Key Points to Check in 'SES Contracts' to Avoid Disguised Dispatching

The SES contract plays a crucial role in the Japanese IT industry by addressing the shortage of IT engineers.

However, depending on its content, an SES contract may potentially be deemed as a disguised dispatch.

Therefore, this article aims to guide engineers and companies considering an SES contract on what to be cautious about to avoid being classified as a disguised dispatch.

What is an SES Contract?

An SES contract is named after the initials of ‘System Engineering Service’. It refers to a contract concerning a human resources support business in which a company providing SES (hereinafter referred to as the ‘SES provider’) dispatches specific engineers to a company that becomes the client (hereinafter referred to as the ‘client company’).

Specifically, the engineer provides services to the client company, and in return, the SES provider receives compensation from the client company.

https://monolith.law/corporate/ses-contract-legal-notes[ja]

Legal Nature of SES Contracts

There are two main perspectives on the legal nature of SES contracts: one views them as contract work, while the other sees them as quasi-mandate contracts.

There are various differences between contract work and quasi-mandate contracts, but a significant distinction lies in whether the purpose is to complete a job or to carry out a task.

SES contracts are generally aimed at carrying out tasks, and therefore, they are often considered to have the nature of quasi-mandate contracts.

Issues with SES Contracts

One of the potential issues with SES contracts is the risk of being deemed as illegal due to disguised dispatching.

In the context of SES contracts, disguised dispatching refers to situations where, despite the outward appearance of an SES contract, it is essentially judged as worker dispatching.

In order to legally conduct a worker dispatching business, it is necessary to obtain permission for the worker dispatching business.

The permission for the worker dispatching business is stipulated in Article 5 of the Act on Securing the Proper Operation of Worker Dispatching Undertakings and Improved Working Conditions for Dispatched Workers (hereinafter referred to as the “Japanese Worker Dispatching Act”).

Article 5: Anyone who wishes to conduct a worker dispatching business must obtain the permission of the Minister of Health, Labour and Welfare.
2. Anyone who wishes to obtain the permission mentioned in the previous paragraph must submit an application form to the Minister of Health, Labour and Welfare, which includes the following items:
1. Name or title and address, and in the case of a corporation, the name of its representative
2. In the case of a corporation, the names and addresses of its officers
3. The name and location of the business office where the worker dispatching business is conducted
4. The name and address of the dispatching manager to be appointed under the provisions of Article 36
3. The application form mentioned in the previous paragraph must be accompanied by a business plan for each business office conducting the worker dispatching business and other documents specified by the Ministry of Health, Labour and Welfare.
4. The business plan mentioned in the previous paragraph must include the number of dispatched workers, the amount of fees related to worker dispatching and other matters related to worker dispatching for each business office conducting the worker dispatching business, as specified by the Ministry of Health, Labour and Welfare.
5. When the Minister of Health, Labour and Welfare intends to grant the permission mentioned in paragraph 1, he/she must first listen to the opinions of the Labour Policy Council.

(Permission for Worker Dispatching Business)

In the case of disguised dispatching, the SES contract may be deemed illegal if the permission for the worker dispatching business has not been obtained, as the contract is concluded as an SES contract.

Furthermore, as an engineer, you may be forced to enter into an unstable employment contract based on illegal disguised dispatching with the SES provider, which could lead to the engineer providing labor under inappropriate conditions.

As such, due to the numerous problems that can arise when judged as disguised dispatching, it is necessary to be cautious not to be judged as disguised dispatching in SES contracts.

Key Points in SES Contracts

In the following, we will explain what to pay attention to in the specific provisions of SES contracts in order not to be judged as disguised dispatching.

The following Article 4, Paragraph 1 of the Employment Stability Law Enforcement Regulations is a provision concerning disguised contracting, but it serves as a reference when judging whether it is disguised dispatching or not.

