Service agreements should now be reviewed with Japan's fair subcontracting rules and Freelance Act in mind
Hello, this is Legal Agent.
Startups and growing companies rely heavily on outsourcing for development, design, and marketing operations handled by external partners. Engaging outside talent before hiring full-time staff is a practical choice for an early-stage company that wants to manage fixed costs while accessing specialized skills when needed.
Japan's fair subcontracting legislation, referred to in this article as the Toriteki Act, is the amended and renamed former Subcontract Act, with the changes effective from January 1, 2026. This reform expanded covered transactions and size criteria while updating prohibited conduct. Ordering companies should assess its requirements alongside the Freelance Act before issuing work orders.
Neither statute governs every outsourcing relationship. The Toriteki Act applies according to transaction category and thresholds such as capital and headcount. Meanwhile, obligations and prohibitions under the Freelance Act depend on whether the counterparty is a specified entrusted business operator and how the ordering business is structured. Checking compliance only after completing the work is unworkable in practice. Companies need to design their ordering procedures, purchase orders, and payment terms around both laws from the outset. This article outlines the essential points an ordering company, particularly a startup, should verify when reviewing service agreements.
Operational Reality Beyond Written Clauses
Reviewing a service agreement involves more than negotiating clauses on scope, fees, and intellectual property ownership. Under both the Toriteki Act and the Freelance Act, legal review must extend to how teams place orders once the contract is signed. Master agreements often state that individual tasks will be defined in separate purchase orders. In practice, however, teams frequently send instructions over Slack or email. Payment terms often mix monthly retainers with hourly rates, while inspection timing and revision rules remain vague. Such ambiguity creates operational friction later. An ordering company might seek to hold back payment during an unfinished inspection or reduce fees for subpar work.
Similarly, terminating an order midstream or demanding free revisions raises compliance questions under both statutes. When the original order is ill-defined, claiming that a deliverable failed expectations carries little weight. Specifying the scope, deliverable, and payment date clearly at the time of ordering protects the company's position.
Statutory Scope and Counterparty Status
Assessing compliance begins by confirming whether either statute applies. The Toriteki Act updates the former Subcontract Act to promote fairer commercial terms. It covers categories such as manufacturing subcontracting and the commissioned creation of information products, while introducing specified transport subcontracting and headcount-based criteria. Viewing it merely as the former Subcontract Act creates compliance risk. For software, websites, and advertising materials, companies must assess statutory rules for commissioned information products. When commissioning a product for internal use, the company must verify whether it produces similar items in its ordinary business alongside other statutory criteria.
In contrast, the category for commissioned services generally covers services that the ordering business supplies onward to third parties; services procured strictly for internal use generally fall outside this category. Outsourcing alone does not trigger the Toriteki Act.
The Freelance Act has been in force since November 1, 2024. It protects individuals without employees as well as corporations having a single representative, no other officers, and no employees. Any business outsourcing work to a covered provider must comply with the terms-disclosure duty, even if the ordering party is another freelancer. Broader obligations apply to specified ordering businesses, which comprise individuals with employees and corporations with at least two officers or with employees. Because the statutory definition of an employee differs under each law, businesses must evaluate workforce metrics separately. A single outsourcing transaction can fall under both statutes simultaneously.
Addressing these requirements solely within the contract text is insufficient. Before reviewing a service agreement, legal counsel should gather key operational facts from the business team: both parties' capital and workforce sizes; the counterparty's corporate or individual classification, assessing officer and employee status under the relevant law; the classification of work as deliverable-based or service-oriented; whether the engagement is one-off or recurring; whether formal purchase orders are issued; how compensation is structured; the existence of an inspection flow; the payment schedule; and the agreed framework for revisions or rework.
Mandatory Terms Disclosure with Every Order
Prompt disclosure of transaction terms at the time of ordering is a core requirement under both regimes. Under the Toriteki Act, a company placing a manufacturing subcontract or similar order must disclose terms in writing or by an authorized electronic method, and operational guidelines emphasize clarifying all conditions upon ordering. The Freelance Act requires immediate disclosure of terms in writing or electronically, including email and chat channels, whenever work is outsourced to a covered freelancer. A master agreement alone is insufficient where required order-specific terms remain unstated. A master contract sets broad baseline conditions, whereas actual project scope, deadlines, and compensation are fixed with each engagement. Purchase orders, individual statements of work, and chat instructions must maintain a clear written record of these agreed terms.
Sending a quick Slack message asking for a landing page by next week is common in startups, but omitting compensation, deadlines, or revision parameters leads to disputes. Even an order placed via Slack or email must set out all statutory items: the contracting parties, order date, work scope, fee, date and location of delivery or service provision, payment deadline, and the scheduled inspection completion date where applicable. If certain terms cannot be finalized immediately for legitimate operational reasons, the ordering company must state the concrete reason and a projected timeline, providing the missing details immediately once established.
Payment Deadlines and the Inspection Process
Payment clauses specifying month-end payment following completed inspection appear standard, but setting deadlines requires caution under both statutes. Under the Toriteki Act, the payment date must be set as short as practicable and within 60 days from receiving the work. If parties fail to fix a date or agree on a date exceeding 60 days, statutory rules automatically establish the deadline. Article 4 of the Freelance Act similarly requires specified ordering businesses to pay within 60 days of deliverable receipt or service performance, regardless of whether inspection has concluded.
A statutory exception applies to re-subcontracted work: subject to disclosure that the work is being re-subcontracted, the upstream client's name, and the upstream contractual payment date, payment may be set within 30 days of that upstream due date, rather than waiting for the actual transfer of funds. If the transaction also falls under the Toriteki Act, its independent deadline must still be honored. A standard month-end closing cycle remains permissible only if payment occurs within 60 days of receipt.
