You have decided not to make a permanent hire in Japan yet. The plan is an outsourcing agreement — a gyomu itaku — with one individual who will run the market for you. On paper it removes several problems at once: no dismissal exposure, no employer social insurance enrolment, no work rules to draft for a headcount of one. The plan is legitimate, and it is how a large number of foreign companies start here.
It stops being legitimate at a line that the contract does not draw, and the contract is the one document that has no say in where the line falls. The Japanese term for crossing it is gisou ukeoi — disguised contracting. English-language guides usually translate this as misclassification and stop there, which loses something important: Japan has two distinct ways an outsourcing arrangement fails, they sit under different statutes, and the more expensive of the two applies when you engage someone through a vendor rather than directly.
Both are decided by the same principle. Whether a person counts as a “worker” is assessed on the actual conditions of the work performed, “regardless of the form or name of the work agreement” — the wording is from the guidelines issued jointly by the Cabinet Secretariat, the Japan Fair Trade Commission, the Small and Medium Enterprise Agency and the Ministry of Health, Labour and Welfare. JETRO makes the same point about outsourcing contracts in one sentence: “If the outsourcing contract is in fact a labor contract, various labor-related laws and ordinances are applied.”
BLP places work with contractors rather than starting from a permanent hire, so this article describes the failure mode of our own model. Read the section on where contractor-first does not work as exactly that: the boundary of what we sell. Classification depends on the specific facts of a specific engagement, and none of what follows replaces a Japanese employment lawyer or a certified social insurance and labour consultant (sharoushi).
What this article covers
- The two separate failures that both get translated as “disguised employment”, and why the vendor-mediated one is worse
- The criteria Japanese labour inspectors and courts apply to decide whether someone is a worker
- A second, wider definition of “worker” that applies to collective bargaining and catches people the first test does not
- What becomes payable if the classification flips, and how far back the claims reach
- Where classification disputes actually arise in Japan, according to labour inspection records
- The roles where a contractor-first entry model does not work, and what the alternatives cost you
Key facts at a glance
| Item | What the official guidance says |
|---|---|
| What decides classification | Whether “employment dependency” exists in substance: labour provided under the direction and supervision of an employer, and wages paid as compensation for that labour. Judged irrespective of the details and wording of the contract. |
| Where the test comes from | “Judgment Criteria for the Workers under the Labor Standards Act”, a report of the Ministry of Labour’s Study Group on the Labor Standards Act dated 19 December 1985. Not itself a statute. |
| Reinforcing factors | Whether the person is a business owner (for example, which side pays for the machinery and equipment the work needs) and the degree of exclusivity. |
| A second definition | The Labour Union Act has its own, wider “worker” test — three basic factors, two supplementary factors and one negative factor. Refusing collective bargaining with someone who meets it, without justifiable grounds, is illegal. |
| Direct engagement gone wrong | A contractor or mandatary “falls under the category of worker” where employment dependency is substantially found — even where the written contract states it is not a labor contract and the person consented to that. |
| Vendor engagement gone wrong | Treated as worker dispatching. Under Article 40-6 of the Worker Dispatching Act the client is deemed to have applied for a labor contract on the dispatching company’s terms, formed when the worker agrees. Excluded where the client did not know and was not negligent in failing to know. |
| Dispatching without a licence | Prohibited with criminal penalty. Clients may not receive workers dispatched by a company without a licence. |
| Reach-back on wage claims | Five years in principle, three years for the time being, for wages due on or after 1 April 2020. |
| Additional payment | Where an employer has not paid premium wages, a court may order an additional payment of the identical amount (Labor Standards Act Article 114). Same limitation period as wage claims. |
| Premium wage rates | 25% or more for overtime; 50% or more above 60 hours of overtime a month (applicable to SMEs from 1 April 2023); 25% or more for work between 22:00 and 05:00; 35% or more for work on a statutory day off. |
| Annual paid leave | 10 days after six months’ continuous service with at least 80% attendance, rising with service. The employer must have each worker take five days within the year. |
| Social insurance | Health Insurance 9.91% of standard monthly remuneration in Tokyo (March 2025) and Employees’ Pension Insurance 18.3%; in each case the insured person and the employer share the premiums equally. |
Two failures share one English name
The first failure is the one most guides describe. You contract directly with an individual under a contract for work or a mandate, two of the Civil Code forms a Japanese outsourcing agreement is built on. A contractor, in the official description, “completes the work based on his/her own authority and responsibility without receiving direction or supervision from the client or employer”, and therefore does not generally count as a worker. The qualifier follows immediately: “even when it is a contract for work in form, if a client directly gives direction or order to the contractor or otherwise the contractor’s employment dependency is substantially found, the contractor falls under the category of worker.”
