[Contents]
1. Introduction – The Subcontract Act and the New Freelance Act
2. Recruiting Outsourcees
3. Requirements Applicable upon Outsourcing
(1) Article 3 Notice/Document
(2) Handling of Undetermined Matters
(3) Handling of Common Matters
4. Requirements Applicable During the Performance of Services
(1) Improvement of Working Environment
(2) Preparation and Preservation of Documents Pertaining to the Circumstances of Transaction
(3) Prohibited Acts of Outsourcer
5. Concerning Payment of Remuneration
(1) Setting Payment Date
(2) Exceptions to Payment Date in Case of Sub-Outsourcing
6. Termination of Contract
7. Conclusion
1. Introduction – The Subcontract Act and the New Freelance Act
In Japan, diversification of working style has progressed over time, from the time when the main style was to work as a member of an organization until one’s retirement age, and now there are an increasing number of people called freelance workers who do business on their own without belonging to an organization. In line with this situation, the “Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators” (Act No. 25 of 2023, commonly called the “New Freelance Act”; hereinafter referred to as the “New Act”) was enacted with the objectives of: (1) ensuring fair transactions between freelance workers and outsourcing companies, and (2) improving a secure working environment for freelance workers. The New Act came into force on November 1, 2024. As the New Act was enacted for the said purposes, it mainly consists of provisions concerning: (1) the proper handling of transactions with freelance workers, and (2) improvement of the working environment for freelance workers (*1). Regarding (1), there is the “Act Against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors” (the “Subcontract Act”) that was enacted for similar purposes and aims to ensure fair transactions between outsourcing companies (large procuring enterprises) and service providers (subcontractors), and the provisions of the New Act are similar to those of the Subcontract Act. The Subcontract Act defines the scope of the subject transactions based on the following two criteria: the amount of stated capital (or total contributions) of the parties, and the contents of the transactions. The purpose of these provisions is to regulate improper conduct by outsourcing companies (large procuring enterprises) quickly and effectively in subcontracting transactions by treating such large procuring enterprises as having a “dominant position” according to their stated capital. On the other hand, the New Act applies to outsourcing of services to an individual or a corporation that has no employees (in this respect, the scope of the requirements imposed on the outsourcers varies depending on certain conditions such as whether the outsourcer has employees). As the applicability of each Act is determined based on their respective conditions, certain transactions may be subject to both the Subcontract Act and the New Act. In other words, depending on the parties/contents of the transaction, there are cases where (i) only the Subcontract Act applies, (ii) only the New Act applies, and (iii) both the Subcontract Act and the New Act apply. (However, in the case of (iii) above, the penal provisions of the New Act take precedence in the breach of both Acts, in principle, and any act that is subject to a recommendation under the New Act will not be subject to a recommendation under the Subcontract Act (*2). As the Subcontract Act was enacted and enforced in 1956, most companies should already be in compliance with the requirements imposed on the outsourcers (large procuring enterprises) under the Subcontract Act. Therefore, in this article, we will go over the matters that such companies need to newly address and note in light of the enforcement of the New Act, according to the actual flow of outsourcing services to third parties.
*1) The New Act contains other provisions such as definitions and penal provisions. *2) Japan Fair Trade Commission, “Relationship between the Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators and the Antimonopoly Act/the Subcontract Act” (May 31, 2024)
2. Recruiting Outsourcees
First, let us assume a situation where a company decides to outsource certain services to a third party and recruit an outsourcee. In such case, if (i) only the Subcontract Act applies, there is no regulation regarding such recruitment under the Subcontract Act. However, if (ii) only the New Act applies or (iii) both the Subcontract Act and the New Act apply, when the outsourcer is a “specified entrusting business operator (*3),” such as an outsourcer with employees, and it provides certain information (*4) concerning the recruitment of outsourcees to which the outsourcer is to entrust services by advertisement, etc. (*5), such outsourcer must not make a false or misleading representation regarding such information, and it must keep the information accurate and up-to-date (New Act, Art. 12).
*3) In the case of an individual, it means a person with employees; in the case of a corporation, it means a corporation with two or more officers or employees (New Act, Art. 2, para. 6).
