What are the Criteria and Remedies for Disguised Subcontracting in the IT Industry?

In IT-related projects, including system development, there is often a need for a large number of personnel, making labor management and the establishment of a proper working environment extremely important issues. In order to legally manage the labor of project members, knowledge of contract law is also required. Sending people to the field without sufficient knowledge of contracts can sometimes lead to compliance issues. A very clear example of this is the issue of ‘disguised subcontracting’ in Japanese law. In this article, we will explain the criteria for determining disguised subcontracting and how to avoid falling into this category.

Characteristics of Projects in the IT Industry

Projects in the IT industry often require a large number of personnel and have a tendency to evolve into high-value business transactions and large-scale service industries. In particular, many IT-related projects, including system development, tend to evolve into formats that involve a large number of personnel on-site. From the perspective of the vendor receiving the work, this can lead to difficulties in managing the project.

https://monolith.law/corporate/project-management-duties[ja]

The above article explains the personalityistics of IT-related projects as a service industry, from the perspective of the difficulty for vendors in managing project progress.

Commonly Used Contracts in Projects

In IT-related projects, which often involve a large number of people on-site, the most commonly used types of contracts are the subcontracting contract and the quasi-mandate contract. The differences between these two types of contracts are explained in detail in the following article.

https://monolith.law/corporate/contract-and-timeandmaterialcontract[ja]

While the detailed content is covered in the above article, the two types of contracts that are often used are subcontracting, which emphasizes the completion of work as a requirement for fulfilling obligations, and quasi-mandate, which emphasizes the advancement of delegated tasks with a certain level of care, based on the trust relationship between the parties. These two types of contracts are managed in practice by involving subcontractors at times, or by dividing the development process into multiple stages.

If contract practices are conducted in accordance with the original meaning and purpose of these types of contracts, there should be no problem. However, if they are used in a deviated manner, various legal issues may arise.

What are Worker Supply and Worker Dispatch?

Furthermore, IT-related projects, which often involve a large number of people, can be a promising market for those engaged in the human resources business. To legally manage the labor of team members in such projects, knowledge of various regulations related to the human resources business becomes important.

What is Worker Supply?

Under the Japanese Employment Security Act, “worker supply” is prohibited and punishable by law. But what exactly are the Employment Security Act and the “worker supply” it prohibits? Let’s take a look at the relevant provisions of the Act, along with its purpose.

(Purpose of the Act)
Article 1: This Act aims to provide opportunities for individuals to engage in occupations suitable for their abilities, to meet the labor needs of industries, and to contribute to the economic and social development by promoting comprehensive labor measures and ensuring the stable employment and enrichment of workers’ professional lives (Law No. 132 of 1966), in conjunction with public employment security offices and other employment security agencies serving the public, conducting job introduction businesses, etc., with the cooperation of relevant administrative agencies or organizations, and ensuring the proper operation of job introduction businesses, etc., conducted by persons other than employment security agencies, considering the role they should play in the proper and smooth adjustment of labor supply and demand.

In other words, it can be said that this is a legal field aimed at managing the relationship between job-seeking workers and job-introducing businesses in a fair manner, taking into consideration job-seekers who are often unemployed and tend to be in a weak social position. The following is a provision in the Act that prohibits worker supply with penalties (the underlined and bold parts are added by the author).

Article 4-7: In this Act, “worker supply” refers to making workers work under the command of others based on a supply contract, excluding those that fall under worker dispatching as defined in Article 2, Paragraph 1 of the Act on Securing the Proper Operation of Worker Dispatching Businesses and Protection of Dispatched Workers (Law No. 88 of 1985, hereinafter referred to as the “Worker Dispatching Act”).
(Prohibition of Worker Supply Business)
Article 44: No one shall conduct a worker supply business or make workers supplied by such business work under their own command, except as provided in the following article.
(Permission for Worker Supply Business)
Article 45: Labor unions, etc., may conduct a free worker supply business with the permission of the Minister of Health, Labor and Welfare.
Article 64: Anyone who falls under any of the following items shall be punished by imprisonment for up to one year or a fine of up to one million yen.
(Items 1 to 8 omitted)
9. Those who violate the provisions of Article 44

In summary, it is generally illegal to contract to make others work under someone else’s command, except in the case of legally defined worker dispatching. The reason for this regulation is that unnecessary intermediaries in contracts for labor can lead to exploitation and skimming by the intermediaries. From the perspective of those accepting the workers, if they can accept workers without directly contracting with them, there is very little incentive to employ people and comply with labor laws. For these reasons, contracts involving labor are required to be completed between the “worker” and the “employer,” except in special cases where permission has been granted for a staffing business. By establishing a system based on these principles, unfair labor exploitation and evasion of labor laws are also prevented.