For consignment arrangements the same guidance closes the door on the defence foreign companies reach for first. A person is a worker where employment dependency is found “even if a written contract clearly states that it is not a labor contract but a consignment contract, and the person has given his/her consent thereto.” The contractor’s signature on a document disclaiming employment carries no weight against the facts of how the work ran.
The second failure looks safer and is not. Instead of engaging an individual, you contract with a company — a development shop, a marketing agency, a staffing-adjacent vendor — and their employee works to your instructions. JETRO sets out the requirement: where Company B subcontracts part of its work to Company A, “Company A is required to conduct its work, including personnel administration regarding said worker, independent from Company B, and thus Company B can neither give orders to nor conduct personnel administration of said worker.” If you do give orders, the arrangement is not subcontracting. “Regardless of the name or the content of the contract, if the actual situation is confirmed to be applicable to worker dispatching, regulations related to worker dispatching will be applied.”
That matters because worker dispatching is a licensed business in Japan. Engaging in it without a licence is “prohibited with criminal penalty”, and clients may not receive workers from an unlicensed dispatching company. A vendor that never applied for a dispatching licence, and a client that never thought it was using dispatch, can between them produce an unlicensed dispatch arrangement without either party intending one. The official notice that draws the boundary anticipates the obvious workaround: if a business “intentionally engages in camouflage in order to avoid violating the provisions of the Worker Dispatching Act”, it “cannot avoid being deemed as a worker dispatching undertaking”.
The test: what “worker” means under the Labor Standards Act
Article 9 of the Labor Standards Act defines a worker as “one who is employed at a business or office and receives wages therefrom, regardless of the type of occupation”. Two conditions follow from that: labour is provided under the direction and supervision of an employer, and wages are paid as compensation for labour. Together these are referred to as employment dependency, and whether they exist is examined in substance rather than from the contract text.
For the difficult cases, the operative criteria come from a 1985 report by the Ministry of Labour’s Study Group on the Labor Standards Act. That report is not legislation, but it is the framework labour inspectors and courts work from, and the current official summary of it reads as follows.
- A. Whether a person has freedom to accept or reject a request for work or the engagement in work
- B. Whether a person is subject to direction and supervision while performing duties — specifically, whether they receive concrete direction or orders concerning the details of or how to perform the duties, and whether they sometimes engage in duties other than their normal duties at the employer’s order or request
- C. Whether a person is subject to restrictions such as their workplace and working hours being designated and managed
- D. Whether a person’s labour can be substituted
- Payment. Whether the money is compensation for the provision of labour for a certain period of time under the employer’s direction and supervision, rather than payment for an outcome
The 2021 joint guidelines add two reinforcing factors used where the criteria above leave the question open: whether the person is a business owner — illustrated with the question of which party pays for the machinery and equipment the work requires — and the degree of exclusivity, meaning whether the person has to work for one particular client to a high degree.
