Independent Contractors Agreement

Establishment of Overseas Offices

When a small or medium-sized company expands overseas, the first question is how to establish an overseas office. The establishment of a branch office or a subsidiary may be the first step, but before that, it is often desirable to conduct a local market survey and start simple activities, and then proceed to the establishment of a subsidiary when it becomes clear that the business is expected to be profitable.

Recruitment of Personnel

When starting local activities, it is necessary to hire people first. If there is a local subsidiary, a contract is concluded with the subsidiary as the employer. In other words, the employment contract is between the subsidiary and the local employee. If no local subsidiary is established, the Japanese company may become the employer and hire the local employee.

Application of the Employment Contracts Law

However, since each country has its own laws and regulations regarding the protection of workers in employment agreements, even if Japanese law is stipulated as the governing law in the employment agreement, the local labor laws and regulations are likely to be applied in many cases to protect the workers (mandatory application of labor laws). If the content of the employment contract violates local labor laws, the local labor laws, not the content of the employment contract, will prevail and the content of the employment contract will be deemed invalid to the extent that it violates local labor laws. Even if a Japanese corporation becomes the employer and hires local employees, the local labor laws of the place where the labor is actually provided will take precedence over Japanese law.

Social Insurance Contributions

In addition, in the case of an employment contract, the company will be obliged to pay social insurance premiums and join unemployment insurance, as these systems are designed to protect employees. Furthermore, in the case of employment contracts, it is important to consider whether or not the termination of an employee will be approved if the business does not do well and the local business is to be closed.

Signing an Independent Contractor Agreement

In order to avoid the above restrictions on employment contracts, the question arises whether it is possible to hire local people as independent contractors instead of hiring them as employees. Since an Independent Contractor Agreement is a contract that promises to pay compensation for certain work, it is a contract between independent parties and differs from an employment contract, which means that labor laws and regulations do not apply.

Points to be Noted in Contractor Agreements

Of course, the fact that a contractor has entered into an independent contractor agreement subcontracting agreement, even though the substance of the agreement is an employment contract, does not mean that the contractor is exempt from the application of labor laws and regulations. Therefore, when making an independent contractor agreement, it is necessary to clarify that the actual contractual relationship is not employment but an independent contractor agreement, and care must be taken to ensure that the actual performance of the work is not regarded as an employment contract. If the contract is determined to be an employment contract rather than an outsourced contract, the local government may intervene, and there is a risk that the local government may impose penalties for non-payment of pension and social insurance premiums, and that the tax office may levy withholding taxes on the employee. If a local person is injured in the course of performing his/her work, he/she may be sanctioned with a fine for non-payment of workers’ compensation insurance, and there is a possibility that the matter may be brought to court with the work provider.

Criteria for determining whether a contract is an employment contract or an independent contractor agreement

Therefore, it is necessary to carefully determine what constitutes an employment contract and what constitutes an independent contractor agreement. It is also important to avoid as much as possible the risk of being considered an employment contract by paying close attention to these criteria. The most important factor in determining whether a contract is an employment contract or an independent contractor agreement is whether there is management supervision over the performance of the work. In the case of an employment contract, the employer has the authority to manage and supervise the performance of the work, while in the case of an independent contractor agreement, the employer does not have the authority to manage and supervise the performance of the work, but is left to the discretion of the person performing the work. The actual judgment will be made based on the ability, authority, time management, place of performance, legal authority, etc. of the person performing the work. For example, in the case of hiring an attorney (except for in-house attorneys, etc.), the attorney is usually considered to be an outside contractor (whether delegated or contracted), not a worker, since the attorney is highly competent and has discretionary authority in the performance of his/her duties. In addition, although it is possible to stipulate in an independent contractor agreement that the hours of labor should be 8 hours per day, if the contract stipulates strict working hours and specifically instructs the contractor to work from 9:00 am to 6:00 pm, it is more likely that the contract will be considered a labor contract. Since the contractor promises to perform a certain amount of work, it is left to the discretion of the work provider as to when and how much work is to be performed, as long as the requested work can be completed.