(*4) The information concerning recruitment subject to the obligation to make accurate presentation is, as follows: – contents of the business (e.g., contents of the required deliverables and services to be provided; scope of the licensing/assignment of intellectual property rights of the deliverables); matters concerning the place, period, or time during which the business is to be engaged; – matters concerning remuneration (e.g., amount of remuneration; payment date; payment method; compensation for assignment/licensing of intellectual property rights of deliverables); – matters concerning contract termination (including non-renewal after the expiration) (e.g., provisions concerning termination events, expenses and penalty for early termination); and – matters concerning the person who recruits a specified entrusted business operator (e.g., name and business records of the person who is the specified entrusting business operator).
(*5) “Advertisement, etc.” as used herein means the following manners of providing information concerning recruitment: – placing advertisements in newspapers, magazines, or other publications; – posting or distributing documents; – delivering documents; – sending facsimiles; * sending emails, etc. (“Email, etc.” refers to emails and telecommunications using messaging functions, such as, SNS. As SNS messaging functions are widely used in transactions with freelance workers, it is important to pay attention to the requirements described in this section.); and – broadcasting, cable broadcasting, etc.
In this respect, if a specified entrusted business operator has already been appointed and the contract terms and other matters are being negotiated with an outsourcee of such entrusted business operator, the requirements described in this section do not apply to the case even where the potential transaction is subject to the New Act (*6).
When an outsourcee has been appointed and the specific services are actually outsourced, the following requirements apply.
(1) Article 3 Notice/Document
In the case where (i) only the Subcontract Act applies, the outsourcer is required to deliver, immediately upon placing an order, a document stating the details of the services to be performed, the remuneration amount, the date of payment and other matters (“Article 3 Document”) to the outsourcee. As a rule, the Article 3 Document is to be delivered in writing; however, it can be given by email or other electromagnetic means. In such case, the outsourcer must first obtain the consent of the outsourcee regarding the use of an electromagnetic record in lieu of a document. Also, even if the consent is obtained, if the outsourcee later changes his/her mind and requests the delivery of a paper document, it is necessary to resume such manner of delivery of the document (Subcontract Act Enforcement Order, Art. 2). There are also rules regarding the electromagnetic means that can be used. They need to be certain prescribed methods, such as sending ordinary emails, using EDI, using websites, or delivering electromagnetic recording media to the outsourcee, and these methods must be capable of allowing the outsourcee to produce a paper document by outputting the electromagnetic record (*7). In this respect, sending emails to outsourcees’ cell-phones is not included in the manners of providing an electromagnetic record permitted under the Subcontract Act, because the information that needs to be recorded in the outsourcee’s file when using the methods such as emails and websites will not be recorded in such manner. Based on this rule, the manner of providing information by way of SMS or chatting tools is also likely to be unacceptable as an alternative to delivering a document. In practice, there may be a need to use, or actual cases of using, chatting tools and SNS messaging functions; however, it should be noted that such method may not be accepted as an alternative to the Article 3 Document as it stands now.
