Criteria for Determining Worker Status in Japanese Labor Law: An Explanation of Judicial Approaches to Scope of Application

The Japanese labor law system provides robust protection for “workers.” However, the issue of who qualifies as a “worker” is not determined solely by the name of the contract or the intentions of the parties involved. Japanese courts assess “worker status” based on the actual nature of the work performed, rather than the form of the contract. Misjudging this can expose companies to unexpected legal risks. For instance, if an individual who had entered into a subcontracting agreement is later recognized by the court as a worker, the company may be ordered to make retroactive payments for overtime and social insurance contributions. This is not merely a financial burden. The recognition of worker status poses a significant managerial risk that could shake the foundation of a company’s business model, especially for businesses that rely on flexible labor forces such as freelancers and sole proprietors. This is because, once recognized as workers, the stringent regulations on working hours, breaks, and holidays set forth by the Japanese Labor Standards Act become applicable. This article will start with the definition of “worker” under the Japanese Labor Standards Act and provide a detailed explanation of the judicial framework, including abundant case examples, to illustrate how courts determine “worker status.” Understanding this issue is not just a matter of compliance; it is a strategic imperative that affects the sustainability of a company.

The Legal Definition of “Worker” Under Japanese Labor Law

In the Japanese legal framework of labor law, the definition of “worker” varies subtly depending on the underlying legislation. Understanding these differences is essential for accurately assessing risks.

Firstly, the Japanese Labor Standards Act, which sets the minimum standards for individual workers’ labor conditions, defines a “worker” in Article 9 as “any person, regardless of the type of occupation, who is employed at a business or office and receives wages.” This definition is a core concept commonly used in many specific labor laws, such as the Japanese Industrial Safety and Health Act, which aims to ensure the safety and health of workers, and the Japanese Minimum Wage Act, which guarantees a minimum amount of wages. Similarly, Article 2 of the Japanese Labor Contract Act adopts almost the same definition, delineating the basic protection targets in individual labor contract relationships.

In contrast, the Japanese Trade Union Act, which guarantees workers’ rights to organize and collective bargaining, includes a broader range of individuals under its protection. Article 3 of the Act defines a “worker” as “any person, regardless of the type of occupation, who lives on wages, salary, or other income equivalent thereto.” This definition does not contain the requirement of being “employed” as in the Labor Standards Act and targets a wider range of individuals who economically depend on others for the provision of labor services.

The difference in these definitions leads to significant legal consequences. An individual who is not considered a “worker” under the Labor Standards Act and is denied overtime pay claims may still qualify as a “worker” under the broader definition of the Trade Union Act. In such a case, the individual would have the right to form a labor union and demand collective bargaining with the company. Therefore, companies are required to manage labor from a dual perspective, keeping in mind not only the risks under the Labor Standards Act but also those under the Trade Union Act.

The Judicial Framework for Determining Worker Status in Japan: Emphasizing Substance Over Form

Even if a contract is explicitly labeled as a “service agreement” or “contracting agreement,” this alone does not negate the status of a worker. Japanese courts consistently take the position that, rather than being bound by the formal elements such as the name of the contract, they will determine worker status based on the actual relationship between the parties, namely the reality of the labor provided. This “substance over form” approach is an essential principle to prevent employers with stronger positions from abusing contractual forms to unjustly evade labor law protections.

The foundation of this judgment framework is the “Labor Standards Act Research Committee Report” published in 1985 (hereinafter referred to as the “1985 Report”) by the former Ministry of Labor. Although this report is not a law itself, it has had a significant impact on subsequent case law and administrative interpretations, functioning as a de facto guideline for determining worker status to this day.

The 1985 Report organizes the criteria for judgment into two main levels. First, there are the core criteria concerning “employment dependency,” which concretize the phrase “those who are employed and paid wages” from Article 9 of the Japanese Labor Standards Act. This consists of two aspects: “labor under supervision and direction” and “remuneration for labor provided.” Second, there are supplementary elements to reinforce the judgment when the main criteria alone are insufficient. The fact that this stable interpretive framework has been maintained over the years suggests that the Japanese legal system favors the gradual development of interpretations through the accumulation of case law over frequent legislative amendments. Therefore, understanding the content of this historical report is crucial for predicting court decisions in modern labor disputes in Japan.

