Explaining the Penalties for Violating the New Freelancer Law Based on Three Case Studies

The Freelance New Law, enacted in Reiwa 6 (2024), has garnered significant attention as a transformative measure for the working styles of freelancers. This legislation aims to prohibit unfair treatment of freelancers and create a more conducive working environment for them. However, what penalties can companies face if they violate this new law?

This article will discuss the main provisions of the Freelance New Law and the specific penalties that can be imposed, drawing on examples from recommendations made by the Fair Trade Commission just before the law’s enforcement, based on the Subcontract Act. This is essential reading for companies that engage freelancers.

Overview of the New Freelance Law in Japan

The New Freelance Law (Act on Ensuring the Proper Operation of Contracts Involving Specific Contracted Business Operators) is a Japanese law designed to create a secure working environment for freelancers by clearly defining contract terms and transaction rules. The New Freelance Law stipulates the following:

Reference: Overview of the Act on Ensuring the Proper Operation of Contracts Involving Specific Contracted Business Operators

Parties and Transactions Defined Under the New Freelance Law

The parties subject to the New Freelance Law are defined as follows:

• Specific Contracted Business Operators: Business operators who do not employ workers and undertake outsourced work.
• Specific Business Outsourcing Operators: Companies with employees that outsource work to Specific Contracted Business Operators.

The term “business outsourcing” here refers to the entrustment of business purposes such as manufacturing goods, creating information products, and providing services.

Main Regulatory Provisions of the New Freelance Law

The regulatory content of the New Freelance Law can be broadly divided into the following three points:

1. Obligation to Clarify Transaction Terms (Article 3)
   Mandates the prior clarification of contract content, remuneration, payment deadlines, etc., in writing or electronically.
2. Obligation to Pay Remuneration Within 60 Days (Article 4)
   Requires that remuneration be paid within 60 days of completing the work. In the case of re-outsourcing, payment must be made within 30 days of receipt from the original contractor.
3. Prohibition of Unfair Practices
   • Prohibits unjustified reduction of remuneration, refusal of receipt, or returns.
   • Regulates unfairly low remuneration settings and unreasonable change requests.
   • Also prohibits harassment and illegitimate demands.

Obligation to Maintain a Working Environment for Specific Contracted Workers

The New Freelance Law also imposes an obligation on companies to maintain a working environment for freelancers. The main contents are as follows:

• Prohibits false advertising and requires the provision of accurate recruitment information.
• Considers the balance between childcare/caregiving and work, taking necessary measures as needed.
• Mandates the establishment of consultation services and internal systems to prevent harassment.
• Requires a 30-day notice in the event of a mid-term contract termination.

Responses and Penalties for Violations

The New Freelance Law aims to protect the working rights of freelancers. Therefore, companies that violate the regulations of the new law will be subject to various penalties from the relevant ministries and agencies. The specific penalties are as follows:

• Advice, guidance, investigations, and recommendations from the Fair Trade Commission or the Small and Medium Enterprise Agency
• A fine of up to 500,000 yen for violations

Related article: [Enacted in November 2024 (Reiwa 6)] What is the Freelancer Protection Law? Explaining the Measures Companies Should Take

Thus, with the enforcement of the New Freelance Law, companies in Japan are required to review their contract processes and management systems. Below, we will discuss the measures that companies should take and the penalties that may be imposed in the event of a violation, using the corrective recommendation measures taken against Monolith Corporation as an example.

Three Violation Examples by Cover Corp. Regarding “Free Redos”

On October 25, 2024 (Reiwa 6), the Japan Fair Trade Commission issued a recommendation and guidance against Cover Corporation, the operator of the major VTuber talent agency “Hololive Production,” for violating the Subcontract Act. The violation pertains to the practice of requiring subcontractors, who create illustrations and 2D/3D models for VTuber videos, to redo their work without compensation.

The regulations against Cover Corporation are based on the Subcontract Act, not the new Freelance Law. However, since the Freelance Law and the Subcontract Act establish similar regulations, this case will be explained as a reference example of the penalties that can be imposed on companies for violations of the Freelance Law in Japan.

