Freelancer Protection Law to be Enforced in November of Reiwa 6 (2024): An Explanation of the Measures Companies Should Take

Recent labor reforms promoted by the Japanese Ministry of Health, Labour and Welfare have shifted the values of the workforce, leading to a year-on-year increase in the number of people working as freelancers. The pandemic has also played a role in drawing attention to more flexible ways of working.

As more companies engage with freelancers, the ‘Japanese Freelancer Protection Act (New Freelancer Law)’ will come into effect in November 2024, establishing compliance requirements for businesses that contract freelancers. Many are likely eager to quickly integrate the essentials of the Freelancer Protection Act into their practices.

In this article, we will introduce the contents and guidelines of the Freelancer Protection Act and explain the measures that companies should take in response.

What is the Freelance Protection Act (New Freelance Law)?

The Freelance Protection Act (New Freelance Law) is a law that sets forth compliance requirements for businesses that commission work to freelancers, particularly in service contracts. Its official name is the “Act on Ensuring the Proper Conduct of Specific Contractual Transactions.”

Here, we will explain an overview of the New Freelance Law.

Background and Significance of the Freelance Protection Act

The background for the establishment of the Freelance Protection Act lies in the diversification of work styles in Japan. In recent years, the number of people working as freelancers instead of being employed by a company has increased. However, freelancers are not recognized as “workers” under the Japanese Labor Standards Act, and therefore are not covered by labor-related laws. This means that in their relationships with clients, freelancers are often in a weaker position compared to employees. It is a fact that not a few freelancers accept work under poor conditions at the mercy of their clients.

In light of such circumstances, the Freelance Protection Act was established with the aim of creating an environment where individuals can engage in contracted work as business operators on a stable basis.

The Freelance Protection Act was enacted on April 28, Reiwa 5 (2023), and will come into effect on November 1, Reiwa 6 (2024).

Difference between the Freelance Protection Act and the Subcontract Act

The Subcontract Act is a law that prohibits client companies from engaging in practices that disadvantage subcontractors in transactions involving payment and the exchange of goods.

Since the structure of the relationship between freelancers and contracting businesses appears similar, at first glance, it may seem that they regulate the same type of contractual relationships. However, there is a difference in terms of capital requirements.

• Subcontract Act → Applies when the client’s capital exceeds a certain amount
• New Freelance Law → No capital requirement restrictions for the client

Since the Subcontract Act does not apply when businesses with less capital engage in transactions with freelancers, the Freelance Protection Act regulates all contracting businesses that commission work to freelancers, without the capital requirement restrictions like those in the Subcontract Act, aiming to protect freelancers.

Guidelines for Transactions with Freelancers

When engaging in transactions with freelancers, it is essential to refer to the guidelines that precede the Japanese Freelancer Protection Law. These guidelines are crucial when implementing new regulations into practice.

Let us first introduce an overview of the Freelancer Guidelines.

About the Freelancer Guidelines

In Reiwa 3 (2021), related Japanese ministries jointly established the “Guidelines for Creating a Safe Working Environment for Freelancers” to facilitate secure working conditions for freelancers.

The main content clarifies the application of the Japanese Antimonopoly Act, Subcontract Act, and labor-related laws in transactions between businesses and freelancers, and explicitly identifies types of problematic behaviors.

Reference: Fair Trade Commission, etc. “Guidelines for Creating a Safe Working Environment for Freelancers[ja]“

Relationship with the Subcontract Act and Antimonopoly Act

When freelancers and businesses engage in transactions, the Japanese Antimonopoly Act applies to all transactions. Furthermore, if the business placing the order has a capital of 10 million yen or more, the Japanese Subcontract Act also applies.

The Freelancer Guidelines indicate the application of the Subcontract Act and Antimonopoly Act in transactions, and the following businesses must ensure compliance:

• Businesses that transact with freelancers
• Intermediary businesses (businesses that match freelancers with ordering businesses)

The Freelancer Guidelines present the basic principles regarding the relationship with the Subcontract Act and Antimonopoly Act, including:

• Regulations on the abuse of a superior position
• Clarification of transaction conditions at the time of ordering

It also concretely presents types of behaviors that could constitute violations of these laws.

Relationship with Labor-Related Laws

As freelancers typically do not enter into employment contracts, labor-related laws do not generally apply to them.

However, if the relationship with individual clients or intermediary businesses meets the criteria that qualify them as “workers” under the Japanese Labor Standards Act, the application of labor-related laws is recognized.

The Freelancer Guidelines provide criteria and specific considerations for determining whether an individual is recognized as a “worker” under various labor-related laws.

