Amendment of Workers Dispatch Act Now in Effect

Impact on Companies

In 2012, the Workers Dispatch Act (“Act”) was amended to impose a new obligation on companies to directly hire dispatched workers under certain conditions when using temporary employment agencies (“Agency”).  The amendment provided a three year period to allow for companies to adjust their HR policies and infrastructure to comply with the future restrictions.

This amendment recently became effective on October 1, 2015.  The Act was also amended on September 11, 2015 (and enforced on September 30, 2015) to implement other new rules for the worker dispatch business, but this newsletter focuses on the issue of “fictitious” labor contracts (i.e., services agreements or gizou ukeoi) and its potential impact on firms which outsource services and the employers which receive them.

Newly Effective Amendment of the Act

Previous to the amendment of the Act, the Ministry of Health, Labour and Welfare (“MHLW”) had issued guidelines regarding classifications of the worker dispatch business (“Guidelines”) to help companies distinguish between legitimate outsourcing labor contracts and fictitious ones.  If the local labor bureau finds a fictitious labor contract due to non-compliance with the Guidelines (i.e., a company conducted the worker dispatch business without a license), the service provider can be sentenced up to one year in prison or be fined up to JPY1,000,000.  In addition, the client company can also be sentenced up to one year in prison or be fined up to JPY 1,000,000 under the Employment Security Law since it received illegal labor outsourcing services.  However, despite these penalties, there was criticism that the Act still could not ensure a stable working environment for dispatched workers.  Client companies could freely terminate the service provider’s services which would often result in the dispatched workers losing their jobs.  With the newly effective amendment of the Act, the client company could be obligated to hire the dispatched workers under certain circumstances in order to secure their employment.

Risks For Firms Which Outsource Services and For Their Company Clients

The potential risk of violating the newly amended Act arises from the fact that an Agency is required to comply with strict regulations under the Act and obtain a business license from the MHLW to be able to dispatch workers to employers.  As a licensed Agency, the Agency can dispatch its employees to companies and such companies can directly instruct and control the dispatched workers.  However, potential issues arise when a firm (which is not a licensed Agency) dispatches its employees to a client and the client directly instructs the dispatched worker on how to perform his work – e.g., where the dispatched worker cannot act in his discretion in performing the work set forth in the labor contract.

For example, when developing a company’s IT infrastructure, a company will often outsource the development portion of the project to a consulting firm, and the firm will dispatch its consultants to the client’s office to learn its needs and business flow and develop the IT system on site.  A common occurrence in these types of projects is that the company actively instructs and controls these consultants so that the IT system is customized for the company’s operations.  Unfortunately, however, such actions could cause the contract with the consulting firm to be deemed a “fictitious” contract if it is determined that the company is controlling the dispatched worker.  As a result, the consulting firm would have violated the Act as it would not have the required business license to dispatch temporary workers, and the client may be forced to hire the dispatched consultant should the consultant request such action from the client.

As these new regulations were enforced on October 1, 2015, we believe that the MHLW will strengthen their inspection and supervision of companies in relation to fictitious labor contracts, and therefore, firms which outsource services (e.g., consulting, accounting, architect, engineering, and of course, law firms) and their client companies face an increased risk of violating the Act.

What To Do?

While it is unclear how strictly the MHLW will enforce the newly effective amendment, it will be prudent for firms to conduct employee training for employees who work at the client’s site or have close contact with the client’s employees.  The MHLW’s Guidelines provides a few key practical pointers as to how a firm (that is not a licensed Agency) should conduct the provision of its employees to a client which include:

1) instructing the dispatched employee on how to proceed with his work duties;

2) managing the employee’s work hours (including overtime), break time, holidays, and days of leave;

3) providing evaluation of the employee’s performance; and

4) assuming responsibility to discipline the employee for any improper behavior.

The Guidelines also note that the services provided by a non-licensed firm should involve specialized skill and experience and suggest that dispatching workers who perform physical labor type work may run afoul of the Act.