Criteria for Determining When an Independent Contractor Agreement is Considered to be a Contractor Agreement

In order to be considered an independent contractor agreement, the following conditions must be met: (1) the contractor must be paid for the work based on an evaluation of the work provider’s professional ability, (2) the work provider must be given discretionary authority regarding the performance of the work, (3) the time management regarding the provision of work must not be too strict, (4) the work provider must be given discretion regarding the time for providing the work, and (5) the place where the work is performed must not be too strict. It is also necessary to give discretion to the work provider regarding the time of work provision, and to allow the work provider as much freedom as possible in the location of work provision. However, since there are many evaluative factors involved, there is no absolute standard that must be met in order for the contract to be considered an independent contractor agreement. Even if a company stipulates that the work is to be provided for 8 hours per day as a goal, this does not immediately lead to the conclusion that the contract is an employment contract.

Agent Contract

An agent agreement or a distributor agreement may be prepared as a form of consignment of customer solicitation, etc. and payment of remuneration according to the results, with the aim of expanding sales channels in the local market. The distinction between an agent agreement and a distributor agreement is based on whether or not the agent has the legal authority to represent the client in concluding the contract, whether the agent merely introduces clients, whether the agent sells services or products at his/her own risk, or whether the agent acts as an intermediary. The contract is considered to be more independent than the contractor in an Independent Contractor Agreement.

The Company’s Burden in an Employment Contract

The following is a summary of the company’s burden in cases where the contract is deemed an employment contract.

1. The local labor laws apply regardless of the governing law.
2. Regardless of the jurisdictional agreement, the place of jurisdiction in the event of a lawsuit by a worker is the place where the worker’s labor is provided.
3. There are restrictions on the dismissal of workers (dismissal without just cause or a certain amount of money may be demanded upon dismissal).
4. Mandatory enrollment in social insurance is required, and the company is required to bear a certain amount of the cost.
5. Mandatory enrollment in unemployment insurance
6. Mandatory workers’ accident compensation insurance
7. Compulsory payment of overtime wages
8. Withholding tax is required on salary payments.

Characteristics of an Independent Contractor Agreement

On the contrary, in the case of an independent contractor agreement, the following can be said.

1. The governing law (which country’s law is applicable) can be determined by agreement of the parties.
2. The parties can agree on the jurisdiction of the court (e.g., it can be stipulated that the trial must be held in a Japanese court).
3. No need to join social insurance, unemployment insurance, workers’ accident compensation insurance, etc.
4. No need to pay overtime (no need for labor management)
5. No withholding tax is required.

Independent Contractor Agreement and Consultant Agreement

As described above, from the employer’s perspective, an independent contractor agreement is overwhelmingly advantageous. Therefore, it is important for small and medium-sized enterprises (SMEs) to consider the possibility of adopting an independent contractor agreement when hiring local personnel for their overseas expansion. In addition, a consultant agreement is not an employment contract, but rather a contract with an independent third party, and is considered to be an independent contractor agreement. The difference between a consultant agreement and a contractor agreement is not always clear, but it can be thought of as a case where the contractor agreement makes it clearer that specific results are required (the relationship of payment for the results performed is clearer).

Concept of Independent Contractor Agreement

Independent contractor is a literal translation of the term “independent contractor,” so it would seem that the party who constructs the building, prepares the report, or submits a certain set of results, etc., would be considered an independent contractor. Therefore, it is questionable whether a local employee is an independent contractor or not. However, the term “contractor” is not so much a contracting party as it is an independent contractor. Therefore, it is considered to be a broader concept than that of a contractor (e.g., a carpenter or a research institute) as considered in the Japanese Civil Code. The point depends on whether the employee is considered to be employed by the company as an employee, or whether he or she is self-employed and performs the work requested by the company for which he or she is compensated. For example, if you work 8 hours a day, Monday through Friday, answering phones at the company’s office, but you are an employee and are bound by the hours you work and receive compensation for them, it is an employment contract. However, if you are an independent self-employed person and you provide certain services (telephone appointments) under contract to the company and receive compensation as stipulated in the contract, you may be considered self-employed.