Article 4: Those who provide workers and have them work under the command of others (excluding those who carry out the worker dispatching business stipulated in Article 2, Paragraph 3 of the Act on Securing the Proper Operation of Worker Dispatching Businesses and Protection of Dispatched Workers (Law No. 88 of 1986 (Showa 60). Hereinafter referred to as the “Worker Dispatching Act”.) Even if the contract is a contract, it is considered to be a business that supplies workers according to the provisions of Article 4, Paragraph 7 of the Act, except in the case where all of the following items apply.
1. The person who bears all the financial and legal responsibilities as a business owner for the completion of the work.
2. The person who supervises and directs the workers engaged in the work.
3. The person who bears all the obligations stipulated by law as an employer to the workers engaged in the work.
4. The person who uses the machines, equipment, and tools provided by himself (excluding simple tools necessary for business.) or materials and supplies necessary for the work, or performs work that requires planning or specialized technology or specialized experience, and is not merely a provider of physical labor.

(Matters concerning Article 4)

Specifically, the following elements are used to determine whether it is disguised dispatching or not.

① Who bears the financial and legal responsibility
② Who has the authority to supervise and direct the engineer
③ Who bears the obligations as an employer to the engineer
④ Who prepares the necessary equipment and materials for the business

About Clause ①

For ①, in the SES contract, the entity that bears the financial and legal responsibility should be the SES provider, not the client company.

Regarding financial responsibility, it is required that all funds necessary for the processing of the business are procured and paid under the responsibility of the SES provider itself.

Therefore, it is necessary to have a provision in the SES contract that clearly states that the SES provider will bear the financial responsibility necessary for the business.

Also, regarding legal responsibility, the SES provider must bear the responsibility stipulated by the Civil Code, Commercial Code, and other laws for the processing of the business.

Therefore, it is important to have a provision in the SES contract that clearly states that the SES provider will bear the legal responsibility.

About Clause ②

For ②, it is necessary to clearly state that the authority to supervise and direct the engineer is held by the SES provider, not the client company.

Specifically, it is possible to have a clause stating that the SES provider itself will give instructions and other management regarding the method of performing the engineer’s work and instructions and other management regarding the evaluation of the engineer’s work performance.

Also, it is possible to have a clause stating that the SES provider itself will give instructions and other management regarding the start and end times of the engineer’s work, break times, holidays, vacations, etc., and instructions and other management when extending the engineer’s working hours or making the engineer work on holidays.

In addition, it is possible to have a clause stating that the SES provider itself will give instructions and other management regarding matters related to the engineer’s service discipline and decisions and changes in the placement of workers.

About Clause ③

For ③, it is necessary to clearly state that the obligations as an employer to the engineer are borne by the SES provider, not the client company.

An employer has various obligations as an employer to the worker, but an important obligation is, for example, the obligation to pay wages.

Also, the responsibility for the engineer’s health is also included in the employer’s responsibility, so it is possible to have a clause stating that the engineer should undergo regular health checkups.

About Clause ④

For ④, it is possible to have a clause stating that the SES provider prepares and procures the necessary equipment and materials for the business.

https://monolith.law/corporate/ses-contract-notes-explanation[ja]

Creating a System to Avoid Disguised Dispatch is Crucial

Even if you stipulate clauses in the SES contract to avoid being judged as a disguised dispatch, if the actual operation is such that it could be judged as a disguised dispatch, there is a possibility that the clauses of the SES contract will become meaningless.

Therefore, it is also important to create a system where operations are carried out in accordance with the SES contract, which has stipulated clauses to avoid being judged as a disguised dispatch. For example, providing training to employees and establishing internal regulations.

In addition to the clauses of the SES contract, it is also necessary to include clauses in the employment contract that the SES provider company concludes with the engineer to avoid being judged as a disguised dispatch.

Summary

We have explained the points to be careful about in SES contracts to avoid becoming a disguised dispatch.

Regarding the issue of disguised dispatch in SES contracts, not only knowledge about IT but also knowledge about labor law is required. We recommend that engineers and companies considering entering into an SES contract consult with a lawyer who has specialized knowledge.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the Internet, and law. A legal check is essential for the safe utilization of SES contracts. Our firm conducts reviews for various cases, ranging from companies listed on the Tokyo Stock Exchange Prime Market to venture startups. If you have any concerns about contracts, please refer to the article below.