Two features of this test are easy for a foreign company to miss. The first is that it is comprehensive: no single criterion settles the outcome, and meeting one of them does not by itself make someone a worker. The second is that the criteria describe ordinary management behaviour. A daily stand-up at a fixed time touches criterion C. Asking the person to pick up something outside the statement of work touches criterion B. Requiring that this specific person does the work, with no right to subcontract or send a substitute, touches criterion D. Paying a flat monthly retainer for availability rather than for defined deliverables touches the payment limb. A retainer that also has to be approved as annual leave before the person takes a holiday touches three of them at once.
None of those facts is fatal on its own, and it would be wrong to read the list as a compliance checklist with a pass mark. What it does show is that the drift into employment happens through normal, well-intentioned management, not through a decision anyone records. The engagement that started as a defined project becomes a person who attends your meetings, follows your priorities and has no other clients — and nothing in your contract file registers the change.
The second definition of “worker” is wider than the first
Japan applies a separate worker test under the Labour Union Act, and it is deliberately broader. The 2021 joint guidelines set out three basic judgment factors: inclusion in the business organisation, meaning whether the person is secured within the organisation as an indispensable or important worker for the execution of business operations; unilateral and standardised determination of contract provisions, meaning whether the other party sets working conditions and work description unilaterally; and compensatory remuneration.
Two supplementary factors follow: whether the relationship is one in which the person essentially cannot avoid responding to individual service requests, and whether labour is supplied under direction and supervision in a broad sense. One negative factor cuts the other way — the obvious fact that the person is a business owner, assuming business risk personally while having consistent opportunities to earn profit through their own talent.
The consequence is specific rather than general. Where a person is recognised as a worker under the Labour Union Act, refusing them the right of collective bargaining without justifiable grounds is illegal — and JETRO states the underlying rule without qualification: no company may refuse its labor union’s request for collective negotiations without due cause. Because this test is wider than the Labor Standards Act test, a contractor can fall outside employment for wage and hour purposes and still be inside it for this one. For a foreign company whose entire Japanese presence is one contractor and no HR function, that is an unfamiliar position to be put in.
What becomes payable, and how far back
Reclassification is not a fine. It is a finding that an employment relationship existed all along, which turns every entitlement the person did not receive into a debt.
Wages sit at the centre of it. Statutory working hours are eight hours a day and 40 hours a week, and hours beyond that attract premium rates: 25% or more for overtime, 50% or more once overtime passes 60 hours in a month, 25% or more for work between 22:00 and 05:00, and 35% or more for work on a statutory day off. A contractor invoicing a flat monthly fee has been paid none of these. The reach-back was extended by the 2020 revision of the Labor Standards Act, which set the limitation period for wage claims at five years in principle with a transitional period of three years, applying to wages due on or after 1 April 2020. Record preservation was extended on the same basis.
Article 114 sits on top of that. Where an employer has failed to pay premium wages or other payments required by the Act, a court may order the payment of an additional amount identical to the unpaid portion — and the 2020 revision put the claim period for that additional amount on the same five-year and interim three-year footing. The exposure is therefore not the unpaid overtime figure. It is that figure, potentially doubled, across up to three years of engagement.
Annual paid leave attaches from six months of continuous service at 80% attendance, starting at 10 days a year, and the employer carries an obligation to have five of those days actually taken. Social insurance enrolment attaches too: Health Insurance is 9.91% of standard monthly remuneration in Tokyo as of March 2025, with an additional 1.59% long-term care premium for those aged 40 to 64, and Employees’ Pension Insurance is 18.3%, with the insured person and the employer sharing each of these equally. How far back unpaid social insurance premiums can be collected is a question we could not verify in an official English-language source, and it is one of the first things to put to a sharoushi. Ending the relationship also changes character. Dismissal requires at least 30 days’ advance notice, and Article 16 of the Labor Contracts Act voids a dismissal that lacks objectively reasonable grounds and is not appropriate in general social terms.