Reference: Japan Fair Trade Commission “About the Recommendation to Cover Corporation (October 25, Reiwa 6 (2024))”

Actions in Question

The actions that became the subject of the Japan Fair Trade Commission’s corrective recommendations and guidance to Cover Corporation are as follows:

• Acts that violate the provisions of Article 4, Paragraph 2, Item 4 of the Subcontract Act (prohibition of unfair changes to payment terms and unfair demands for rework)
• Acts that violate the provisions of Article 4, Paragraph 1, Item 2 of the Subcontract Act (prohibition of delayed payment of subcontract proceeds)

Improper Content Alterations and Unjustified Redo Requests

Cover Corporation had been commissioning freelance subcontractors to create illustrations, 2D models for videos, and 3D models for videos, intended for use in “VTuber videos” and similar content.

However, from April 2022 (Reiwa 4) to December 2023 (Reiwa 5), Cover Corporation had unjustly required subcontractors to redo work without compensation, even when it was not apparent from the specifications outlined in the order forms that any revisions were necessary (affecting 23 subcontractors for a total of 24 instances).

The specific instances of these redo instructions are as follows:

Violation Example 1

On April 8, 2022 (Reiwa 4), Cover Corporation commissioned a subcontractor to create a 2D model for a video. After receiving the deliverable on April 18, they made the subcontractor redo the work seven times without compensation until September 15 of the same year, despite no clear need for revisions from the original specifications. Out of these seven redos, three were requested after the seven-business-day inspection period had passed, which was stipulated in the contract.

Two of these three redos were demanded after July 11, 2022 (Reiwa 4), when Cover Corporation had already notified the subcontractor of the project’s completion, citing the VTuber’s desire for modifications as the reason. The payment for this order was eventually made on December 27, 2023 (Reiwa 5), 619 days after the 2D model was received, due to oversights in accounting procedures.

Violation Example 2

On October 27, 2022 (Reiwa 4), Cover Corporation placed an order with a subcontractor for the creation of a 2D model for a video. However, after receiving the model on November 21, they made the subcontractor redo the work five times without compensation until May 23, 2023 (Reiwa 5), again without any apparent need for revisions from the original specifications.

All five redos were requested after the inspection period had passed. Cover Corporation notified the subcontractor that “all checks were completed internally and by the talent” 277 days after the model’s receipt, on August 25, 2023 (Reiwa 5). The payment for this order was made 312 days after the model was received.

Violation Example 3

On January 24, 2023 (Reiwa 5), Cover Corporation commissioned a subcontractor to create a 2D model for a video. After receiving the model on February 8, they made the subcontractor redo the work three times without compensation until March 22 of the same year, with no clear need for revisions from the original specifications.

Two of these three redos were requested after the inspection period had passed. Cover Corporation notified the subcontractor of the delivery completion 230 days after the model’s receipt, on September 26, 2023 (Reiwa 5).

Furthermore, although Cover Corporation began using the created 2D model for video streaming around April 2023 (Reiwa 5), the payment for the subcontract was made 266 days after the model’s receipt, on October 31, 2023 (Reiwa 5).

Content of the Japan Fair Trade Commission’s Corrective Recommendations

In response to the violation by Cover Corporation, the Japan Fair Trade Commission has issued the following recommendations.

Paying for Rework Costs at No Charge

The Japan Fair Trade Commission has mandated that Cover Corporation promptly pay the equivalent amount of costs incurred for having subcontractors make corrections at no charge after receiving goods from them.

Furthermore, the equivalent amount of costs must be verified by the Japan Fair Trade Commission.

Board of Directors’ Confirmation of Legal Compliance  

The Japan Fair Trade Commission has requested that the Board of Directors of Cover Corporation confirm the following matters through a board resolution:

• The act of demanding free rework is in violation of Article 4, Paragraph 2, Item 4 of the Japanese Subcontract Act.
• To ensure that, going forward, no undue harm is caused to subcontractors by forcing rework without any fault on their part.

This procedure is expected to help Cover Corporation recognize legal violations across the organization and establish a system to prevent future issues before they arise.

Thorough Investigation of Past Transactions  

The Japan Fair Trade Commission has demanded that Cover Corporation conduct a thorough investigation into all subcontracting transactions carried out from April 1, 2022 (Reiwa 4), to October 25, 2024 (Reiwa 6), to ensure that they do not include any instances of uncompensated rework. Should any illegal activities be recognized, the Commission has also advised that necessary measures be taken to protect the interests of the subcontractors.