The Core Criterion for Judgment: Specific Elements of “Subordination” Under Japanese Law

“Subordination” is the most crucial concept in determining the status of a worker. It refers to whether there is a dependent relationship where an individual provides labor under the supervision and direction of another and receives compensation in return. Japanese courts consider multiple factors comprehensively to determine the presence of subordination.

Labor Under Supervision and Direction in Japan

“Labor under supervision and direction” in Japan does not merely mean receiving instructions for tasks. It involves a multifaceted examination of the specificity and enforceability of the instructions, as well as the scope of discretion in the execution of the work.

Freedom to Accept or Decline Work Assignments and Instructions

Even if a contract formally grants the freedom to refuse work assignments, if the reality is such that refusal is not practically possible, this can affirm the existence of a supervisory and directive relationship. For instance, if declining an assignment leads to a significant reduction or complete cessation of subsequent work, resulting in disadvantage, this “freedom” is considered merely nominal. In legal precedents, cases where workers were required to follow a shift schedule and faced fines for unauthorized absences have strongly indicated the absence of freedom to accept or decline, thus affirming the worker status (Tokyo High Court, October 17, 2018). Conversely, in a case where drivers could freely choose between “coming to the office,” “being available for contact,” or “taking a day off,” and faced no penalties for refusing work, the freedom to accept or decline was recognized, serving as a factor to deny worker status (Osaka District Court, December 11, 2020).

Supervision and Direction in Task Execution

The extent to which one receives specific instructions and management regarding the method of task execution is also a crucial factor. If instructions are detailed, not only about the objectives and deadlines of the work but also about the processes and means to achieve them, the supervisory and directive relationship is strengthened. For example, in a case where language school instructors were mandated to teach according to school-designated textbooks and manuals and were forced to participate in regular training, strong supervision and direction were recognized (Nagoya High Court, October 23, 2020). On the other hand, in the case of part-time university lecturers, where the lecturers had broad discretion in developing the specific content of their lectures beyond the outline, the supervisory and directive relationship was deemed weak (Tokyo District Court, March 28, 2022).

Temporal and Spatial Constraints

The designation of work locations and times, along with the employer’s management of attendance, are typical indicators of a supervisory and directive relationship. Obligations such as clocking in with a time card, strict shift management, and the duty to submit detailed activity reports through work diaries intensify the temporal and spatial constraints. Even in remote work arrangements, if working hours are effectively managed through the monitoring of login and logout times or a requirement to be constantly online, such constraints may be deemed present. In a case where game programmers were required to work on-site using company facilities and instructed to clock in with a time card, strong constraints were recognized, leading to the affirmation of worker status (Tokyo District Court, September 26, 1997, Tao Human Systems case).

Substitutability of Labor Provision

Whether or not one can substitute their labor provision at their discretion with a third party is also a factor in the assessment. If an individual can use assistants or substitutes at their own expense and responsibility, this suggests the personality of a business owner and weakens the worker status. Conversely, if the provision of labor by the individual themselves is strictly required for any reason, this is considered to be highly personal labor, indicative of an employment contract nature, and strengthens the worker status. While substitutability is not a decisive factor in itself, it plays a reinforcing role in determining the presence of a supervisory and directive relationship.

The Remunerative Nature of Labor Compensation Under Japanese Law

The question arises whether the remuneration possesses the personality of being a direct compensation (i.e., wages) for the labor provided. The nature of the remuneration is determined not by its name but by the actual method of calculation and the manner in which it is paid.

When remuneration is paid in the form of hourly wages, daily wages, or monthly salaries, and is proportional to the length of working hours, it is strongly personalityized as “wages.” Similarly, if the remuneration is reduced according to the number of days or hours of absence (applying the so-called “no work, no pay” principle), or if separate allowances are paid for overtime work, these factors strongly suggest the remunerative nature of labor compensation. In the case of a certain tax accountant, a fixed amount was paid monthly regardless of the volume of work, and bonuses were also provided, leading to the recognition that the remuneration was a compensation for labor provided under supervision (Tokyo District Court, March 30, 2011 (2011)).