Overseas Operations of SMEs

When a small or medium-sized enterprise first begins to develop its overseas operations, it may first need to perform the following tasks, for example:

1. Market research;
2. Investigation of local laws and regulations;
3. Setup of branch office or subsidiary (selection of office and signing of lease agreement);
4. Liaison with the Japanese subsidiary and reporting on the status of operations;
5. Acquisition of prospective clients;
6. Preparation of marketing materials;
7. Localization of services;
8. Recruitment and management of human resources.

Although there may be a perception that it is normal to have employees under employment contracts to perform the above tasks, there is no problem in having consultants or independent contractors to perform them. Of course, whether the contract is an employment contract or an independent contractor agreement contract is determined based not only on the name of the contract but also on the substance of the work, such as the status of performance of the work, etc. Therefore, it is necessary to be careful not to consider the actual work as an employment contract (existence of time management and management supervision) while paying attention to the previously described merkmal.

Provisions on the nature of the work

When preparing an Independent Contractor Agreement, it is necessary to define the services to be provided, paying attention to the above-mentioned points. The services can be itemized, as they usually include a variety of duties. For example, a clause that defines the services to be rendered might look like this:

(Sample Clause)
Contractor agrees to perform work for the Company on the terms and conditions set forth in this agreement, and agrees to devote all necessary time and attention to the performance of the duties specified in this agreement. Contractor’s duties shall be as follows:–
Contractor further agrees that in all such aspects of such work, Contractor shall comply with the policies, standards, regulations of the Company from time to time established, and shall perform the duties assigned faithfully to be best of his ability, and in the best interest of the Company.

The duties may also be described in a more concise manner. For example, it could be something like this:

(Sample Clause)
During the Term, the Company may engage the Contractor to provide the following services as needed, or other such services as mutually agreed upon in writing by the Parties.

Contract Term

The term of the contract may be set for a certain period of time or until the completion of the work. The following methods can be used to define the contract period. In the case of an employment contract, there are restrictions under labor laws regarding termination of the contract, but there are no such restrictions in the case of an independent contractor agreement so it is possible to set the contract period as one year and then stipulate that the company may terminate the contract at any time, even during the contract period.

(Sample Clause)
This agreement shall commence on the signing of this agreement and be effective for one year thereafter. This agreement may be terminated by the Company immediately in the sole discretion of the Company. Contractor may terminate this agreement upon fourteen days written notice to the Company.

On the other hand, if the term of the agreement is until the termination of the business, the following clause may be considered.

(Sample Clause)
This agreement shall take effect as of the effective date, and remain in full force and effect until the Contractor has completed the Service, unless earlier terminated under this agreement.

Independent Contractor Confirmation Clause

Although the title of the Independent Contractor Agreement clearly states that it is a contractor agreement, it is possible that the parties may disagree on the legal nature of the agreement. In addition, it is effective to clearly state the status of the contract in case of termination of the contract or payment of additional remuneration in the event of a court case. Therefore, in most Independent Contractor Agreements, it is carefully stated that the contractor is an independent contractor and not an employee.

(Sample Clause)
The Parties intend that the Contractor be engaged as independent contractors of the Company. Nothing contained in this agreement will be construed to The Contractor will not be entitled to worker’s compensation, retirement, insurance or other benefits afforded to employees of the Company. The Contractor will not be entitled to worker’s compensation, retirement, insurance or other benefits afforded to employees of the Company.

Intellectual Property Rights

It should be made clear that intellectual property rights created by the contractor in the course of performing his/her work belong to the company. Examples include software programs and copyrights on works of authorship. In the case of an employment contract, as long as the work is recognized as a work in the course of employment, it naturally belongs to the company. However, in the case of an independent contractor agreement, the ownership is not clear (it can be freely determined by agreement between the parties), so it is necessary to stipulate it properly in the contract.

