Contractor or Employee?

Labour Law

More and more frequently in Japan, employers are looking to sign “contractor-client contracts” rather than taking on a new employee. The reasons for this can vary depending on the client.

In any event, even if a “contractor-client contract” is signed by both parties – a company (payer) and an individual (contractor) – and if the agreement clearly states that it is a “contract for service”, the status of a contractor should be carefully examined in order to determine the appropriateness of this type of contract.

Listed below are the primary criteria under which a “contractor-client contract for service” is deemed appropriate:

• The scope of work is clearly prescribed in written specifications or instructions, and is not directly ordered or instructed by the payer.
• The payer has no control over where and when the contractor works. The contractor is not subject to any disciplinary action or pay reduction against his / her late arrival and / or absence from work.
• The contractor should purchase and prepare his / her own work equipment (PC, telephone, etc).
• The contractor is not provided with transportation allowance.
• The contractor takes full responsibilty for work produced, and is liable for damages caused by negligence.
• The contractor should be publicly regarded as a business operator and receive compensation (expenses included) as such.
  Income tax is not withheld from such compensation.

It is vital for companies to give thorough explanation and consultation to contractors prior to entering a contract. In Japan, it is often that case that contractors do not clearly understand the concept of personal liability for damages. Contractors also must be made aware that they are responsible for taking care of their own tax filing and insurance coverage under a contractor-client contract.

If a company undergoes an inspection and a contractor is deemed an employee, the company is required to enroll him / her in the Japanese social insurance scheme immediately and withhold income tax from his / her compensations retroactively. Penalties may be imposed for non-compliance. In order to avoid such situations, a contract should be made in accordance with the worker’s actual status; this will ultimately protect both the company and the worker.

– Thanks to BCCJ member company Nagamine Mishima Accounting Office for this content.
– The BCCJ can accept no liability for any errors, inaccuracies or misrepresentations.