On the other hand, if the remuneration is determined entirely based on the results of the work, such as a commission system based on sales or a lump-sum contract fee paid upon completion of a project, it strongly resembles the personality of a transaction between business operators, which weakens the element of worker status. However, even if the system is nominally commission-based, if there are elements of livelihood security, such as a guaranteed minimum wage, these factors may be considered in affirming the status of the individual as a worker.

Factors Reinforcing the Determination of Worker Status Under Japanese Law

Even after considering the core elements related to “subordination,” there may be cases where the presence or absence of worker status is not clear. In such borderline cases, Japanese courts take into account the following supplementary factors to make a comprehensive judgment.

Presence of Entrepreneurial Characteristics

The extent to which a labor provider possesses the personalityistics of an independent entrepreneur is a particularly important supplementary factor for consideration. This is assessed from the perspective of whether the labor provider operates a business at their own risk and expense.

As specific criteria, first, whether the labor provider owns or bears the cost of essential machinery, equipment, or vehicles at their own expense is considered. For example, owning expensive trucks or heavy machinery strongly suggests an entrepreneurial personality. Next, whether the remuneration is significantly higher compared to the salary of a full-time employee performing similar work is also taken into account. This higher remuneration is interpreted as including compensation for the expenses and business risks borne by the entrepreneur, which weakens the element of worker status. Other considerations include whether the labor provider assumes responsibility for business-related damages or conducts business activities using their own trade name.

Degree of Exclusivity

A high degree of economic dependence on a specific company can be a factor that reinforces worker status. The degree of exclusivity is evaluated from two aspects. One is whether the contract prohibits engagement in the business of other companies, or whether it is factually difficult due to time or physical constraints. If a person is bound by the business of a specific company for most of their time, resulting in an inability to take on other work, the degree of exclusivity is considered high. The other aspect is the livelihood-securing side of remuneration. If the majority of one’s income depends on the remuneration from a specific company, a high economic dependence is recognized, which strengthens the direction of worker status.

Other Factors

In addition to the above factors, objective circumstances that show how the parties perceived the labor provider are also considered. Specifically, whether withholding tax is being conducted on the remuneration as salary income, whether the labor provider is enrolled in labor insurance (workers’ compensation insurance, employment insurance) and social insurance (health insurance, welfare pension insurance), or whether the company’s work rules are applied, are mentioned. These facts suggest that the company treated the individual as a worker, and serve as material to reinforce the judgment affirming worker status.

Guidelines from the Supreme Court Precedent: The Yokohama Minami Labor Standards Inspection Office Case

As a leading case on the criteria for determining worker status, the decision made by the Supreme Court of Japan on November 28, 1996 (the Yokohama Minami Labor Standards Inspection Office case) provides extremely important guidelines.

The case involved a driver who owned his own truck and was primarily engaged in the transportation of products for a paper company. After being injured during work, he applied for workers’ accident compensation insurance benefits. However, the Labor Standards Inspection Office Director denied the benefits on the grounds that he was not considered a “worker,” prompting the driver to file a lawsuit seeking to overturn this decision.

The Supreme Court of Japan ultimately denied the driver’s status as a worker. The reasoning process applied the judgment framework that had been discussed up to that point in a concrete manner, offering insightful implications.

First, the Supreme Court examined the instructions from the company, determining that directives regarding the items to be transported, destinations, and delivery times were naturally necessary instructions from the client due to the nature of the transportation business. The Court concluded that these instructions alone did not constitute specific command and supervision over the execution of work.

Next, regarding the temporal and spatial constraints, the Court noted that once a single transportation task was completed, the driver was free from the company’s control and could use his time freely until the next task was assigned. The degree of constraint was significantly more relaxed compared to the company’s regular employees, which was deemed insufficient to evaluate as being under command and supervision.

