Subcontract Act Basics Every Ordering Party Must Know

This section reveals the reality that companies placing orders without understanding the Subcontract Act are receiving serious penalties from the Fair Trade Commission.

In FY2023, the Fair Trade Commission issued recommendations or guidance to 73 businesses for Subcontract Act violations. Of these, approximately 60% were document delivery obligation violations and payment delays in service agreements. Particularly noteworthy is the high frequency of violations in creative service agreements including website production, system development, and design work.

One mid-sized IT company (capital 80 million yen) placed a verbal order with a freelance engineer for system development, and after completion unilaterally demanded a 20% reduction. This company received a recommendation from the Fair Trade Commission and had its corporate name disclosed. The company's share price fell 15% in the week following disclosure, and new orders were significantly affected by the loss of client trust.

Many companies think "the Subcontract Act is for construction or manufacturing," but this is a major misconception. Information services, advertising, and design work are also subject to the Subcontract Act. When a company with capital over 300 million yen commissions work to freelancers or small businesses, the Subcontract Act applies regardless of the transaction value.

What makes this more serious is that many companies do not even understand the basic obligations of the Subcontract Act. Not delivering order documents, not paying within 60 days, and making unreasonable reductions are all common practices. These are all subject to Subcontract Act penalties, and carry the risk of damages claims in addition to corporate name disclosure.

Operating service agreements without understanding one's obligations as an ordering party under the Subcontract Act has become a serious risk for corporate management. This problem is only resolved when not just the legal department but also the field staff who actually place orders have accurate knowledge.

This section provides a structural analysis of the complexity of applicability conditions based on capital and transaction value, and the common oversight patterns in service agreements.

The scope of the Subcontract Act is determined by the capital of the ordering party (prime contractor) and the receiving party (subcontractor), and the type and value of the transaction. This determination criteria is complex and the source of misconceptions for many companies.

For Consignment of Information Product Creation and Service Provision

• Company with capital over ¥300 million → Sole proprietor or corporation with capital ¥10 million or less: applies regardless of amount
• Company with capital over ¥10 million and ¥300 million or less → Sole proprietor or corporation with capital ¥10 million or less: applies for transactions over ¥1 million

Website production, system development, design, translation, video production, and similar work falls under consignment of information product creation. Cleaning, security, and transportation fall under consignment of service provision. Many companies cannot accurately understand this classification.

Here are specific patterns where misconceptions arise.

Pattern 1: Error in Capital Determination

When a marketing company with capital of 50 million yen commissions website production from a production company with capital of 8 million yen, the Subcontract Act applies. However, many companies mistakenly think "the other party is also a corporation so the Subcontract Act doesn't apply." Not only sole proprietors but also corporations with capital of 10 million yen or less qualify as subcontractors.

Pattern 2: Overlooking Transaction Value

Even when a company with capital of 20 million yen commissions a logo design from a freelance designer for 500,000 yen, the Subcontract Act applies. Staff members who think it doesn't apply because it's under 1 million yen are overlooking the point — for companies with capital over 10 million and 300 million or less, only transactions exceeding 1 million yen are covered.

Pattern 3: Insufficient Understanding of the Nature of Service Agreements

Many companies think "it's a service agreement so the Subcontract Act doesn't apply." However, "delegation" under the Subcontract Act encompasses not only quasi-mandate contracts under civil law but also contracts for work. Transactions delegating the creation of deliverables or the provision of services may be subject to the Subcontract Act regardless of the name of the contract.

Pattern 4: Cumulative Amount Calculation in Ongoing Transactions

When SEO work is continuously commissioned at 200,000 yen per month, the annual total reaches 2.4 million yen, making the transaction subject to the Subcontract Act. However, cases where the monthly amount is used for determination and the transaction is mistakenly considered outside scope frequently occur. Fair Trade Commission guidelines state that for ongoing transactions, the cumulative amount is used for determination.

The root cause of these misconceptions is that the Subcontract Act, enacted in 1956, is being applied to the diverse transaction forms of the modern digital economy. The law's scope has expanded incrementally to include information service and advertising industries that were not anticipated at the time of enactment.

To understand the Subcontract Act clearly, a systematic approach is needed: accurately confirm your own company's capital, classify the type of work being commissioned, and confirm the counterparty's capital and transaction value. Ambiguous judgments cannot eliminate corporate risk.

This section provides detailed explanation of specific obligations and practical procedures to prevent violations, including document delivery, payment deadlines, and prohibition on reductions.

In transactions subject to the Subcontract Act, 4 obligations and 11 prohibited acts are defined for the prime contractor (ordering party). Here is a specific checklist for reliably complying with these at an operational level.

Practical Response for the 4 Obligations

1. Document Delivery Obligation

There is an obligation to deliver a document containing required items at the time of ordering. Electronic mail delivery is also possible but requires the consent of the subcontractor.

Required items on the order document:

• Names of prime contractor and subcontractor
• Date of commission
• Commission content (concretely and clearly)
• Amount of subcontracting fee (calculation method also acceptable)
• Payment due date
• Payment method

In practice, write specifically — not "website production in full" but "corporate website 10 pages, responsive design, CMS implementation." Vague language like "to be discussed" or "to be determined separately" is not acceptable.

2. Payment Due Date Setting Obligation

A payment due date must be set within 60 days from the date goods etc. were received. This must be "a specific date within 60 days of receipt" — not "60 days after receipt."

