The line between outsourcing and employment is not settled by the contract

In short: Even where there is a contract for services (業務委託契約書), if the reality is employment it is treated as employment. The judgment is made not on the title of the contract but on the facts — whether the person can refuse a request for work, whether they are under direction and supervision, whether they are constrained as to time and place.

"We engage them under a contract for services" is an explanation we hear often. There is a contract, and an invoice arrives every month. Even so, the arrangement can later be treated as "in reality, employment." Where the form of the contract and the reality diverge, it is the reality that is taken as correct, not the form.

If the paper says "contract for services," does that make it one?

It does not. The Labor Standards Act (労働基準法, Act No. 49 of 1947) defines a "worker" as a person who is used in a business and to whom wages are paid (Article 9). The name of the contract does not appear there. The structure turns not on whether the arrangement is mandate, contract for work or employment, but on whether the person is being used.

What gives this idea concrete shape is the Labor Standards Act Study Group report, "On the criteria for determining who is a 'worker' under the Labor Standards Act" (労働基準法研究会報告「労働基準法の『労働者』の判断基準について」, December 19, 1985). It is a report from forty years ago, but the Ministry of Health, Labour and Welfare still presents it as the reference material for the criteria. The report takes "being used," meaning the form in which labor is provided as work under direction and supervision, together with "being paid wages," meaning remuneration that is consideration for labor, calls the two together "use and subordination" (使用従属性), and judges cases comprehensively on that axis.

What is looked at in determining the reality?

The items the report lists are as follows. The top four are the core of the judgment; the bottom three are structured as reinforcing factors.

	What is looked at	Where it sits
①	Whether there is freedom to accept or refuse requests for work, instructions to perform duties and the like	Is the work under direction and supervision
②	Whether there is direction and supervision in carrying out the work	Same as above
③	Whether there is constraint (as to time and place)	Same as above
④	Whether the work is substitutable	Reinforces the finding on the direction and supervision relationship
⑤	Whether the remuneration is consideration for labor	The other pillar of use and subordination
⑥	Whether the person has the character of a business operator (bearing the cost of machinery and tools, the level of remuneration, and others)	Reinforces the finding on worker status
⑦	The degree of exclusivity	Same as above

In practice, ① and ③ are where things come apart. Can the person say "that day does not work for me" and decline? Are the start and finish times fixed, so that the person is in effect required to be there during those hours? Where these are filled in, the position becomes difficult whatever the contract says.

Item ⑥, "the bearing of machinery and tools," looks at whether the company supplies the equipment. A situation where the company lends the computer and the work clothes and also pays for materials works in the direction of weakening the character of a business operator.

These seven items are not decided by any one of them alone. The report itself says the judgment is comprehensive, and which way an individual case falls cannot be known without laying out all of the facts.

What is demanded when the reality was employment?

Claims come retroactively. The scope differs by system, and the limitation periods are not aligned either.

What	Limitation period	Basis
Labor insurance premiums (workers' accident compensation insurance and employment insurance)	2 years	Act on Collection of Insurance Premiums of Labor Insurance (労働保険の保険料の徴収等に関する法律), Article 41
Health insurance premiums	2 years	Health Insurance Act (健康保険法), Article 193
Employees' pension insurance premiums	2 years	Employees' Pension Insurance Act (厚生年金保険法), Article 92, paragraph 1
Wages (overtime pay and the like; excluding retirement allowance)	3 years for the time being	Labor Standards Act (労働基準法), Article 115 and Supplementary Provisions, Article 143, paragraph 3
Retirement allowance	5 years	Same as above

It is not the case that "the limitation period for wages is uniformly 3 years." The main text of Article 115 of the Labor Standards Act is already 5 years, and Article 143, paragraph 3 of the Supplementary Provisions reads it as 3 years "for the time being." Because retirement allowance is excluded from the scope of that reading, retirement allowance alone is 5 years from the outset.

And when "for the time being" ends is not written in the statute. There is only a review provision in the Supplementary Provisions to Act No. 13 of 2020; no date on which it automatically becomes 5 years has been fixed. If you come across an explanation that "it will become 5 years in due course," check as well that the timing has not been decided.

Premiums are supposed to be split equally between employer and employee, but when they are claimed retroactively it is in practice difficult to recover the employee's share from the person afterwards. When you estimate the amounts, it is safer to allow for the full amount, not only the employer's share.