The vendor-mediated version carries a different remedy, and a blunter one. Where a client has accepted a dispatched worker illegally — including through what the official English text calls “so-called work contract fraud” — the client is deemed to have applied, at that point in time, for a labor contract on the same working conditions as those set by the dispatching company, and the contract is established when the worker agrees. JETRO states the same rule plainly: where a client accepts an illegal supply of temporary workers, including through a disguised contract, “a direct employment relationship is deemed to have been established between the client company and the temporary workers at the time of accepting such supply”. There is an exclusion where the client did not know the dispatch was illegal and was not negligent in failing to know, which is a narrower shelter than it sounds for a company that wrote the working arrangements itself.
Where these disputes actually come from
The risk is real, and the honest version of it is narrower than the alarm suggests. Keiichiro Hamaguchi of the Japan Institute for Labour Policy and Training examined labour standards inspection documents containing the terms “worker status” or “sole proprietor” over the two-and-a-half years from 1 April 2017 to 2 October 2019. He found 122 documents: 80 inspection reports and 42 declaration processing records.
The distribution is lopsided. By industry, 54 cases (44.3%) were in construction, 16 (13.1%) in food and drink services and related customer-facing work, 11 (9.0%) in transport and 10 (8.2%) in commerce. By occupation, 56 persons (45.9%) were independent contractors on construction sites, 13 were drivers, 13 were serving staff, 9 were barbers or hairdressers, 7 were in marketing and sales, 4 were information and communications technologists and 3 were chefs. The professional knowledge worker that a foreign company hires as its first person in Japan appears at the thin end of that distribution, not the thick end.
The outcomes are also less decisive than the framing implies. Worker status was recognised in 27 cases (22.1%) and not recognised in 37 (30.3%), while in 58 cases (47.5%) no decision was reached either way. Nearly half of the files that reached a labour inspector did not resolve the question at all.
What the same data says about triggers is the part worth acting on. The issues in dispute were unpaid wages in 54 cases (44.3%) and occupational health and safety in 40 (32.8%). Classification is not usually challenged in the abstract or discovered in a sweep. It surfaces because somebody was not paid what they expected, or because somebody got hurt. That points at the two moments in a contractor relationship where a foreign principal is most exposed: the end of the engagement, and any incident on site.
Two caveats keep this from being reassuring. The period studied ends in 2019, before the Freelance Act took effect on 1 November 2024 and before special industrial accident insurance coverage was extended to IT freelancing in September 2021. And the Freelance Act runs alongside classification rather than instead of it: a client outsourcing to a freelancer must state the terms clearly and pay within 60 days of completion or delivery, with those who violate an order or refuse inspection punishable by a fine of up to 500,000 yen. Complying with it does nothing to establish that the person is not a worker.
Where a contractor-first entry model does not work
Everything above describes the boundary of BLP’s own service, so it is worth saying plainly which roles fall outside it.
A role that requires someone present at your fixed hours engages criterion C. A role where you cannot specify a deliverable in advance, and instead need to direct the work as it develops, engages criterion B and the payment limb together. A role you need filled exclusively, where the person cannot take other clients, engages the exclusivity factor. A role where only this individual will do, with no possibility of substitution, engages criterion D. A country manager mandate that is open-ended, full-time, directed day to day and exclusive engages all of them at once. That is employment in substance, and writing it as an outsourcing agreement does not convert it into something else — it converts a manageable hiring decision into an unmanageable legal one.
Nor does routing the engagement through an intermediary dispose of the problem. It changes which failure you are exposed to. If the person is employed by a vendor and works under your direction, you are in the dispatch-shaped case, and that is the one with the deemed labor contract at the end of it. An intermediary that is not a licensed dispatching business does not absorb the risk by standing in the middle; it adds the licensing question to the classification question. The useful test to apply to any provider, ours included, is whether the arrangement being proposed depends on you not directing the work — and whether you can actually run your Japan operation that way.
Where the answer is no, the realistic options are a direct hire or an employer of record, both of which put a proper employment relationship in place and price it accordingly. Choosing one of those is not a failure of nerve. It is paying for the thing you actually need instead of buying a cheaper thing that turns into it later, at three years’ reach-back and a court’s discretion on the additional payment.