On the other hand, in the case where (ii) only the New Act applies, the outsourcer (*8) is also required, as in the case of (i), to notify the details of the services to be performed, the remuneration amount, the date of payment and other matters (“Article 3 Notice”) to the outsourcee immediately upon placing an order. However, the Article 3 Notice does not have to be made by delivery of paper document, and the conditions of use of electromagnetic means are different from those under the Subcontract Act. First, it is not necessary to obtain prior consent from the outsourcee regarding the use of an electromagnetic means. The outsourcer usually needs to deliver the document in response to the request of an outsourcee who has been provided the specified matters by an electromagnetic method; however, this does not necessarily apply when, for example, the outsourcee becomes unable to view the relevant matters because he/she has deleted his/her SNS account. Second, there is a wide range of methods permitted. A permitted electromagnetic method is either: (i) transmitting information by email or other telecommunications used to relay information upon identifying the recipient thereof, or (ii) delivering an electromagnetic medium on which the relevant information is recorded in a file (e.g., USB memory, CD-R, etc.) (New Act Enforcement Regulations, Art. 2, para. 1), in which the relevant information must be indicated in characters, numbers, symbols or other codes (para 2 of the same Article.). Regarding (i), the specific methods are emails, SMS and messaging functions of SNS with which the sender can send the information upon identifying the recipient (*9). Webmail services, cloud services, etc., can also be used, in which case, the information is deemed to be presented when it becomes possible for the outsourcee to check the contents of Article 3 Notice under normal circumstances. However, when using cloud services or other similar services, it is desirable for both the outsourcer and the outsourcee to save the contents of the relevant order using a screen shot function, etc., in order to prevent possible problems since deletion of messages or environmental changes that may hinder browsing. There are public comments on the enforcement order, guidelines, etc., of the New Act that opine that the methods that can be deleted or become unviewable should not be allowed; however, they were eventually accepted after considering such disadvantages and actual practical needs, based on the idea that “it is appropriate to widely accept electromagnetic means including SNS because such various media are actually used in practical dealings.” In practice, SNS messaging functions and chatting tools are often used for communication when dealing with sole proprietors and small corporations to which the New Act is applicable. It is certainly true that the use of messaging functions and chatting tools is a quick and convenient method that benefits both the outsourcer and the outsourcee. On the other hand, we cannot deny possible problems as it is also easy to delete or modify the contents of the transmission (*10). In fact, a survey on the Subcontract Act conducted before the enforcement of the New Act reported a complaint that stated: “I received the details of the order (specifications) and contract terms from the other party’s personnel using a business chat tool, but they unilaterally edited or deleted the agreed terms at a later date. (*11)” We recommend that, in order to prevent such problems and facilitate smooth transactions, both the outsourcers and the outsourcees take preventive measures such as stipulating rules to take screen shots whenever necessary.
Finally, in the case where (iii) both the Subcontract Act and the New Act apply, it is not necessary to deliver both an Article 3 Document and an Article 3 Notice as there are many overlapping items between the contents of the former under the Subcontract Act and those of the latter under the New Act; it is sufficient to include all the information required under both Acts to the outsourcee in one document or email, etc. However, please note that in this case, you may not omit information that are required only under either the Subcontract Act or the New Act (*12), and that when using an electromagnetic means, you must comply with the rules under the Subcontract Act described in the case of (i) above (obtaining prior consent of the outsourcee and the use of a method by which the outsourcee can produce a document by outputting an electromagnetic record).
*7) Japan Fair Trade Commission, “Notes on Provision of Electromagnetic Records in Subcontracting Transactions” *8) Please note that the obligation to provide the Article 3 Notice is not limited to outsourcers that are categorized as a “specified entrusting business operator”; it also applies when a freelance worker who has no employee (an “entrusting business operator”) outsources his/her business to another freelance worker. *9) Thus, it does not include a method by which a particular individual primarily aims at having third parties view his/her posts, such as posting on a Web page *10) While most of the services have functions to indicate the fact that a subsequent modification of the contents of a transmission has been made by stamping “Edited” or to prevent modification after a certain period of time, those functions seem to be unable to show the specific details of such modifications. *11) Japan Fair Trade Commission, “Fact-Finding Survey Report on Subcontracting Transactions in the Software Business” (published in June 2022)
(2) Handling of Undetermined Matters
With respect to the matters that need to be stated in Article 3 Document/Notice, if there are any matters that are yet to be determined for a reasonable reason (“Undetermined Matters”), you are to state/notify the matters other than the Undetermined Matters, the reason for being unable to determine the Undetermined Matters, and the scheduled date of determination. In such case, both the Subcontract Act and the New Act require delivering a document/notice stating the Undetermined Matters immediately after such matters are determined, with clarification of the relationship with the initial document/notice. It is possible to deliver a supplementary document/notice by electromagnetic means. In such case, please refer to Section 3(1) for the rules in each case.
(3) Handling of Common Matters
An Article 3 Document/Article 3 Notice must be delivered each time services are outsourced under the Subcontract Act or the New Act. However, in a continuous transaction, if there are common matters that are applicable for a certain period of time, you may avoid specifying the common matters each time a transaction is made by, for example, first entering it into a master contract that stipulates the common matters and then entering into an individual contract that stipulates the specific matters. In such case, it is necessary under both Acts to indicate the period for which the common matters are valid and the relationship with the initially stated/indicated common matters. It is also possible to specify the common matters by electromagnetic means in lieu of delivery of a document/notice in writing, in which case, please refer to Section 3(1) for the rules in each case.
