Obligations for Companies Ordering Work from Freelancers — Freelance Act Basics

Japan's Freelance Act (formally, the Act on Ensuring Proper Business Transactions Involving Specified Entrusted Business Operators) aims to make transactions with individuals working as freelancers fairer. It establishes a framework requiring companies that place orders with freelancers to handle certain matters, such as clearly stating trading terms and paying compensation by a set deadline. This article gives companies that order from freelancers a neutral overview of the basic ideas involved. Because the details of the obligations, penalties, and exactly which transactions are covered can vary case by case, this article avoids definitive statements and assumes readers will confirm specifics with official Japan Fair Trade Commission materials or a qualified professional.

As the number of people working as freelancers has grown, there have long been reports of trouble arising from the power imbalance between freelancers and the businesses that order work from them — work proceeding under vague terms, or compensation being paid late. Japan's existing Subcontract Act applies only within a limited scope defined by capital-size thresholds, so it did not cover freelance transactions broadly. Against this backdrop, a law specifically addressing freelance transactions was established, setting out a framework of requirements for the ordering companies.

The Freelance Act sets out a framework of several broad areas where companies that place orders (entrusting businesses) are expected to take action. The following is a general overview; whether a specific transaction falls under a specific obligation depends on the nature and continuity of the transaction, so please always confirm with official materials from the Japan Fair Trade Commission, the Ministry of Health, Labour and Welfare, and related bodies.

- Clearly stating trading terms: Specifying the scope of work, compensation amount, payment deadline, and so on in writing or electronic form before work begins
- Paying compensation by the deadline: Paying compensation within a set period after receiving the deliverable
- Avoiding prohibited practices: Avoiding one-sided disadvantages such as refusing to accept deliverables, reducing compensation, or returning items without cause
- Accurate representation in recruitment: Not using false or misleading statements when advertising for outsourced work
- Handling harassment: Establishing a consultation system and other measures to prevent harassment of freelancers
- Advance notice for mid-contract termination: Giving reasonable advance notice when terminating a contract partway through

On clearly stating trading terms: making clear what is being outsourced, by when, and for how much at the time of ordering is a basic starting point for preventing later disputes. It's considered advisable to keep a record — in writing, by email, or via an outsourcing agreement — rather than relying solely on verbal exchanges. Exactly which items must be specified is a matter of regulatory detail, so we recommend confirming with official materials.

On paying compensation by the deadline: the framework is understood to require payment within a set period after a deliverable or service has been received. Rather than leaving payment terms as whatever the company has always used internally, it's important to recognize that transactions with freelancers may call for particular attention. The specific timeframe can vary depending on the nature of the transaction, so consulting a professional is recommended.

On harassment handling and accurate recruitment information: because freelancers aren't employees of the ordering company, harassment protections for them can be easy to overlook, but the law is understood to require the ordering company to put certain systems in place. Advertising outsourced work with terms that don't match reality can also be a concern. It's advisable for staff involved in ordering work to share a common understanding of these points.

Under the Freelance Act, a “specified entrusted business operator” is generally understood as a counterparty to an outsourcing arrangement who is an individual not employing staff, or a corporate entity meeting certain conditions. Whether the party your company orders from meets this definition can depend on the actual contract arrangement and reality of the relationship, not just its label. It's advisable to first take stock of how much freelance work your company outsources, and to consult a professional if there's any uncertainty about whether a given relationship is covered.

The Subcontract Act (the Act Against Delay in Payment of Subcontract Proceeds) is a pre-existing law that applies based on capital-size classifications between a prime contractor and a subcontractor. The Freelance Act is generally positioned as extending fair-dealing protections to transactions between ordering companies and freelancers that the Subcontract Act didn't cover, particularly where the capital-size threshold isn't met. While the two laws share overlapping goals, their scope and specific requirements differ, so it's necessary to confirm individually whether your company's transactions fall under one law, the other, or both.

*The above is a general overview of the framework. The specific application of capital-size thresholds and scope depends on individual transaction circumstances — please confirm with official materials from the Japan Fair Trade Commission, the Small and Medium Enterprise Agency, and related bodies.*

- When ordering from a freelancer, are the scope of work, compensation amount, and payment deadline stated in writing or by email?
- Are internal payment-deadline rules set with freelance transactions specifically in mind?
- Are the criteria and approval process for refusing a deliverable or reducing compensation clearly defined?
- Does the wording in outsourcing recruitment ads match the actual terms being offered?
- Is there a channel or system for freelancers to raise harassment concerns?
- Are internal rules for advance notice on mid-contract termination shared across the team?
- Is there a professional to consult when it's unclear whether a given supplier relationship falls under the Freelance Act, the Subcontract Act, or neither?

The Freelance Act establishes a framework requiring companies that transact with freelancers to handle certain matters, including clearly stating trading terms, paying compensation by the deadline, and addressing harassment. It's important to understand how this relates to the existing Subcontract Act and to review where your company's ordering practices stand. See also the basics of choosing who to order from, the basics of development contracts, and the SMB IT risk guide for related context. For the specific details of obligations, penalties, or how they apply to your company's transactions, always confirm with official Japan Fair Trade Commission materials or consult a lawyer.