Contracting and Dispatching in Japanese Labor Law: Legal Framework and Practical Differences

In Japan, leveraging the workforce of other companies as part of a business strategy is an extremely effective means for enhancing operational efficiency and ensuring expertise. However, there are multiple legally distinct forms of utilization, each governed by different laws. Particularly, the two main models, “contracting for work” and “worker dispatching,” differ fundamentally in their legal nature and practical operation. Contracting for work is a contract aimed at the completion of a specific “job” and is primarily regulated by the Japanese Civil Code. On the other hand, worker dispatching, which has the provision of “labor” itself as its purpose, is subject to strict regulation under the specialized Japanese Worker Dispatch Law. Understanding the differences between these two models is not merely a matter of contractual formality. It is an essential management requirement to ensure compliance, manage legal risks, and develop a human resource utilization strategy that best aligns with the company’s business objectives. This article provides a detailed professional analysis based on Japanese law, defining these two labor utilization models, the rights and obligations of the parties involved, and the core elements that distinguish the two.

The Legal Basis and Practical Aspects of Contracting for Business Processing Services Under Japanese Law

The legal foundation for contracting business processing services in Japan is based on the “contract for work” as stipulated in the Japanese Civil Code. Article 632 of the Japanese Civil Code defines a contract for work as one in which “one party agrees to complete a certain task, and the other party agrees to pay remuneration for the results of that task, thereby giving effect to the contract” . As this article makes clear, the most essential personalityistic of a contract for work is its focus on the “completion of a task” . This “task” is not limited to tangible outcomes like buildings or manufactured goods but also includes the provision of intangible services such as system development, transportation, and cleaning services.  

The rights and obligations of the parties in this type of contract are constructed around the objective of completing the task. The contractor (the party undertaking the work) is obligated to complete the task by the agreed deadline according to the contract and deliver the results to the client . On the other hand, the client (the party ordering the work) is obligated to receive the completed task’s results and pay the agreed remuneration. According to Article 633 of the Japanese Civil Code, this payment of remuneration must, in principle, be made simultaneously with the delivery of the object of the work .  

At the core of a contract for work is the contractor’s independence. The client is essentially purchasing the “results of the work,” not directly managing the “process of labor” that produces those results. Therefore, the method of carrying out the work, the arrangement of tasks, the management of working hours, and specific instructions and supervision of the contractor’s employees are all the responsibility and authority of the contractor . It is a deviation from the legal nature of a contract for work for the client to issue direct commands to the contractor’s employees. The client’s responsibility is limited, and as stipulated in the proviso of Article 716 of the Japanese Civil Code, the client is only liable to compensate for damages caused to third parties by the contractor if there is negligence on the part of the client in the orders or instructions given . This autonomy of the contractor marks the most fundamental difference from worker dispatching, which will be discussed next.  

The Legal Framework of Worker Dispatch and the Obligations of the Client Company in Japan

While subcontracting in Japan is governed by the Civil Code as its basic law, worker dispatch is strictly regulated by a special law called the “Act for Securing the Proper Operation of Worker Dispatching Business and Improved Working Conditions for Dispatched Workers” (hereinafter referred to as the “Worker Dispatch Law”). This system is based on a unique tripartite relationship involving the dispatching agency, the client company, and the dispatched workers. The fundamental structure of worker dispatch involves the dispatching agency employing workers who then work under the direction and orders of the client company.

Article 2, Paragraph 1 of the Worker Dispatch Law defines “worker dispatch” as “having one’s own employees work for another person under the employment relationship and under the direction and orders of that other person.” The most critical legal element here is the “under the direction and orders of that other person.” Direct work instructions and orders to the worker, which are not permitted in subcontracting agreements, are legally allowed in the context of worker dispatch.

However, as a trade-off for granting this authority to issue direction and orders, the client company is subject to many legal obligations under the Worker Dispatch Law. This reflects the intent of the law that the client company should bear direct responsibility for the working environment of the dispatched workers, even though they are not its own employees. The main obligations include the following:

Firstly, the appointment of a person in charge at the client company. Based on Article 41 of the Worker Dispatch Law, the client company must appoint a person responsible for centrally managing the employment of dispatched workers at each business site. This person is responsible for handling complaints from dispatched workers and coordinating communication with the dispatching agency.