4. Requirements Applicable During the Performance of Services
After outsourcing specific services, the following apply when the services are actually performed by the outsourcee.
(1) Improvement of Working Environment
In the case where (i) only the Subcontract Act applies, there is no requirement to improve the working environment of the outsourcee under the Subcontract Act. On the other hand, in the case where (ii) only the New Act applies or (iii) both the Subcontract Act and the New Act apply, it is necessary to comply with (1) a duty to give consideration regarding pregnancy, childbirth, childcare, or nursing care (New Act, Art. 13, para. 1), and (2) a duty to take measures against issues arising from conduct or remarks made in connection with the outsourcing of services (New Act, Art. 14). First, regarding (2) a duty to take measures against issues arising from conduct or remarks made in connection with the outsourcing of services, the outsourcer (if categorized as a “specified entrusting business operator”) is required to take the following measures to put in place a system to deal with harassment (sexual harassment, harassment related to pregnancy, childbirth, etc., and power harassment) against the outsourcee’s persons engaged in the entrusted business:
(a) clarifying the policy against harassment and publicizing and educating on the policy; (b) establishing a system to appropriately respond to consultation requests and complaints; (c) responding promptly and appropriately to harassment after it has occurred; and (d) taking necessary measures in conjunction with the above measures.
Regarding the establishment of a system described in (b), it is required to establish a contact point for responding to consultation requests and complaints from the outsourcee’s persons engaged in the entrusted business. However, as many companies must already have a harassment consultation channel for their own employees, such existing channel can be used for the outsourcee’s persons engaged in the entrusted business. The consultation channel must be easy to use and clearly notified to the outsourcee’s persons engaged in the entrusted business in such manner as stating the contact information of the consultation channel in documents/emails pertaining to the outsourcing contracts or posting it on the intranet that is regularly viewed by the persons engaged in the entrusted business. Other specific measures necessary to be taken to establish a system for preventing harassment are, as follows:
(1) Clarification of the policy, publicizing and educating thereon
(i) Clarify the details of outsourcing-related harassment and the policy against harassment, and thoroughly notify the same to and educate workers including persons in charge of outsourcing contracts.
(ii) Stipulate the strict policy and measures against offenders in outsourcing-related harassment in the work rules or other document and notify the same to and educate workers including the persons in charge of outsourcing contracts.
(2) Establishment of a system to appropriately respond to consultation requests (including complaints)
(iii) Establish a consultation channel and notify the same to specified persons engaged in the entrusted business (Note: freelance workers).
(iv) The person in charge of the consultation channel must be trained to be able to appropriately address various situations. It requires addressing a broad range of situations including not only actual harassment but also when harassment is threatened to occur or when it is difficult to determine whether an act can be considered harassment.
(3) Prompt and appropriate response to outsourcing- related harassment after it has occurred
(v) Promptly and accurately verify facts.
(vi) When facts are verified, take prompt and appropriate action to care for the victim.
(vii) When facts are verified, take appropriate measures against the offender.
(viii) Take measures to prevent recurrence.
(4) Measures to be taken in conjunction with the above
(ix) Take measures necessary to protect the reporter, offender, etc., and notify the same to workers and specified persons engaged in entrusted business (Note: freelance workers).
(x) Stipulate that no disadvantageous treatment including termination of contract will be made for requesting consultation, cooperating in verification of facts or reporting to the Prefectural Labour Bureau, and notify the same to and educate specified persons engaged in the entrusted business (Note: freelance workers).