The same issue arises for tax. If payments made as a contract for services are treated as salary, the treatment of consumption tax and withholding at source changes. Judgments on tax, however, are the work of a tax accountant. We do not handle them, so we suggest that you engage a tax accountant directly, under a separate contract. We receive no referral fee.

What should you do first when you notice this?

Do not start by rewriting the contract. If only the paperwork is tidied up and the reality does not change, the judgment does not change.

The order is ① write out the present reality → ② decide which way to take it → ③ bring both the contract and the day-to-day operation into line with what you decided. ② is the substance. Do you stop directing and supervising and make it genuine outsourcing, or do you organize it as employment? Which you choose changes the whole set of procedures that follow.

If you decide to organize it as employment, you will need enrollment in social insurance and labor insurance, written notice of working conditions, and, depending on the number of people, work rules. Which obligations begin at how many people is set out in From how many people are work rules mandatory, and what is not mandatory; how insurance works when you hire for short hours is set out in What happens to social insurance when you hire for short hours.

Frequently asked questions

Q. What if the person themselves says they would rather have a contract for services than employment?
A. The person's wishes are one factor in the judgment, but they do not settle it on their own. Whether someone falls within "worker" under Article 9 of the Labor Standards Act is judged on the facts, so even where both sides agree, if the reality is employment it is treated as employment. Exchanging a written agreement has no effect that changes this judgment.

Q. Does someone who comes in only one day a week fall within this?
A. It is not decided by how many days. The number of days is not among the criteria listed in the 1985 report. Even at one day a week, if the person cannot refuse that day's work, receives instructions and is constrained as to time, the finding leans toward worker status. Conversely, even at five days a week, if the person works with professional discretion and has freedom to accept or refuse, the arrangement can in some cases be organized as outsourcing.

Q. When claims are made retroactively, is it always for the full number of years in the limitation period?
A. No. The limitation period is a ceiling — "no further back than this" — and how far back a claim actually goes depends on the case. Even so, building your estimate on the ceiling is the safer course for arranging funds. An estimate for your own case is a matter for consultation, after checking when the contracts began and the records of payment.

Q. We currently have ten people on contract. Do we need to review all of them?
A. We suggest first dividing those engaged on the same terms into groups and checking the reality group by group. It is not unusual for people to work differently in practice even where the form of the contract is identical. It is quicker than checking one person at a time, and less likely to leave gaps. On how the fees work, please see the fee schedule.

Sources for this article

• the Labor Standards Act (労働基準法, Act No. 49 of 1947), Article 9, Article 115, and Supplementary Provisions, Article 143, paragraph 3
• the Act Partially Amending the Labor Standards Act (労働基準法の一部を改正する法律, Act No. 13 of 2020), Supplementary Provisions, Article 2, paragraph 2 and Article 3. Date of entry into force: April 1, 2020
• Labor Standards Act Study Group report, "On the criteria for determining who is a 'worker' under the Labor Standards Act" (労働基準法研究会報告「労働基準法の『労働者』の判断基準について」, December 19, 1985). Confirmed against the original text published by the Ministry of Health, Labour and Welfare
• the Act on Collection of Insurance Premiums of Labor Insurance (労働保険の保険料の徴収等に関する法律, Act No. 84 of 1969), Article 41
• the Health Insurance Act (健康保険法, Act No. 70 of 1922), Article 193
• the Employees' Pension Insurance Act (厚生年金保険法, Act No. 115 of 1954), Article 92, paragraph 1
• All of the provisions are the versions in force as confirmed on e-Gov法令検索 (e-Gov Law Search) on August 13, 2026

This article does not go so far as to decide whom you should consult. Forming a view on whether the reality is employment, organizing how far back claims could reach, and the procedures for setting things up as employment are the work of a Shakai Hoken Roumushi (Certified Social Insurance and Labor Consultant). For the treatment of consumption tax and withholding at source, a tax accountant; where the ending of the contract has become a dispute, an attorney — in each case we suggest that you engage them directly, under a separate contract. We receive no referral fee. The fees for consulting 四葉社会保険労務士事務所 are set out in the fee schedule, and the questions we are asked most often in the frequently asked questions.

This article is general information. Judgments that depend on your particular circumstances are made by a qualified professional after a meeting. Written by Joji Uramatsu (Shakai Hoken Roumushi (Certified Social Insurance and Labor Consultant), Gyoseishoshi (Certified Administrative Procedures Legal Specialist), Registered Real Estate Transaction Specialist).