Questions to ask before you commit
Worth putting to a Japanese employment lawyer or sharoushi before the engagement starts, while the scope is still adjustable:
- Reading our draft scope of work against criteria A to D, which specific clauses would an inspector point at first?
- Can this role be expressed as deliverables and acceptance criteria at all, or are we describing availability?
- If this person works only for us for two years, how much does the exclusivity factor move the assessment?
- If the classification were challenged in month 30, how far back would unpaid premium wages and social insurance premiums reach, and what would the employer’s share be?
- Our vendor supplies people who sit in our meetings and take our priorities — does that vendor hold a worker dispatching licence, and if not, what are we in?
- What would we need on file to show we did not know, and were not negligent in failing to know, that an arrangement was unlawful dispatch?
- If this contractor were injured while working for us, who carries the accident insurance, and does that answer change our classification position?
- What has to be true about how we run the relationship day to day, and who on our side is responsible for keeping it true?
Frequently asked questions
What is gisou ukeoi, or disguised employment, in Japan?
It describes an arrangement documented as outsourcing or subcontracting that operates as something else. Where an individual is engaged directly, the arrangement can be found to be employment because employment dependency exists in substance. Where the individual is employed by a vendor but works under the client’s direction, the arrangement is treated as worker dispatching, which is a licensed activity in Japan. Official English-language material also refers to the second case as “so-called work contract fraud” and as a disguised contract.
Does a signed outsourcing contract protect us if the contractor later claims to be an employee?
No. Worker status is judged on the actual conditions of the work, regardless of the form or name of the agreement. The official guidance is explicit that a person can be a worker “even if a written contract clearly states that it is not a labor contract but a consignment contract, and the person has given his/her consent thereto.” A well-drafted contract still matters, because it is evidence of how the parties intended to operate, but it does not decide the question.
What criteria decide whether a contractor is a worker in Japan?
Whether the person has freedom to accept or reject work; whether they receive concrete direction on the details or method of the work and are asked to do things outside their normal duties; whether their workplace and working hours are designated and managed; whether their labour can be substituted; and whether payment is compensation for time worked under direction rather than for an outcome. Two further factors reinforce the assessment: whether the person bears the costs of a business owner, and the degree of exclusivity. The criteria are applied together, and no single one is decisive.
What happens if a contractor in Japan is reclassified as an employee?
The relationship is treated as employment for the period it ran. Unpaid premium wages become claimable, at 25% or more for overtime and higher rates for long overtime, night work and statutory days off, and a court may additionally order a payment equal to the unpaid amount. Wage claims reach back five years in principle, with a transitional period of three years for wages due on or after 1 April 2020. Annual paid leave entitlements and social insurance enrolment also attach, and ending the relationship becomes a dismissal governed by Article 16 of the Labor Contracts Act.
Is it safer to engage someone through a Japanese vendor than directly?
Not automatically, and in one respect it is worse. If the vendor’s employee works under your direction, the arrangement is treated as worker dispatching regardless of what the contract is called. Where dispatch is unlawful — including where the dispatching company has no licence — the client is deemed to have offered the worker a labor contract on the dispatching company’s terms, and it takes effect once the worker agrees. An exclusion applies where the client neither knew nor was negligent in failing to know.
Can a freelancer in Japan join a union and demand negotiation with us?
Potentially, yes. The Labour Union Act applies its own worker test, which looks at inclusion in the business organisation, unilateral determination of contract terms, the compensatory nature of remuneration, whether the person can realistically refuse requests, and direction and supervision in a broad sense. It is wider than the Labor Standards Act test, so someone outside employment for wage and hour purposes can still be inside it here. Where the test is met, refusing collective bargaining without justifiable grounds is illegal.
Does complying with the Freelance Act settle the classification question?