Next, regarding the duty described in (1) above, the outsourcer (if categorized as “specified entrusting business operator”) must give necessary consideration to any request from the outsourcee to enable him/her to balance work with pregnancy, childbirth, childcare, or nursing care with regard to the outsourcing that continues for six months or more (“Continuous Outsourcing”) (*13). The term “six months or more” in this case refers to the period from the start to the end of the outsourcing which is expected to be six months or more and not the period after the expiration of a six-month period. In the case where a master contract is initially entered into and then individual contracts are executed for specific services, as is often the case in practice, the above rule applies if the term of the master contract is six months or more. (It should be noted that “master contract” here refers to a contract that sets forth the basic matters of performance of outsourced services and contains the provisions on the outline of the scheduled performance of the services. If it only sets forth, for example, confidentiality obligations or prohibited matters, and does not refer to the contents of the services, it is not considered a “master contract.”) The rule also applies when the period of the outsourcing or the basic contract is to continue for six months or more by renewal, even if such period is interrupted for a period less than one month (*14).
*13) In the case of any outsourcing other than Continuous Outsourcing, this is only an obligation-to-make-efforts to give such consideration (New Act, Art. 13, para. 2). *14) Specifically, the work is considered to be Continuous Outsourcing when the following two requirements are met: (i) the parties to the contract are the same, and the contents of the work or services to be performed are at least to a certain extent identical, and (ii) the number of days between the day immediately following the date of termination of the previous outsourcing contract or master contract and the day immediately prior to the date of conclusion of the next outsourcing contract or master contract is less than one month.
(2) Preparation and Preservation of Documents Pertaining to the Circumstances of Transaction
When (i) only the Subcontract Act applies or (iii) both the Subcontract Act and the New Act apply, the outsourcer is required to prepare and preserve for two years a document (“Article 5 Document”) or an electromagnetic record (*15) stating certain matters concerning the circumstances of the transaction (*16) (Subcontract Act, Art. 5). On the other hand, when (ii) only the New Act applies, as the New Act has no such provision, it is not required to prepare and preserve a document or electromagnetic record describing the circumstances of the transaction.
*15) When preparing and preserving the Article 5 Document in the form of an electromagnetic record, the following requirements must be met: (i) any correction or deletion made to the recorded matters can be verified; (ii) the electromagnetic record can be displayed on the screen or printed out as needed; and (iii) matters recorded in the electromagnetic record can be searched by name of the outsourcee, a range of dates of order placement, etc. (Rules Concerning Preparation and Preservation of Documents or Electromagnetic Records under Article 5 of the Act against Delay in Payment of Subcontract Proceeds, etc., to Subcontractors, Art. 2, para. 3). *16) Please note that although some matters overlap with those stated in the Article 3 Document, the Article 5 Document is for stating the circumstances of the transaction and so it is not sufficient to keep a copy of the Article 3 Document that state the matters determined at the time of commencement of the transaction.
(3) Prohibited Acts of Outsourcer
In the case where (i) only the Subcontract Act applies, the outsourcer must not conduct any of the following acts that are stipulated in the Act as prohibited acts of outsourcers:
(a) refusing to receive performance of work; (b) failing to make timely payment of subcontract proceeds; (c) reducing the amount of subcontract proceeds; (d) returning goods relating to the work; (e) setting the amount of subcontract proceeds unjustly low; (f) coercing to purchase designated goods or use designated services; (g) taking retaliatory measures; (h) early deduction or causing the subcontractor to pay for raw materials, etc., from the amount of subcontract proceeds to be paid; (i) delivering a negotiable instrument that is difficult to be discounted; (j) demanding provision of unjust economic gains for itself; and (k) unjustly demanding change of the contents of work or re-work.
In this respect, the New Act also sets forth similar prohibited acts. Specifically, the following acts without strikethrough are prohibited under the New Act and therefore prohibited under both Acts:
(a) refusing to receive performance of work; (b) failing to make timely payment of remuneration; (*17) (c) reducing the amount of subcontract proceeds; (d) returning goods relating to the work; (e) setting the amount of remuneration unjustly low; (f) coercing to purchase designated goods or use designated services; (g) taking retaliatory measures; (*18) (h) early deduction or causing the subcontractor to pay for raw materials, etc., from the amount of subcontract proceeds to be paid; (i) delivering a negotiable instrument that is difficult to be discounted; (j) demanding provision of unjust economic gains for itself; and (k) unjustly demanding change of the contents of work or re-work.