Scope and Applicable Parties of the Freelancer Protection Law

This section explains the definition of freelancers and the types of transactions covered under the Freelancer Protection Law. It is essential to verify whether your company’s transactions fall within the scope of this law.

Understanding the Definition of Freelance

The definition of freelance is not explicitly stated in law, nor is there a unified definition. For example, the Freelance Guidelines describe it as follows:

“Freelance” refers to self-employed individuals or sole proprietors who do not have a physical store, do not employ staff, and earn income by utilizing their own experience, knowledge, and skills.

Japan Fair Trade Commission, etc. | Guidelines for Creating a Safe Working Environment for Freelancers[ja]

In other words, it is appropriate to understand that a freelancer is someone who does not employ any staff and independently earns income by engaging in work through contractual agreements such as outsourcing contracts or subcontracting agreements.

Transactions Covered by the Freelance Protection Law

The transactions covered by the Freelance Protection Law refer to BtoB transactions (business-to-business dealings) between companies and freelancers. They do not apply to BtoC transactions between companies and general consumers.

Specifically, the main transactions that are covered are “service contracts.” A service contract is an agreement where a company outsources part or all of its business operations to an external business entity. This is commonly referred to as outsourcing.

The definition of “service contract” is stipulated in the Freelance Protection Law as follows:

(Article 2, Paragraph 3)
This law defines “service contract” as the following acts:
1. A business entity entrusting another business entity with the manufacturing (including processing) of goods or the creation of informational products for its business.
2. A business entity entrusting another business entity with the provision of services for its business (including having the other business entity provide services to itself).

Law Concerning the Proper Transaction of Specific Contracted Business Operators | e-Gov Law Search[ja]

A service contract is a general term for contracts such as contracting agreements and mandate contracts, and it is adopted in most freelance transactions.

Who is Covered by the Freelancer Protection Law

The Japanese Freelancer Protection Law applies to transactions related to tasks ordered by “Specific Contracting Parties.” The definition of a Specific Contracting Party under the Freelancer Protection Law is as follows:

(Article 2, Paragraph 1)
This law refers to a “Specific Contracting Party” as a business entity that is the counterparty in a service contract and meets any of the following criteria:
1. An individual who does not employ any employees.
2. A corporation that, apart from its representative, has no other officers (directors, board members, executive officers, employees who perform business operations, auditors, or any person equivalent to these as referred to in Paragraph 6, Item 2) and does not employ any employees.

Act on Promotion of Proper Transactions with Specific Contracting Parties｜e-Gov Law Search[ja]

In other words, whether one is recognized as a Specific Contracting Party largely depends on the presence or absence of employees. It is essential to understand that freelancers are generally referred to as these Specific Contracting Parties.

Furthermore, business entities that outsource work to Specific Contracting Parties are called “Contracting Business Operators.” Companies that engage in transactions with freelancers fall under this category.

Key Provisions of the Japanese Freelancer Protection Act and Measures Companies Should Take

In light of the enforcement of the Japanese Freelancer Protection Act, we will explain seven measures that companies should take. It is essential to implement strategies that comply with the provisions of the law, so make sure to verify them thoroughly.

Clarification of Transaction Terms

When commissioning work to freelancers, businesses must clarify the transaction terms as stipulated by the Japanese Freelance Protection Law (Article 3, Paragraph 1). The method of clarification can be in writing or through electronic means (such as email).

The details that must be clarified are as follows:

• The content of the services to be provided
• The amount of compensation
• The payment deadline
• Other matters as determined by the rules of the Japanese Fair Trade Commission

Even if the transaction terms are clarified through electronic means, if a freelancer requests the terms in writing, the business must promptly provide them in writing again (as per the same Article, Paragraph 2).

This regulation applies to all commissioning parties, regardless of the form of the contract or the status of the parties involved.

Payment Due Date for Remuneration

Business operators who have commissioned work must set the payment due date for remuneration within 60 days from the date of receiving the deliverables from freelancers, and as soon as possible within that period (Japanese Freelancer Protection Act, Article 4, Paragraph 1).

Note that the starting point of this period is not affected by whether the deliverables are inspected or tested upon receipt.

Furthermore, in cases where the work has been subcontracted, the payment due date for remuneration must be set within 30 days from the original contract’s payment due date, and as soon as possible within that period (same article, Paragraph 3).

This regulation also prevents delays in payment of remuneration in cases of subcontracting.

