(a) There is no specific legislation that specifically provides when contingent workers should be treated as employees (this point is covered in past court cases).
(b) For Japanese income tax purposes, as a rule, the employee's position will depend on their labor law status. Normally, compensation paid to contingent workers is subject to Japanese withholding tax at the same level as (or higher than) regular employees. Thus, in practice, it is quite rare for the Japanese tax authorities to re-characterize a contingent worker as an employee solely from a tax perspective. In Japan, the social insurance program has a close connection with the labor laws (as opposed to tax laws), and thus it also depends on the labor law status of the person.
(c) A pension program is also closely connected to the labor laws, and thus it depends on the person's labor law status.
(a) No.
(b) No.
(c) No.
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A misclassification issue may arise (i.e., the workers may be classified as employees and therefore protected by labor laws).
Whether or not contingent workers are de facto employees depends on case law guidance since there are no clear criteria stipulated in statutes. This inevitably results in a degree of vagueness and depends on the specific facts of the case. The potential financial risks include the back pay of past unpaid overtime allowance and other benefits available for employees. It is rare for criminal penalties to be imposed for past violations of labor laws.
There will be several labor law violations if workers are misclassified. The applicable criminal penalties include a fine of up to JPY 300,000 and/or imprisonment of up to six months in most cases.
Normally, compensation paid to contingent workers is subject to Japanese withholding tax at the same level as (or higher than) regular employees. Thus, it is quite rare in practice that the Japanese tax authorities re-characterize a contingent worker as an employee solely from a tax perspective. Therefore, the tax risk is low in practice.
The tax compliance risk, if any, would be ancillary to the labor law compliance risk. Normally, compensation paid to contingent workers is subject to Japanese withholding tax at the same level as (or higher than) regular employees. Therefore, tax exposure is likely to be low.
Violations are unlikely, but if a shortfall of withholding occurs, possible penalties include: (1) a penalty tax at a 10% rate (or 5% in the case of a voluntary late payment); and (2) for 2023, interest tax at a 2.4% per annum rate (or 8.7% per annum after two months from the due date). Please note that the interest tax rate may change every year based on the interest rate that the MOF releases on 30 November each year (with some adjustments).
If the competent authority finds that the contingent workers are employees, the main risk is that the employer will be in breach of the requirements to take out mandatory social and labor insurance coverage.
There are social security risks for the company if a contingent worker is reclassified as an employee. The company may need to pay for the past years' contributions. It is rare for criminal penalties to be imposed.
Penalties may include a fine of up to JPY 500,000 and/or imprisonment of up to six months.
Certain pension plans, such as the defined benefits pension plan and the corporate-type defined contribution pension plan, are only available for employees of the company. Therefore, contingent workers are not eligible for these pension plans. There may be an occasion where a contingent worker will be reclassified as an employee, but this does not constitute a violation of the law (although this may constitute a breach of work rules or company policy, as the case may be).
While there are no administrative or criminal penalties from a pension law perspective in the case of misclassification of employees, there may be a breach of the company's work rules or policy (as applicable).
There are no criminal or administrative penalties.
For Japanese income tax purposes, the worker's status depends on their labor law status. Thus, the potential tax compliance risk, if any, would be ancillary to the labor law compliance risk. Accordingly, unless the contingent worker arrangement is set up for tax evasion purposes (such an arrangement motivated by tax is rare), the possibility that the company, directors and in-charge person are punished under the tax law should be low.
It is uncommon for the penalties above to be imposed on a company without a prior corrective recommendation being provided by the Labour Standards Inspection Office. If the company fails to correct the problem in response to such corrective recommendation, it may face criminal penalties.
For Japanese tax purposes, certain tax evasion behaviors that are considered extreme are prosecuted and subject to criminal sanctions. As mentioned above, the tax compliance risk, if any, would be ancillary to the labor law compliance risk. The matter would unlikely be prosecuted only from a tax perspective.