What the Supreme Court particularly emphasized was the element of “entrepreneurship.” The driver owned an expensive truck and bore all the costs such as fuel, repairs, and insurance premiums. Furthermore, his compensation was paid based on the volume of transportation, not as a salary with income tax withholding. From these facts, the Court recognized the driver as an independent entrepreneur who conducted transportation business at his own risk and calculation, thus denying his status as a worker.

This judgment clarified that the determination of worker status should not be based solely on specific elements but should be made by comprehensively weighing multiple factors such as the relationship of command and supervision, the degree of constraint, the nature of compensation, and entrepreneurship. In particular, it was a groundbreaking precedent in showing that when a labor provider possesses significant entrepreneurial personalityistics, it can be a strong factor in negating worker status.

Applying Modern Employment Forms: The Worker Status of Gig Workers Under Japanese Law

The emergence of ‘gig workers,’ who undertake one-off jobs via platforms, poses new questions to the traditional framework for determining worker status. The working style of food delivery service couriers, for example, has become a topic of global debate.

In Japan, a labor union formed by Uber Eats couriers requested collective bargaining with the operating company, which was refused by the company on the grounds that the couriers did not have the status of ‘workers.’ This issue was brought to the Tokyo Labor Commission, which in 2022 (Reiwa 4) ruled that the couriers do fall under the definition of ‘workers’ according to the Japanese Labor Union Act, and ordered the company to engage in collective bargaining. This decision was based on reasons such as the couriers being an essential workforce integrated into the organization for the execution of the platform’s business, the fact that their compensation is unilaterally determined by the company, and that they are effectively under the company’s direction and supervision through the app. This is a symbolic case that illustrates how the differences in the definition of ‘workers’ under the Japanese Labor Standards Act and the Labor Union Act appear in specific disputes.

However, whether gig workers are entitled to protections such as overtime pay and minimum wage under the Japanese Labor Standards Act remains unsettled in judicial decisions, and the accumulation of case law is awaited. In civil lawsuits where couriers have sought damages for unreasonable account suspensions (equivalent to de facto dismissal), there have been instances where the court avoided a direct judgment on worker status and a settlement was reached with the company paying a settlement fee.

These developments indicate ongoing legal challenges, such as whether algorithmic task allocation and rating systems constitute ‘direction and supervision,’ or whether bicycles and motorcycles owned by couriers can be considered expensive machinery indicating ‘business operator’ status, fitting traditional judgment criteria to modern ways of working. Companies must recognize that contracts with gig workers may entail the risk of collective bargaining under the Labor Union Act and the potential risk of being deemed workers under the Labor Standards Act in the future.

Comparative Table of Factors Determining Worker Status Under Japanese Law

The following table summarizes the factors that determine worker status, as previously explained. Please note that this table is a simplified guide to indicate the direction of judgment and that actual determinations must consider the specific facts of each individual case comprehensively.

Summary

In Japanese labor law, whether an individual qualifies as an “employee” is not determined by the formal title of a contract but rather by a comprehensive assessment of multifaceted elements based on the actual provision of labor. At the core of this assessment is the concept of “subordination,” which involves examining specific factors such as the presence of supervision and direction, temporal and spatial constraints, and the compensatory nature of remuneration. Supplementary elements like the nature of the business and exclusivity are also considered, leading to conclusions drawn on a case-by-case basis. This framework for judgment has been established by Supreme Court precedents and, while facing new interpretative challenges with the emergence of new work styles like gig work, its basic structure has been maintained. For business managers and legal professionals, accurately understanding this complex and dynamic legal concept and continually reviewing their company’s labor management system is essential to avoid unforeseen legal and financial risks and to achieve sustainable business operations.

Monolith Law Office has a wealth of experience in advising numerous clients within Japan on legal issues related to the determination of employee status, as discussed in this article. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to provide seamless legal support from an international perspective on Japan’s complex labor laws. We offer specialized services tailored to your company’s needs, including classification assessments of labor forces, drafting and reviewing contracts, and representation in related disputes.