(*17) However, the New Act stipulates the requirement, rather than as a prohibited act, to make timely payment of subcontract proceeds in Article 4, paragraph 5, which sets forth the setting of the date of payment of subcontract proceeds; therefore, the outsourcer is naturally required to pay subcontract proceeds by the payment date. (*18) Prohibition of retaliatory measures is stipulated in Article 6, paragraph 3, which sets forth the right to report to the Fair Trade Commission or the Commissioner of the Small and Medium Enterprise Agency, rather than in Article 5, which sets forth the matters to be observed by the specified entrusting business operator.
However, under the New Act, the provisions stipulating such prohibited acts apply when the outsourcer falls under the category of specified entrusting business operator and the outsourced services continue for one month or more; therefore, in the case where (ii) only the New Act applies, outsourcers who outsource services that meet such requirements must pay attention to these provisions. The meaning term “one month” is the same as that described in Section 4(1) above, so please refer to that section.
In this respect, when (iii) both the Subcontract Act and the New Act apply, it must be noted that all of the acts listed above are prohibited regardless of the duration of the outsourcing because of the application of the Subcontract Act. In this case, the penal provisions of the New Act take precedence in a breach of both Acts, in principle, and any act that is subject to a recommendation under the New Act will not be subject to a recommendation under the Subcontract Act, as we described in Section 1 above.
5. Concerning Payment of Remuneration
The payment of remuneration as consideration for outsourced services is subject to the following requirements.
(1) Setting Payment Date
Both the Subcontract Act and the New Act set forth that the outsourcer (if categorized as a “specified entrusting business operator” in the case of the New Act) must set the date of remuneration payment on the earliest possible date that is no later than 60 days from (and including) the day on which the outsourcer receives the performance of work/services from the outsourcee, regardless of whether or not the outsourcer inspects the contents of the work/services performed by the outsourcee. Accordingly, in all the cases of (i), (ii), and (iii), the payment date must be set within 60 days from the date of receipt of the work/services, and the payment must be made by such date. Please note, however, that in the case where (ii) only the New Act applies, there is an exception under the New Act regarding the payment date in the case of sub-outsourcing, as explained in the next section. Also, under the Subcontract Act, if the outsourcer fails to pay the subcontract proceeds by the payment date, the outsourcer is required to pay late payment interest at 14.6% per annum on the unpaid amount for the period from the date on which 60 days have elapsed from the date of receipt of the work to the date of actual payment (Subcontract Act, Art. 4-2), and this requirement applies to the cases where (i) only the Subcontract Act applies and (iii) both the Subcontract Act and the New Act apply and the payment of remuneration is delayed. On the other hand, the New Act has no provision requiring payment of interest on a delayed payment, and therefore in the case where (ii) only the New Act applies, no such payment of interest on a delayed payment is required. (However, under the Civil Code, there is an obligation to pay interest on a delayed payment at the statutory interest rate, and any contractual agreement regarding interest on a delayed payment shall apply.)
(2) Exceptions to Payment Date in Case of Sub-Outsourcing
Where a business operator who has been entrusted work by an outsourcer further outsources all or a part of the entrusted work, when (i) only the Subcontract Act applies, the rules regarding the payment date set forth in Section 5(1) apply to the outsourcer of the sub-outsourcing (i.e., outsourcee of the first outsourcing) regarding the remuneration payable to the second outsourcee, as there is no particular exception to such sub-outsourcing in the Subcontract Act. On the other hand, where (ii) only the New Act applies, the outsourcer (if categorized as a “specified entrusting business operator”) of sub-outsourcing may, by specifying the following matters in the Article 3 Notice, set the date of remuneration payment to the second outsourcee on the earliest possible date that is within 30 days from (and including) the date of payment by the first outsourcer (New Act, Art. 4, para. 3):
(a) the fact that it is sub-outsourcing; (b) name, etc., of the first outsourcer (*19); and (c) payment date under the first outsourcing.