Inspection frequently creates compliance problems. Companies sometimes argue that a deliverable has not been received until formal inspection concludes. However, when a deliverable is already usable and only internal review is delayed, deferring payment on inspection grounds violates statutory standards. Web design and software development projects often experience review bottlenecks once multiple business stakeholders become involved. Ordering companies should therefore align contract inspection windows with realistic internal workflows, such as establishing a five-business-day inspection window with deemed acceptance upon silence. Payment conditions require joint review among business, legal, and accounting teams; leaving payment schedules solely to accounting risks overlooking discrepancies between delivery dates and statutory deadlines.
Restrictions on Fee Reductions, Redos, and Cancellations
Fee cuts, rework demands, and order cancellations represent common disputes when deliverables seem subpar, late, or misaligned with expectations. Fee deductions and revision requests must be checked against each law's scope and prohibitions. Flaws attributable to the contractor do not grant the ordering business unrestricted remedies; responses must correspond to agreed specifications and proportional fault. The Toriteki Act expressly prohibits fee reductions absent contractor fault, as well as modifications or rework without provider fault that unfairly prejudice the contractor's interests. Under Article 5 of the Freelance Act, statutory prohibitions apply to qualifying engagements of at least one month commissioned by specified ordering businesses, with contract renewals included in this duration.
While legitimate corrective requests remain permissible, shifting expenses arising from the client's changes or unrealistic timelines onto the contractor may violate these rules. Examples include demanding uncompensated rework after placing an order without defined specifications, docking pay for delivery delays caused by the client's own sluggish review, or canceling completed deliverables because internal strategies shifted. Under the Toriteki Act, deducting bank transfer fees from agreed compensation constitutes an unlawful fee reduction, regardless of mutual consent. Contractually agreed administrative system fees are likewise not automatically lawful. Because contract language alone cannot resolve these questions, companies must preserve contemporaneous records, including order explanations, inspection notes, and internal approvals.
Working Environment and Relationship Protections
Specified ordering businesses bear statutory responsibilities regarding recruitment accuracy and anti-harassment safeguards, irrespective of engagement duration. Upon request, providing accommodation for pregnancy and childbirth, as well as childcare or family caregiving, is mandatory for engagements lasting at least six months, and constitutes an effort duty for shorter engagements. Terminating or deciding not to renew a covered engagement of at least six months generally requires at least 30 days' advance notice, alongside prompt disclosure of reasons requested between notice and termination, subject to statutory exceptions. Calculate this six-month threshold under the applicable rules for aggregating renewed engagements.
Startups often integrate outside specialists closely into daily operations, adding them to internal Slack workspaces and task management platforms alongside regular employees. While efficient, this integration underscores the importance of managing workload boundaries, harassment prevention, and contract conclusion procedures. Treating weekend or evening responsiveness as routine, persistently assigning tasks outside the contracted scope, or ending contracts abruptly can trigger organizational and legal liability. The assumption that non-employment relationships permit unrestricted demands is untenable under the Freelance Act.
Unified Management of Contracts, Orders, and Invoices
Full compliance with the Toriteki Act and the Freelance Act demands more than refined contract drafting. Practical compliance depends on demonstrating the full workflow from initial order to final payment. Teams must be able to verify the commissioned scope and agreed fee, as well as the dates of delivery, inspection, and payment. When contracts sit in Google Drive, instructions pass through Slack, and invoices reside in separate accounting software, reconstructing events after a dispute arises requires substantial effort. External legal counsel evaluating only the master agreement lacks insight into day-to-day operational practices and cannot accurately gauge statutory risk. Centralizing contracts, purchase orders, and payment records within unified case folders enables external lawyers to assess operational realities much like an in-house legal team.
Practical Review Checklist for Service Agreements
- Is the counterparty an individual, a corporation, or a one-person company?
- Do the Toriteki Act or Freelance Act apply to the engagement?
- Is the relationship between the master agreement and individual orders well-defined?
- Does each order specify the work scope, fee, delivery date, deliverable, and payment deadline?
- Can the terms of orders issued via Slack or email be verified retrospectively?
- Is the contractual inspection period practical for internal reviewers?
- Is the payment date set within statutory limits from receipt or service provision, independently of inspection?
- Are the parameters and cost allocations for revisions and rework explicitly defined?
- Is cost responsibility allocated if the company cancels an order or changes specifications?
- Do fee deductions or system fees violate statutory prohibitions, and does the ordering company cover bank transfer fees under the Toriteki Act?
- Are established procedures in place for harassment complaints and contract termination?
- Are invoices, purchase orders, deliverables, and inspection records systematically archived?
Reviewing the Operational Ordering Decision
Retaining outside counsel solely to review contract text has inherent limitations. Operational disputes typically stem not from boilerplate legal language, but from internal decisions regarding who issues orders, who requests revisions, and how teams manage project boundaries. Consider a marketing department commissioning ad creative from a freelance designer: while the contract may cover scope, compensation, and confidentiality, failing to define the included revision rounds or allocation of costs when an ad is rejected invites conflict. Software development presents similar challenges when companies order entire systems before finalizing specifications. Unsettled requirements lead to accumulating change requests, and standard amendment clauses need to be supported by procedures for approving scope changes and estimating additional costs.
LegalAgent's legal outsourcing addresses the operational ordering decision itself rather than focusing narrowly on contract clauses. This approach reviews the internal checklists teams use prior to placing orders, refines purchase order templates, and aligns workflows closer to an embedded in-house legal team. Where business teams issue service orders frequently, legal teams may need a process for identifying which orders require individual review. Unmonitored workflows allow statutory liabilities under the Toriteki Act and Freelance Act to compound. Establishing standardized ordering workflows, practical checklists, and centralized recordkeeping from the start can help identify and address these risks.
Related LegalAgent services