangement constituted unlawful dispatch. However, for a party in a position to know how work was actually being carried out on site, the bar for being found free of negligence is not low.

Points on Site Operations for Clients and Contractors to Check

To prevent disguised contracting, reviewing day-to-day operations on site comes before revising the wording of the contract.

The client should confirm that the contractor's site manager or team leader is actually in place and is handling day-to-day communication of instructions and progress management. It is important to check that the client's personnel are not giving instructions directly to the contractor's staff and are not directly assigning work at morning meetings or similar. The client should also review whether, beyond checking attendance records, it is approving leave or giving overtime instructions.

The contractor, for its part, should confirm that its site manager is not a manager in name only and that instructions from the client are not reaching its staff directly. Whether it prepares equipment at its own responsibility and whether it carries out the work based on its own skills and know-how are also points to check.

Where there is a gap between how work is actually performed on site and the position under the contract, it is advisable not to postpone revising operations or changing the contract structure, and to sort the matter out at an early stage.

We explain the clause-level review of SES agreements in Checkpoints for Reviewing SES Agreements, and the legal position of contracts for work and outsourcing in Service Agreements, the Torihiki Tekiseika Act and the Freelance Act.