Specifically, in the case where outsourcing by an outsourcer (specified entrusting business operator) to an outsourcee is sub-outsourcing, uniform application of the rules described in 5(1) above could cause financial difficulties for the second outsourcer because the second outsourcer may be required to pay remuneration to the second outsourcee before receiving the consideration from the first outsourcer, and that may result in reluctance to outsource to other outsourcees who are freelance workers. Therefore, it is permitted to make payment to the second outsourcee within 30 days of receipt of payment from the first outsourcer. However, in such case, there is a possibility that the second outsourcee may be required to bear the cost for commencing the services for a longer period due to the delayed payment date; therefore, if the second outsourcer receives an advance payment from the first outsourcer, the second outsourcer must give due consideration to make sure that the second outsourcee receives an advance payment for the costs necessary to commence the services, including procurement of materials (by, for example, appropriately distributing to the second outsourcee the advance payment received from the first outsourcer) (New Act, Art. 4, para. 6). Please note that it is not necessarily required to apply such exception to the payment date in the case of sub-outsourcing. As it can apply only when the second outsourcer (specified entrusting business operator) specifies (a), (b) and (c) above in an Article 3 Notice, in such a case where the second outsourcer does not want to disclose the information on the first outsourcer from the viewpoint of confidentiality or other reason, it may choose not to apply such exception and set the remuneration payment date on the earliest possible date within 60 days of the receipt of the work/services in accordance with the basic rules.
Next, in the case where (iii) both the Subcontract Act and the New Act apply to a transaction that is categorized as sub-outsourcing, the above-described exception does not seem to be permitted because of the applicability of the Subcontract Act, and so it is necessary to set the payment date as described in Section 5(1) above as in the case where (i) only the Subcontract Act applies (*20).
*19) Specifically, “the first outsourcer’s trade name, personal name or appellation, or number, mark or other codes appropriated to each business operator by which the first outsourcer can be identified” (New Act Enforcement Regulations, Art. 6, item 2). *20) As described in Section 1 above, as a general rule, the New Act applies preferentially to acts that violate both the Subcontract Act and the New Act; however, this rule is about acts in violation of both the Subcontract Act and the New Act, and the Subcontract Act applies to any act that violates only the Subcontract Act. Therefore, it is deemed necessary to comply with the provisions of payment date of the Subcontract Act with respect to sub-outsourcing to which both the Subcontract Act and the New Act apply.
6. Termination of Contract
Lastly, we will explain about the requirements governing termination of outsourcing contracts.
In the case where (i) only the Subcontract Act applies, there is no legal requirement to give advance notice for early termination of a contract as the Subcontract Act has no provision for such advance notice for termination by the outsourcer. However, it should be noted that early termination of a contract by the outsourcer may constitute a prohibited act such as “refusing to receive performance of work” or “unjustly demanding change of the contents of work or re-work” (please see Section 4(3)). As these acts are also prohibited under the New Act as described in Section 4(3), this should also be noted when (ii) only the New Act applies and (iii) both the Subcontract Act and the New Act apply.
In addition, in the case where (ii) only the New Act applies or (iii) both the New Act and the Subcontract Act apply, the outsourcer (if categorized as a “specified entrusting business operator”) is required under the New Act to notify the outsourcee of its intention to terminate or not renew a continuous outsourcing contract for six months or more no later than 30 days prior to the date of termination or expiration of the contract (New Act, Art. 16, para. 1). Also, if the outsourcee so requests during the period from the date of said advance notice to the date of expiration of the contract, the outsourcer must disclose the reason for the termination or non-renewal without undue delay (id., para. 2). Regarding a continuous outsourcing contract for six months or more referred to above, the concept of the period is as described in Section 4(1). Please note that if there is a basic contract, the period is determined based on the basic contract rather than individual contracts, and that if the basic contract constitutes a continuous outsourcing contract, not only the individual contracts under the basic contract but also the basic contract itself are subject to advance notice as forming a part of the agreement. Non-renewal of a contract means that the outsourcer does not enter into the next contract within one month from the date of expiration of the current contract with the intention of not renewing the said current contract. If these conditions are met, the outsourcer is subject to the obligation to give 30-days advance notice; however, advance notice is exceptionally exempted in the following cases, and in such cases, it is not required to disclose the reason for termination or non-renewal either. Please note that even if the parties agree in advance that the contract can be terminated without notice in certain events, the advance notice required under the New Act does not immediately become unnecessary unless any of the following events for exception exists:
(a) when it is difficult to give advance notice due to a disaster or other unavoidable reason (Order of the Ministry of Health, Labour and Welfare on the New Act, Art. 4, item 1); (b) in the case of sub-outsourcing, when it is necessary to immediately terminate the sub-outsourcing contract because, for example, a majority of the services under the sub-outsourcing contract has become unnecessary due to a termination of the entire or a part of the first outsourcing contract (id., item 2); (c) in the case of continued outsourcing based on a basic contract or renewal of a contract, when terminating one outsourcing contract with the term of 30 days or less (id., item 3); (d) when it is necessary to immediately terminate the contract due to a reason attributable to the outsourcee (id., item 4); or (e) when a basic contract exists but no service has been provided under an individual contract for a considerable period of time due to any reason attributable to the outsourcee (id., item 5).