Confidentiality

In the course of performing work, the contractor has many opportunities to come into contact with the company’s confidential information. In addition, from the company’s perspective, the contractor is not an employee of the company, but an outsider, and it is quite possible that the confidential information provided by the contractor will be provided to other competitors, or that the contractor will use the confidential information to conduct business on its own. Therefore, it is necessary, at the very least, to have a well-defined obligation of confidentiality. The confidentiality obligation may be stipulated in the Independent Contractor Agreement, or a separate Non-Disclosure Agreement (NDA) may be concluded, or a standard format NDA may be attached to the Independent Contractor Agreement. It is also possible to use a standard form NDA as an attachment to the Independent Contractor Agreement. It is also advisable to provide for a non-competition clause, if possible. In the case of an employment contract, it is common to stipulate the confidentiality and non-competition clauses as a set and have the employee sign the contract at the time of employment. In the case of an independent contractor agreement, it is quite possible that the contractor may use the company’s know-how to compete in the future or leak information to other companies.

Confidentiality and non-competition of Independent Contractor Agreement

As we have already explained, it is preferable to enter into an Independent Contractor Agreement with a local employee when doing business overseas, rather than concluding an employment contract with the local employee at the initial stage. Agreement provides more protection for the company’s position with respect to confidentiality and non-competition than an employment agreement. Many agreements do not necessarily take sufficient care to protect the company’s confidentiality, intellectual property rights, and non-compete. We would like to take a look at some of the specifics below.

Importance of Confidentiality and Non-Compete Agreements

Even when an employment contract is concluded with an employee, there are many opportunities for the employee to come into contact with the company’s confidential information, and there is no guarantee that such information will not be leaked to outside parties or used illegally to cause damage to the company. Moreover, it is not impossible that an employee may start his/her own independent business after leaving the company or move to another company with which the company is in competition and misappropriate your company’s information. If the employment contract does not include a provision regarding confidentiality and non-competition, the company may require the employee to submit a separate written pledge regarding confidentiality and non-competition.

In general, employment contracts are ongoing contractual relationships, so even though the opportunity to come into contact with the company’s confidential information is even greater, there may be insufficient provisions for confidentiality because of the mutual trust. In many cases, the labor laws require that employees submit a written pledge of confidentiality and non-competition, but the rules are not always strictly enforced.

Many countries have laws to protect workers, and judicial precedents have ruled that contractual rules that excessively restrict a worker’s freedom to change jobs are invalid. For example, even if a clause prohibiting a worker from finding employment with a company that is in competition with the company after leaving the company, whether such a clause is valid or not will be disputed.

In determining the validity of a non-compete clause, the following criteria are generally used: the employee’s position, the nature of the work, the term of the contract, whether or not compensation is paid, the period of prohibition, and whether or not the region or type of work is limited. In terms of employee status, a non-compete clause is more likely to be recognized for higher-ranking employees (e.g., department heads and section managers) (directors are also considered to be higher-ranking, although they are not in an employment relationship). For lower-ranking employees, on the other hand, it is less likely that the non-compete clause will be found to be valid. For the general employees, there is a judgment that they will not be able to make a living if they are not allowed to change jobs as much as possible, and for the employees in lower positions, there are fewer opportunities to come in contact with confidential information and the importance of the information is not so great. Therefore, the freedom of the employee to change jobs is considered more important than the protection of confidential information.

The nature of the work is also an important merkmal. For example, if an employee is an engineer and has access to the company’s core confidential information, the non-compete clause is more likely to be recognized, whereas if the employee is an ordinary salesperson, the confidentiality of the information he or she has access to may not be so high, and the restriction on the freedom to change jobs may not be recognized. In addition, if an employee receives a high salary or a large severance package when he or she leaves the company, it is more likely that the employee will be judged to have received sufficient compensation in exchange for the non-compete obligation, and that the compensation includes the non-compete obligation. Conversely, if an employee with a low salary is restricted from changing jobs, he or she will have a hard time making a living, and the non-compete clause will be less likely to be upheld.

Similarly, when judging a non-compete clause, it is also important to determine whether or not there are any restrictions on the period of time during which the clause is in effect, or on the type of job or region in which the clause is in effect. If you refer to Japanese precedents, it is highly likely that a prohibition period of about one year will be judged as valid, while a prohibition period exceeding two years is often judged as invalid. The validity of such a contract can be said to be on a case-by-case basis. The validity of a non-compete agreement is more likely to be recognized in cases where there are geographical limitations or restrictions on the type of work that is prohibited. From the employee’s perspective, he or she is free to find employment outside of the prohibited area or in an occupation other than the prohibited type of work.