Secondly, the creation and management of a management ledger for dispatched workers. The client company is required to create a ledger that includes the names of dispatched workers, details of their work, working hours, break times, etc., and to retain this ledger for three years after the end of the contract.

Thirdly, the client company bears the responsibility as an employer for certain provisions of Japanese labor-related laws such as the Labor Standards Act and the Industrial Safety and Health Act. For example, the client company is responsible for regulations concerning working hours, breaks, holidays, and measures to ensure safety and health in the workplace, even if it does not directly employ the dispatched workers. These regulations are based on the rationale that the client company, benefiting from the labor force for business gains, should also bear appropriate responsibility for the protection of those workers.

The Core Element in Distinguishing Contracting from Staffing: The Presence of a Command and Control Relationship

As we have seen, the most decisive and essential element in legally distinguishing between contracting for work and worker dispatching in Japan is the presence or absence of a “command and control relationship” . Even if the contract is named “service agreement” or “contracting agreement,” if the reality is that the client directly instructs and manages the contractor’s employees, the contract may be legally deemed as worker dispatching. Under Japanese labor law, the actual nature of the work takes precedence over the form of the contract .  

To concretize this criterion, the Japanese Ministry of Health, Labour and Welfare has established the “Standards on the Distinction between Worker Dispatching Businesses and Contracting” (Heisei 1 (1989) Ministry of Labour Notification No. 37) . According to this notification, for a business to be recognized as a proper contracting arrangement, the contractor must meet two requirements: “directly utilizing the labor force of their own employees” and “independently processing the contracted work as their own business, separate from the client” .  

The presence of a “command and control relationship” is determined by comprehensively considering elements such as:

First, instructions and management regarding the method of carrying out work. If the client gives specific instructions to the contractor’s employees on how to proceed with work, the order of operations, or pacing, there is a tendency to determine that a command and control relationship exists. In a proper contracting arrangement, all such management should be the responsibility of the contractor’s supervisor .  

Second, management of working hours. If the client specifies the start and end times or break periods for the contractor’s employees, or directly orders overtime or work on holidays, it serves as strong evidence of the existence of a command and control relationship. Attendance management should be conducted by the employer, the contractor .  

Third, involvement in corporate order management and personnel evaluation. If the client decides on the placement of the contractor’s employees, evaluates their work performance, or gives instructions regarding service discipline, it is considered that the independence of both parties is lost .  

To clarify these legal differences, the following table summarizes the main personalityistics of work contracting and worker dispatching.

As the table shows, choosing between these two forms is not merely a matter of using different contracts, but directly relates to a management strategy decision on how much to integrate and directly manage labor within one’s own organization.

Key Types and Duration Limits of Worker Dispatching in Japan

The worker dispatching system in Japan is divided into several types to meet the diverse needs of companies. Among these, the main ones are “General Worker Dispatching” and “Dispatching with the Intent to Hire.” General Worker Dispatching is the most standard form of dispatching, aimed at flexibly meeting the labor demands of companies, such as supplementing personnel during busy periods or temporarily addressing specialized tasks.

On the other hand, “Dispatching with the Intent to Hire” is a unique form that combines dispatching with job placement services. Under this system, the worker is dispatched for a maximum period of six months (6 months), with the premise that the dispatching company will eventually directly employ the dispatched worker (as a full-time or contract employee). This dispatching period serves as a trial period for both the company and the worker to assess each other’s suitability. Therefore, selection activities such as checking resumes and conducting interviews before the start of dispatching, which are prohibited in General Worker Dispatching, are exceptionally allowed in Dispatching with the Intent to Hire.

Furthermore, the Japanese Worker Dispatching Law imposes strict limitations on the duration of dispatching to ensure the employment stability of dispatched workers. This is commonly known as the “3-Year Rule.” This rule is applied at two different levels.