It is not required to disclose the reason for termination if there is a risk of harming the interests of a third party or if such disclosure would result in a violation of another law or regulation (New Act, Art. 16, para. 2; Order of the Ministry of Health, Labour and Welfare on the New Act, Art. 6).
Advance notice of termination or non-renewal or disclosure of the reason therefor must be made by one of the following methods: (i) delivery of a document, (ii) facsimile, or (iii) email, etc. (Order of the Ministry of Health, Labour and Welfare on the New Act, Art. 3, para. 1 and Art. 5, para. 1). Regarding (iii) above, in addition to emails, SMS and messaging functions of SNS can be used if the sender can send information by identifying the recipient (*21). Webmail services, cloud services, etc., can also be used. In such case, the notice of termination, etc., is deemed to have reached the outsourcee when it becomes possible for the outsourcee to check the contents of the relevant notice or disclosure under normal circumstances. These discussions are the same as those regarding the manner of giving the Article 3 Notice by electromagnetic means described in Section 3(1); however, please note that with respect to the advance notice of termination, etc., the outsourcee must be able to produce a document by outputting the record of email, etc. (Order of the Ministry of Health, Labour and Welfare on the New Act, Art. 3, para. 1, item 3). “Being able to produce a document by outputting” means that the text of the relevant email, etc., or attached file can be printed on paper, and it is necessary to be able to output the full text of the matters pertaining to the advance notice sent by the outsourcer. In light of the actual business situation, the use of services without a file-attachment function, such as SMS, is exceptionally permitted for giving advance notice if the contents of the notice can be saved using screen shots or a similar function; however, it is not permitted to give advance notice in a way that cannot be recorded, such as by sending voice data or by a method that restricts screen shots or similar functions. As the data retention period may be limited when using SNS or similar means for giving advance notice, a heads-up is given not only to outsourcees but also to outsourcers to tell the outsourcees to save the information by, for example, downloading and/or printing the file to prevent problems. There have been criticisms with respect to the use of these methods for advance notice of termination or non-renewal or disclosure of reasons, as in the case of an Article 3 Notice; however, it seems that practical needs and the idea that administrative intervention should be kept to a minimum in business transactions were taken into account.
*21) Thus, it does not include a method by which a particular individual primarily aims at having third parties view his/her posts, such as posting on a Web page.
7. Conclusion
As described above, in comparison to the Subcontract Act, the New Act is stricter in some respects as it applies to smaller outsourcers in terms of the amount of stated capital and new requirements on the improvement of the working environment for outsourcees have been added; however, at the same time, the New Act is more flexible in line with actual business practices, such as the wide use of electromagnetic means and the exception regarding remuneration payment in the case of sub-outsourcing. As outsourcing to outside business operators is conducted daily as a vital business activity, it is advisable to take the enforcement of the New Act as an opportunity and review the applicability of both the New Act and the Subcontract Act to each of your transactions and whether the requirements of both Acts are properly addressed. If you have any questions regarding specific measures or further clarification, please feel free to contact our office.
(**Please note that, with respect to the Subcontract Act, there is a possibility that the applicable standards and the matters regarding use of electromagnetic methods, etc., may change if the proposed amendments approved by the Cabinet on March 11, 2025 are enacted.)