Thus, the validity of confidentiality and non-competition clauses for employees is often disputed, so from the company’s standpoint, it is not necessarily safe to say that the company has stipulated such clauses in the contract.

On the other hand, in the case of an independent contractor, since the contractor is an independent business entity, it is considered that the company has concluded a confidentiality and non-competition agreement based on its own judgment of the merits and demerits of the agreement as an independent party to the contract. Therefore, it is more likely that a confidentiality or non-competition agreement will be judged valid than in the case of an employee.

Importance of Confidentiality and Non-Compete Agreements

Confidentiality obligations in an independent contractor agreement may include, for example, the following clauses.

(Sample Clause)
Each party (on its behalf and on behalf of its subcontractors, employees, or representatives, or agents of any kind) agrees to hold and treat all confidential information of the other party, including, but not limited to, trade secrets, sales figures, employee and customer information, and any other information that the receiving party reasonably should know is confidential (“Confidential Information”) as confidential and protect the Confidential Information with the same degree of care as each party uses to protect its own Confidential Information of like nature.

Confidentiality Agreement in the form of a letter of escrow

While the above is a general confidentiality clause, there is also a form of confidentiality agreement that the independent contractor may insert into the company. In such a case, the following is an example of a non-disclosure agreement.

(Sample Clause)
You agree that during the term of this contract and for a period of three years following the termination of this contract, you shall not directly or indirectly divulge or make use of any Confidential Information outside of your performance of your duties under this contract without the prior written consent of the Company. You shall not directly or indirectly misappropriate, divulge, or make use of Trade Secret for an indefinite period of time, so long as the information remains a Trade Secret as defined by the applicable laws.

Provisions for Return of Confidential Information

Many recent contracts also include provisions regarding the return of confidential information. Of course, it is difficult to return information that is in a person’s memory, but if the information is recorded on a recording medium, it is considered necessary to recover such medium at the end of the contract. In particular, since almost all confidential information these days is converted into data and stored in PC memory or USB, it is important to stipulate the return of such information.

(Sample Clause)
You agree to return to the Company all Confidential Information within five calendar days following the termination of the contract for any reason.

Non-Compete Clause

Independent contractors have many opportunities to access your confidential information, and you may want to prohibit them from using your confidential information to conduct their own business elsewhere or to provide services to outside companies. I think that you may want to prohibit the use of your company’s confidential information when conducting your own business or providing business to outside companies. Given the shorter contract terms, less loyalty to the company, and more opportunities to perform work for outside companies, it is necessary to have a more detailed non-compete agreement than is the case for employees. In our experience, there have been many cases in which independent businesses (independent contractors) have conducted business with others using the company’s customer or technical information, causing problems when the client’s information was leaked. In particular, since customer information is relatively easy to use, it may be necessary to consider not only setting contractual restrictions but also prohibiting or restricting access to computers or servers on which customer information is recorded. The non-compete clause could be worded as follows. The following Sample Clause language is very simplified; in practice, a more detailed agreement would be necessary.

(Sample Clause)
Contractor covenants and agrees that, during the term of this contract and two years after the termination hereof, Contractor will not conduct business competitive with that of the Company or work for the company competitive with the Company.

Protection of Intellectual Property in Independent Contractor Agreement

Protection of intellectual property rights is also important when conducting business overseas. If your company’s intellectual property rights are illegally used in Japan, it is relatively easy to identify the illegal activities and file a claim for injunction. However, when doing business overseas, it is often difficult to detect infringement of your company’s intellectual property rights because the local language is naturally used. In addition to the usual employment contracts that require consideration of intellectual property rights, it is also necessary to consider the treatment of intellectual property rights when concluding an Independent Contractor Agreement.