No. The Act, in force since 1 November 2024, obliges a client that outsources to a freelancer to state the terms of the work clearly and to pay within 60 days of completion or delivery, among other duties, with a fine of up to 500,000 yen for violating an order or refusing inspection. It regulates the transaction. It does not determine whether the person is a worker, and JETRO notes separately that where the outsourcing contract is in fact a labor contract, labour law applies.
Summary
- Japanese authorities decide worker status on how the work actually ran, not on the contract’s title, and a contractor’s written consent to non-employee status carries no weight against the facts.
- The operative criteria — freedom to refuse work, direction over method, control of place and hours, substitutability, and the nature of the payment — describe ordinary management behaviour, which is why engagements drift across the line without anyone deciding to.
- Engaging through a vendor moves you into dispatch regulation rather than out of risk, and that route ends in a deemed labor contract with the worker rather than a fine.
- The cost of being wrong is retroactive: premium wages at 25% and above, a possible court-ordered additional payment of the same amount, leave and social insurance entitlements, and a claim window of three years for wages due since April 2020.
- In the inspection records, these disputes cluster in construction, transport and hospitality rather than professional services, and they surface through unpaid money or an injury — which tells you when to be careful rather than whether to be.
The conclusion is not that outsourcing your first Japanese role is dangerous. It is that the arrangement has to be true. A contract for work describes someone who takes responsibility for an outcome and organises their own means of reaching it. If that is what you need, the model holds and the paperwork matches reality. If what you need is a person under your direction during your hours, the model does not hold, and no contract, vendor or intermediary structure makes it hold.
The practical work is therefore in the scoping, not the drafting. Deciding what the first Japanese engagement is actually for — an outcome you can define and accept, or a presence you need to direct — determines which route is legally available before any lawyer sees a document. Getting that wrong is cheap to fix in week one and expensive to fix in year three.
BLP is a Japanese company that supports overseas businesses entering the Japanese market by breaking required work into defined tasks and placing it with contractors. That model has the limits described above, and for some roles it is the wrong answer. If you want to work through which category your first Japanese role falls into, we are happy to talk it through.
Sources
- Employment Consultation Center (established under the National Strategic Special Zones Act; Cabinet Office and Ministry of Health, Labour and Welfare), "Explanations of Labor-Related Laws" (English edition) — https://kecc.mhlw.go.jp/pdf/explanations_of_labor_related_laws_en_2310.pdf
- Cabinet Secretariat, Japan Fair Trade Commission, Small and Medium Enterprise Agency and Ministry of Health, Labour and Welfare, "Guidelines for creating a safe environment where people can work on a freelance basis" (outline, English) — https://www.jftc.go.jp/en/legislation_gls/210611.pdf
- Ministry of Health, Labour and Welfare, "Outline of the Act on the Partial Revision to the Labor Standard Act (No.13 of 2020)" — https://www.mhlw.go.jp/content/11200000/000667097.pdf
- JETRO, "4.3 Labor contracts", Setting Up Business in Japan — https://www.jetro.go.jp/en/invest/setting_up/section4/page3/
- JETRO, "Coverage of temporary workers by labor law", Setting Up Business in Japan, Section 4 reference — https://www.jetro.go.jp/en/invest/setting_up/section4/reference.html
- JETRO, "4.9 Japan's social security system", Setting Up Business in Japan — https://www.jetro.go.jp/en/invest/setting_up/section4/page9.html
- HAMAGUCHI Keiichiro, "Labor Law Policy on Freelance Work", Japan Labor Issues vol.6, no.38, The Japan Institute for Labour Policy and Training (JILPT), 2022 — https://www.jil.go.jp/english/jli/documents/2022/038_02.pdf
- "Freelance Act Comes into Effect in November 2024", Japan Labor Issues vol.8, no.49, The Japan Institute for Labour Policy and Training (JILPT), 2024 — https://www.jil.go.jp/english/jli/documents/2024/049-01.pdf
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