What is Worker Dispatch?

In labor contracts, the principle is not to involve intermediaries. Therefore, the cases where it is legal for the person who employs and the person who works to be different are extremely limited. The provision quoted below, which corresponds to “Japanese Worker Dispatch,” succinctly illustrates this point (the underlined and bold parts are by the author).

Article 2 Even if a business owner engages his own employees in work performed under a contract in the form of a contract, unless the business owner meets all of the following requirements in relation to the processing of the work, he shall be deemed a worker dispatching business owner.
1. Directly utilizes the labor of his own employees by meeting all of the following requirements.
(a) Directly manages the execution of the work by meeting all of the following requirements.
(1) Directly manages instructions and other management related to the method of performing the work for the workers.
(2) Directly manages instructions and other management related to the evaluation of the performance of the workers.
(b) Directly manages instructions and other management related to working hours by meeting all of the following requirements.
(1) Directly manages instructions and other management related to the start and end times of work, break times, holidays, and vacations for workers (excluding mere understanding of these).
(2) Directly manages instructions and other management in cases where the worker’s working hours are extended or the worker is made to work on a holiday (excluding mere understanding of working hours in these cases).
(c) Directly manages instructions and other management for maintaining and ensuring order in the company by meeting all of the following requirements.
(1) Directly manages instructions and other management related to matters concerning the discipline of workers.
(2) Directly decides and changes the placement of workers.
2. Processes the work contracted under a contract as his own work independently from the other party to the contract by meeting all of the following requirements.
(a) Procures and pays for all the funds required for the processing of the work under his own responsibility.
(b) Assumes all the responsibilities as a business owner stipulated in the Civil Code, Commercial Code, and other laws.
(c) Is not merely providing physical labor, but meets one of the following requirements.
(1) Processes the work with machinery, equipment, or materials (excluding simple tools necessary for the work) or materials or supplies prepared and procured at his own responsibility and expense.
(2) Processes the work based on his own planning or his own specialized skills or experience.

Although the provision is very long, the key point is that only when all these detailed provisions are met, it is not treated as worker dispatch, and it can be a legitimate contract work. In other words, if there is even one condition that is not met, it will be considered dispatch, and strict legal requirements will be imposed as a personnel dispatch business operator.

How to Avoid Falling into the Category of Disguised Contracting

Now that we have the tools to understand what disguised contracting is, let’s delve deeper. In the staffing industry, strict regulations are applied based on a licensing system. However, there are cases where, despite the fact that staffing is being carried out in reality, it is presented as a contracting agreement (usually without permission, and therefore illegally) to mediate workers. This is referred to as “disguised contracting”. With this understanding, the direction of measures to avoid falling into the category of disguised contracting becomes clear.

Do not directly contract with workers, and do not (or do not allow) command, order, or supervise workers from the user/client side

Whether it’s a contracting agreement or a quasi-mandate agreement, if a relationship based on command and order is established, regardless of the surface contract, there arises a demand for worker protection in labor relations. Therefore, even when workers are stationed on site, it is important to ensure that work orders are issued strictly from the vendor side, and that workers are engaged in “internal work received by their own company” rather than “work done for the place of residence”. This setup can help avoid problems.

Obtain permission for the staffing business and carry out legal staffing

In order to legally carry out the staffing business, it is necessary to apply to the Ministry of Health, Labour and Welfare and obtain permission. In addition, when trying to legalize by changing contracting to staffing, the selection of a staffing manager and the maintenance of a staffing management ledger are also required at the staffing destination. In other words, a certain level of employer responsibility is imposed on the site that will become the place of residence.

Summary

In this article, we have explained the content of lawful subcontracting and quasi-commission contracts, the illegality of disguised subcontracting, and the path to its legalization. The content can be complex as it involves laws related to the staffing industry. The key point of the discussion is that it is important to understand that the obligations and rights of workers and employers are paired. In other words, workers are required to provide labor in accordance with instructions and orders, and employers are required to protect the rights of workers. The obligations of both parties are regulated by direct contracts without intermediaries as a principle. By understanding this, it is believed that it will be easier to understand the positioning of staffing, which is an exception to this, and the illegality of disguised subcontracting.