Strengthening Internal Systems and Implementing Training  

The Japan Fair Trade Commission has called for Cover Corporation to strengthen its internal compliance systems to ensure adherence to legal requirements. As part of this effort, it has been recommended that necessary measures be taken, including the provision of subcontracting law training for the personnel in charge of placing orders.

Cover Corporation is expected by the Japan Fair Trade Commission to ensure that all employees have a deep understanding of the legal provisions and appropriate trading practices.

Thorough Dissemination to Business Partners and Employees  

The Japan Fair Trade Commission has demanded that Cover Corporation widely notify both internal and external parties of the improvement measures required. Specifically, the following actions are requested:

• Ensuring that all executives and employees are aware of the improvement measures concerning the matters for which recommendations were received.  
• Notifying subcontractors among the business partners of the aforementioned improvement details.  

This aims to secure trust from business partners and employees and to enhance awareness for the prevention of recurrence.

Reporting Remedial Measures to the Japan Fair Trade Commission  

Kabur Corporation was obligated to take the aforementioned measures and report the results to the Japan Fair Trade Commission (JFTC).

These corrective recommendations by the JFTC highlight the illegal activities conducted by Kabur Corporation and reaffirm the importance of protecting subcontractors.

It is expected that the company’s prompt and appropriate response will not only restore trust but also lead to the proper normalization of transaction environments in anticipation of the upcoming enforcement of the new Freelance Law in Japan.

Delays in Payment to Subcontractors Under Japanese Law

Kabur Corporation, despite having received 2D models and other deliverables from its subcontractors between July 2022 (Reiwa 4) and February 2024 (Reiwa 6), failed to pay the subcontracting fees by the predetermined payment deadlines.

The amount of late interest due to Kabur Corporation’s payment delays amounted to a total of 1,152,642 yen for 29 subcontractors.

However, by September 17, 2024 (Reiwa 6), Kabur Corporation had paid the full amount of late interest incurred due to the payment delays.

Guidance from the Japan Fair Trade Commission

In response to the violations committed by Cover Corporation, the Japan Fair Trade Commission has issued the following guidance:

1. Implement necessary corrective measures for the violations.
2. In the event that issues under Article 4, Paragraph 1, Item 2 of the Subcontract Act are identified during investigations based on recommendations concerning past illegal transactions, take necessary measures to protect the interests of subcontractors.
3. Ensure that similar violations do not occur in the future.
4. Cover Corporation must promptly report to the Japan Fair Trade Commission the measures taken based on the above guidance.

The Impact of Compliance Orders and Guidance Under Japanese Law

Cover Corporation has issued an official statement on its website in response to the recommendations and guidance from the Japan Fair Trade Commission.

Cover Corporation: Regarding the Recommendations Based on the Act Against Delay in Payment of Subcontract Proceeds, Etc. by the Japan Fair Trade Commission

Violating the regulations of the Subcontract Act in Japan not only requires taking necessary measures in accordance with the recommendations and guidance but also poses risks that can affect normal business operations, such as the need to conduct board meetings and handle media relations.

Furthermore, in today’s environment where online opinions can sway corporate evaluations, companies must also consider the reputational risks associated with receiving compliance orders for violations and having them publicized by the media.

Summary: Future Strategies Including Regulations Under the New Freelance Law

In this article, we have explained the penalties for violations based on the case of Cover Corporation, which received a corrective recommendation from the Japan Fair Trade Commission for violating the Subcontract Act.

While this case involved regulations under the Subcontract Act, the new Freelance Law, which will be enacted in November of Reiwa 6 (2024), will impose even stricter regulations to protect the rights of freelancers. It is essential for companies to disseminate knowledge about the new law widely among their employees.

Such cases highlight the increasing need for other businesses to review their own trading practices. Through this article, we hope to provide an opportunity to consider how building appropriate relationships with subcontractors is crucial for sustainable business operations.

Guidance on Measures by Our Firm

Monolith Law Office is a law firm with high expertise in both IT, particularly the internet, and legal matters. In complying with the Freelancer’s New Law in Japan, there are times when the creation of contracts becomes necessary. Our firm provides contract drafting and review services for a wide range of cases, from Tokyo Stock Exchange Prime-listed companies to venture businesses. If you are having trouble with contracts, please refer to the article below.

Areas of practice at Monolith Law Office: Contract Drafting & Review, etc.