One is the “worksite-based duration limit.” This limits the period during which the same worksite (such as a factory or office) can accept dispatched workers to a maximum of three years, in principle. This period is calculated from the day the dispatched worker is first accepted at the worksite. However, this duration limit can be extended every three years through proper procedures, such as obtaining the opinion of the majority labor union at the worksite or the representative of the majority of workers.

The other is the “individual-based duration limit.” This limits the period during which the same dispatched worker can work in the same organizational unit (such as a department or section) of the dispatching company to a maximum of three years. Even if the worksite-based period is extended, the same person cannot continue to work in the same department for more than three years. In this case, the dispatching company is required to take measures such as transferring the worker to a different department or switching to direct employment.

However, there are several exceptions to this 3-Year Rule. For example, dispatched workers who have concluded an indefinite employment contract with the dispatching employer, dispatched workers over the age of 60, workers engaged in fixed-term project work with a clear end date, or workers dispatched as substitutes for employees on maternity leave or childcare leave are not subject to this duration limit. The 3-Year Rule is not merely a compliance deadline but also has a policy intention to prevent companies from using dispatched labor indefinitely for core business operations and to encourage long-term personnel planning.

Practical Considerations and Commentary on Key Legal Precedents

In practice, one of the most critical legal risks to be aware of is “disguised contracting,” where, despite a contract being ostensibly for subcontracting, the reality is that the client exercises direct control over the workers. If deemed disguised contracting, this can be seen as an illegal act attempting to circumvent the regulations of the Japanese Worker Dispatch Law, potentially leading to administrative guidance and penalties.

The greatest management risk in disguised contracting is the court’s recognition of an implied employment contract between the client and the worker. If an implied employment contract is acknowledged, the client becomes liable for all legal responsibilities of a direct employer, including dismissal regulations and the obligation to enroll in social insurance.

A leading case in Japan on this matter is the Panasonic Plasma Display incident (Supreme Court of Japan, December 18, 2009). In this case, a worker employed by a subcontracting company, who worked at a Panasonic factory, claimed that an implied employment contract had been established with Panasonic due to receiving direct orders from Panasonic employees.

The Supreme Court overturned the lower court’s decision and denied the establishment of an implied employment contract. In its reasoning, the Supreme Court provided important criteria, stating that the mere fact of a client giving orders to a subcontractor’s workers (a state of disguised contracting) does not immediately lead to the establishment of an implied employment contract. For such a contract to be recognized, there must be further involvement, such as the client substantially participating in decisions regarding the hiring and treatment (such as salary) of the workers, to the extent that the subcontracting company becomes a nominal entity and the client can be seen as the de facto employer.

This precedent offers two important implications for managers. One is a certain reassurance that deficiencies in the management of the chain of command do not automatically lead to direct employment liability. However, the other is a more serious warning: the deeper the client’s involvement in the subcontractor’s fundamental personnel rights and labor management, the higher the risk that the court will recognize a direct employment relationship, overriding the formal contract. Therefore, to reliably avoid legal risks, it is essential to respect the independence of the contractor and strictly separate the command chain in practice.

Summary

In the realm of Japanese labor law, distinguishing between contract work and worker dispatching is extremely important. Contract work is based on the Japanese Civil Code and aims for the “completion of work,” with the contractor autonomously managing their own employees. In contrast, worker dispatching operates under the special regulations of the Worker Dispatching Act, aiming to provide “labor force” where the dispatch destination has direct command over the workers, in exchange for bearing many legal obligations. The choice between these two forms is not merely a contractual issue but a strategic decision for companies, reflecting whether they seek independent services or an integrated workforce within their organization. Mismanaging this relationship can lead to significant legal risks. Therefore, careful contract design and strict management of daily operations are key to ensuring compliance and stable business execution.

Monolith Law Office has a wealth of experience in labor law services, including the aforementioned theme, for a diverse range of clients within Japan. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to provide clear and practical legal advice on the complex Japanese labor regulations that international businesses face. From proper contract construction to the establishment of labor management systems and compliance advice, we offer comprehensive support tailored to your company’s needs.