Obligations of Contracting Parties Under the Freelancer Protection Act

Under the Japanese Freelancer Protection Act, when a long-term service contract is established, certain obligations are set for the contracting party to prevent any disadvantage to the freelancer (Article 5, Paragraph 1 of the Japanese Freelancer Protection Act).

The stipulated obligations are as follows:

• Not to unjustifiably refuse acceptance of deliverables without fault attributable to the freelancer
• Not to reduce the compensation without fault attributable to the freelancer
• Not to return goods without fault attributable to the freelancer
• Not to set compensation at an amount significantly lower than the market rate without justification
• Not to force the purchase of goods or use of services designated by oneself without a valid reason

Furthermore, regardless of the length of the service period, the contracting party must not unjustly harm the interests of the specific contracted business by the following actions (Paragraph 2 of the same article):

• Forcing the freelancer to provide money, services, or other economic benefits for the benefit of the contracting party
• Changing the content of deliverables or demanding redoing of work without fault attributable to the freelancer

Note that the applicable service contract period will need to be defined in future government ordinances.

Accurate Display of Recruitment Information

When recruiting freelancers, it is prohibited to use false or misleading representations in advertisements (Article 12, Paragraph 1 of the Japanese Freelance Protection Law).

Furthermore, it is necessary to maintain information that is accurate and up-to-date (the same article, Paragraph 2).

This regulation ensures protection similar to the obligation to clearly state working conditions when recruiting workers under the Japanese Employment Security Act.

Consideration for Pregnancy, Childbirth, Childcare, and Nursing Care

The Japanese Freelancer Protection Law provides protection similar to that of employees for individuals regarding pregnancy, childbirth, childcare, and nursing care.

When a freelancer, who has been contracted for a certain period, requests it, the client must provide considerations to enable them to balance work with pregnancy, childbirth, childcare, or nursing care, according to the circumstances (Japanese Freelancer Protection Law, Article 13, Paragraph 1). The applicable period for these provisions will be defined in future government ordinances.

Even if the contract period with the freelancer does not meet the duration specified by the government ordinance, the client has a duty to make an effort to provide necessary considerations according to the circumstances, to enable the freelancer to balance work with childcare or nursing care (the same article, Paragraph 2).

Establishing a Framework to Combat Harassment

Commissioners of work must take necessary measures, such as setting up a consultation system, to ensure that freelancers are not subjected to a hostile work environment due to harassment, as mandated by Article 14, Paragraph 1 of the Japanese Freelancer Protection Act.

The specific types of harassment listed in the Japanese Freelancer Protection Act include the following:

• Sexual Harassment
• Maternity Harassment
• Power Harassment

It is prohibited to terminate a contract or treat freelancers unfavorably for reasons such as having sought consultation about harassment, as stated in the same article, Paragraph 2.

Notice of Termination or Non-Renewal

The Japanese Freelance New Law includes regulations akin to those for notice of dismissal in employment contracts.

In the case of ongoing service contracts, when terminating or deciding not to renew a contract with a freelancer, the principle is that notice must be given at least 30 days in advance (Japanese Freelancer Protection Law, Article 16, Paragraph 1).

Furthermore, when a client is requested by a freelancer to disclose the reasons for contract termination, they must do so without delay (the same article, Paragraph 2).

Penalties for Violating the Freelancer Protection Law

In the event of a violation of the Freelancer Protection Law, freelancers can report the infringement, which may lead to administrative inspections and the possibility of recommendations or orders for necessary measures.

Non-compliance with these orders or refusal to undergo inspections can result in fines of up to 500,000 yen, so caution is advised.

Summary: Consult a Lawyer for Measures Regarding the Freelancer Protection Law

The Japanese Freelancer Protection Law is designed to create a stable working environment for freelancers by imposing regulations on the businesses that commission them. It is essential to review the main points of compliance and guidelines, which serve as indicators for the application of other laws, and to establish an appropriate system.

However, although the Japanese Freelancer Protection Law has been established, we must wait for the development of detailed requirements in the rules of the Japan Fair Trade Commission and the ordinances of the Ministry of Health, Labour and Welfare.

Businesses engaging with freelancers will continue to be required to respond appropriately to the evolving situation. Misjudgments can lead to penalties and potentially cause significant disadvantages to the company. Therefore, it is advisable to seek professional legal advice when implementing measures based on the Freelancer Protection Law.

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 recent years, with the diversification of work styles, there has been a growing focus on labor-related laws. Our firm provides solutions in labor law, which are detailed in the article below.

Areas of practice at Monolith Law Office: Corporate Legal Affairs for IT & Startups[ja]