Intellectual property rights generally include patent rights, trademark rights, design rights, copyrights, etc. In addition to these rights that can be registered, it is also important to protect trade secrets and know-how. For rights that are registrable (e.g., trademark rights), except in certain cases, such as well-known trademarks, they are not protected unless they are registered. With the exception of patents, the first to register generally has priority, so if you are starting a business locally, trademark registration should be the first thing you consider.
In many cases we have handled, independent contractors, agents, and distributors have registered trademarks in their own names, and only after several years have passed, when the contractual relationship is terminated, does the registration of the trademark become an issue. If the distributorship agreement is terminated, the distributor may demand a large sum of money in exchange for transferring the trademark. Similarly, even if a company is to be sold in the future through M&A, the fact that the trademark is registered in someone else’s name may cause problems with the transfer of rights.

Some businesses think that by registering first, they may be able to demand money in the future. In many cases, however, the independent contractor or agent does not maliciously register the trademark in his own name from the beginning, but there is something about the business that initially prevents the Japanese company from registering in its own name.

The most important aspect of creating an Independent Contractor Agreement is the attribution of copyrights to the works produced. As a Japanese company, you may ask an independent contractor to create promotional materials or instruction manuals to localize your products or services. For example, in the case of an employee of a company, such a work made for hire is considered a work made in the course of employment, and the copyright is attributed to the company. Since the employee receives a salary from the company and provides labor, the copyrights created in the process of work for hire naturally belong to the company.

In contrast, an independent contractor (independent business operator) has a contractual legal relationship with the company, but is an independent third party in terms of law, so the provisions of the Copyright Act regarding works in the course of employment do not apply as is. Therefore, it is necessary to clarify in the Independent Contractor Agreement that the work created by the independent contractor is considered a work product under the Copyright Law, and that the copyright in the work belongs to the company (client), not the independent contractor. The company (client), not the independent contractor (independent business operator), owns the copyright to the work.
In addition, since Work Products are only related to the employee’s work on the job, it is not necessarily applicable to the independent contractor’s contractual relationship. Therefore, it is important to stipulate that, in the event that the work does not fall under the concept of work products and the rights are determined not to belong to the company (client), the independent contractor transfers all rights related to copyright to the company (client) free of charge, or can use the work at any time free of charge without payment of license fees, etc. It is also important to stipulate that the independent contractor transfers all rights related to copyright to the company (client) free of charge, or that it can be used at any time without charge and without payment of a license fee. Among intellectual property rights, copyrights are particularly important because most work these days is done using personal computers, and the question arises as to who owns the software that is created as a result.

In addition, with respect to copyright, it is also necessary to take care of moral rights. Moral rights belong essentially to the author and cannot be transferred to a third party. Independent contractors (independent business operators) must waive moral rights and stipulate that they will not exercise such rights.

Even in Japan, joint development contracts and subcontracting contracts involving the production of programs often stipulate provisions regarding the attribution of patent rights and copyrights. Since independent contractors are expected to work for the company on a daily basis, they are expected to perform the same work as employees of the company, but contractually they are third parties outside the company, so it is essential to provide for the treatment of intellectual property rights that arise in the course of providing their services.

In the normal case, for the purpose of the Independent Contractor Agreement, it would stipulate that all intellectual property rights belong to the company (client or consignor) and that no rights remain with the independent contractor (independent business operator). In view of the relationship between the parties, we believe this is natural. On the other hand, if, based on the concept of a joint development agreement in Japan, it is stipulated that industrial property rights shall belong to the independent contractor for creations created by the independent contractor, and industrial property rights shall belong to the company for creations created by the company. If this is the case, problems may arise later on, which could be very troublesome for a Japanese company. This is a point that needs to be taken into consideration when preparing an independent contractor agreement.

In addition to the above, the independent contractor must not infringe on the intellectual property rights of any third party in the course of providing its services, must not bring onto the company’s premises any work that infringes on the intellectual property rights of any third party, and must immediately report to the company any claims of infringement of intellectual property rights by any third party, general provisions, such as that any dispute with a third party regarding intellectual property rights shall be resolved at the party’s own expense and shall not cause damage to the company, should also be stipulated in the independent contractor agreement.

If general provisions regarding the protection of intellectual property rights are included, the contract will become extremely long. Therefore, it is preferable to specify what kind of intellectual property rights may be created and what kind of intellectual property rights must be protected in each case, and to include a clause specific to the protection of such intellectual property rights.