Explaining the Legal Considerations of 'Japanese SES Contracts' to Address Staffing Shortages

With the decline in the working population, securing talent is becoming an urgent issue for companies.

In particular, professional occupations such as engineers require advanced skills, making it difficult to secure talent. The SES (System Engineering Service) contract, which aims to solve the shortage of engineers in companies, is attracting attention.

In this article, we will explain the overview and key points of the SES contract for companies (vendors) that are considering entering into an SES contract and providing engineers, and companies (clients) that are considering entering into an SES contract and receiving the provision of engineers.

What is an SES Contract?

An SES contract refers to an agreement where an engineer provides technical services or performs tasks at the client’s office or other work sites.

In an SES contract, there are cases where the engineer resides at the client’s site for a certain period to provide services.

Legal Nature of SES Contracts

When it comes to contracts for providing services, they are broadly divided into mandate contracts (quasi-mandate contracts) and contract for work.

A contract for work aims for “one party to complete a certain job” (Article 632 of the Japanese Civil Code), but the services provided by engineers do not necessarily aim for the completion of a job. In many cases, the purpose is the provision of the service itself.

Therefore, in SES contracts, remuneration is often determined based on the time of the services provided by the engineer, and its legal nature is generally considered to be a quasi-mandate contract.

Advantages and Disadvantages of SES Contracts

SES contracts have their own set of advantages and disadvantages for the three main parties involved: the vendor, the engineer, and the client.

Below, we will introduce the advantages and disadvantages for each of these three parties.

For the Vendor

In the IT industry, while there are many companies looking for engineers, there is a problem of a shortage of engineers.

In such a situation of talent shortage, the vendor can set a high price for the services provided by the engineers.

Therefore, one of the advantages for the vendor is the ability to receive a relatively high amount of money from the client.

The disadvantage, however, is the potential difficulty in securing engineers.

Since the existence of engineers is essential for concluding an SES contract, it is necessary to create a system within the company to train engineers and ensure a stable supply of them.

For the Engineer

One of the advantages for engineers is the opportunity to gain experience in various fields.

Also, the fact that the vendor will find work for them, without the engineers having to actively look for it themselves, can also be considered an advantage.

The disadvantage, however, is that the compensation they receive may be lower than if they were to contract directly, due to the involvement of the vendor.

Also, if the workplace changes regularly, the need to adapt to environmental changes and build relationships can be seen as a disadvantage for some people.

For the Client

One of the advantages for the client is the ability to receive services from engineers with the required skills whenever they need them.

The disadvantage, however, is the potential for the amount paid to the vendor to be high.

Relationship with Worker Dispatch

In an SES contract, the vendor and the engineer first enter into an employment contract, and then the vendor and the client enter into an SES contract, with the engineer providing services at the client’s site.

In such cases, it is important to be aware of the risk of being judged as a so-called disguised contract and, in reality, being judged as illegal worker dispatch.

Worker dispatch refers to “having one’s own employees work for another person under the employment relationship and under the direction and orders of the other person, excluding those that promise to employ the worker to the other person” (Japanese Worker Dispatch Law).

When conducting a worker dispatch business (conducting worker dispatch as a business), it is necessary to obtain the permission of the Minister of Health, Labour and Welfare (Article 5 of the Worker Dispatch Law). Therefore, if an SES contract is judged to be essentially a worker dispatch, it becomes an illegal worker dispatch.

https://monolith.law/corporate/criteria-for-disguised-contract[ja]

Distinguishing between SES Contracts (Quasi-Delegation Contracts) and Worker Dispatch

The distinction between SES contracts and worker dispatch is determined by whether a command and control relationship can be recognized between the client and the engineer.

Specifically, it is comprehensively judged from the following elements:

• Whether the vendor is giving instructions and other management regarding the method of performing the engineer’s work
• Whether the vendor is giving instructions and other management related to the evaluation of the engineer’s work performance
• Whether the vendor is giving instructions and other management (excluding mere understanding) regarding the engineer’s start and end times, break times, holidays, and vacations
• Whether the vendor is giving instructions and other management (excluding mere understanding of working hours, etc. in these cases) when extending the engineer’s working hours or having the engineer work on holidays
• Whether the vendor is giving instructions and other management regarding matters related to the engineer’s service discipline
• Whether the vendor is deciding and changing the engineer’s placement
• Whether all the funds required for the processing of the work are procured and paid under the responsibility of the vendor
• Whether the vendor is responsible for all the responsibilities of a business owner as stipulated in the Civil Code, Commercial Code, and other laws regarding the processing of work
• Whether the work is being processed with machines, equipment or tools (excluding simple tools necessary for work), or materials or supplies prepared and procured at the vendor’s responsibility and expense
• Whether the work is being processed based on the vendor’s planning or the vendor’s specialized technology or experience

Risks of Engaging in Illegal Worker Dispatch

If you engage in illegal worker dispatch without the permission of the Minister of Health, Labour and Welfare, you may be sentenced to imprisonment for up to one year or a fine of up to one million yen.

There is also a risk of reputational issues, such as the spread of illegal worker dispatch on social media.

Points to Note in SES Contracts

One of the key points to note in SES contracts is the need to establish provisions that take into account the distinction between SES contracts (quasi-delegation contracts) and worker dispatching, to avoid illegal worker dispatching.

As a client, you may want to make various requests to the vendor regarding the provision of engineer services.

However, as a vendor, it is necessary to avoid becoming involved in illegal worker dispatching, so you should refuse requests that you cannot comply with.

When refusing a request, it is not enough to simply say no. Explaining that there is a possibility of becoming involved in illegal worker dispatching can provide a sense of understanding to the client.

https://monolith.law/corporate/regulation-of-outsourcing-contract[ja]

Summary

We have explained the overview and key points of the SES contract.

When entering into an SES contract, engineers are often stationed at the client’s office or other locations. If not properly managed, this could potentially lead to illegal worker dispatching.

Therefore, both the vendor and the client, who are the parties to the SES contract, need to have a solid understanding of the contract.

Also, as an engineer, if the vendor and client have a solid understanding, you can focus on providing your services as an engineer without unnecessary worries.

For SES contracts, in addition to knowledge of the Worker Dispatch Law (Japanese Worker Dispatch Law), knowledge of labor laws and the IT industry is also required. Therefore, we recommend consulting with a lawyer who has specialized knowledge in these areas.