Practical example: For end-of-month billing with payment at end of following month, the maximum period is approximately 60 days, which is compliant. However, end-of-month billing with payment at end of the month after that (approximately 90 days) is a violation.

3. Document Preparation and Retention Obligation

There is an obligation to record the content of subcontracting transactions and retain these records for 2 years. Keep all order documents, acceptance records, payment records, and email communications.

4. Late Payment Interest Obligation

If payment is late, there is an obligation to pay late payment interest (14.6% per year). Interest accrues even for one day of delay.

Practical Checkpoints for the 11 Prohibited Acts

Prohibition on Refusal to Accept

The receipt of deliverables prepared in accordance with the order content must not be refused. Refusing receipt citing "different from our image" or "needs redoing" constitutes a violation. Pre-order requirements definition and establishing an approval process are important.

Prohibition on Delayed Payment of Subcontracting Fee

Any payment made after the payment due date set within 60 days is not permitted under any circumstances. Manage payment so that funds arrive within the deadline, factoring in bank business days.

Prohibition on Reduction of Subcontracting Fee

Reducing the fee without reasonable cause is prohibited. "Our budget has been reduced" or "our sales have declined" are not acceptable reasons. Even in the case of reduction due to specification changes, prior agreement and written confirmation are necessary.

Prohibition on Returns

Returns for which the subcontractor bears no responsibility are prohibited. Returns or cancellations at the ordering party's convenience require payment of the full fee.

Prohibition on Below-Market Pricing

Ordering at a price significantly lower than comparable item prices or market prices is prohibited. Obtain quotes from multiple companies and be mindful of ordering at appropriate prices.

Prohibition on Forced Purchases or Use

The ordering party must not force the subcontractor to purchase its products or use its services. This includes demands for entertainment or gifts.

Prohibition on Retaliatory Measures

Unfavorable treatment because a subcontractor filed a report with the Fair Trade Commission is prohibited.

Prohibition on Early Settlement of Consideration for Provided Materials

Offsetting material costs provided on a paid basis against subcontracting fees early is prohibited.

Prohibition on Delivering Bills Difficult to Discount

When paying by promissory note, delivering a note that is difficult to discount is prohibited.

Prohibition on Demanding Unjust Economic Benefits

Money, services, or other economic benefits not included in the subcontracting fee must not be demanded.

Prohibition on Unjust Changes to Deliverable Content or Rework Demands

Changes to deliverable content or rework demands for which the subcontractor bears no responsibility are prohibited. When changes arise that involve additional costs, appropriate consideration must be paid.

To reliably comply with these obligations and prohibited acts, it is indispensable to use checklists at the time of ordering, during the project, and at completion, and to build an organizational management structure.

This section specifically presents typical violation patterns learned from actual enforcement cases and preventive measures.

Here is an analysis of typical patterns that ordering parties fall into and practical countermeasures, based on Subcontract Act violation cases published by the Fair Trade Commission.

Typical Cases of Document Delivery Obligation Violations

Case 1: Major Advertising Agency Company A (capital ¥5 billion)

To 200 freelance designers, the company sent only simple instructions by email and did not deliver formal order documents. The stated reason was "there are many urgent projects and we can't keep up with document creation," but over the course of 2 years there were approximately 3,000 cases of non-delivery.

The company received a recommendation from the Fair Trade Commission and its name was disclosed. It subsequently introduced an order management system that automatically generates documents at the time of ordering.

Preventive measure: Systemize document delivery to automate it, reducing both staff workload and human error. Even for urgent projects, document delivery cannot be omitted.

Typical Cases of Payment Delay

Case 2: System Development Company B (capital ¥200 million)

The company had standardized payment to freelance programmers on a "payment at end of the month after next" basis. The contract stated "within 60 days of receipt," but actual operations resulted in payment cycles of 70 to 90 days.

In addition to receiving a recommendation for Subcontract Act violations, the company was required to pay late payment interest at 14.6% per year going back 2 years. The total additional payment came to approximately 8 million yen.

Preventive measure: When designing payment cycles, consider Subcontract Act restrictions, and introduce automatic checking functionality in the accounting system.

Typical Cases of Reduction

Case 3: Marketing Company C (capital ¥30 million)

The company ordered promotional video production from a video production company (capital ¥5 million) for 5 million yen. After completion, it unilaterally reduced the fee to 4 million yen citing "client budget cuts."

The case came to light through a report from the subcontractor, and the company was ordered to pay the 1 million yen reduction and late payment interest.

Preventive measure: At the time of ordering, consider the risk of changes to end-client contract terms, and if necessary, create a mechanism to guarantee the order amount.

Typical Cases of Returns and Refusal to Accept

Case 4: Publisher D (capital ¥50 million)

After commissioning article writing from a freelance writer, the company refused to accept the completed manuscript citing "the direction has changed." It proposed transferring to another project, but when the writer refused, did not pay the fee.

A Fair Trade Commission investigation confirmed that the manuscript met the order specifications, and the company was ordered to pay the full amount plus late payment interest.

Preventive measure: Elaborate on requirements definition before ordering and conduct staged direction confirmation during the project. Establish as a premise that if changes occur, additional consideration will be paid.

Typical Cases of Rework Demands

Case 5: Web Production Company E (capital ¥80 million)

The company commissioned website design from an individual designer. In response to the completed design, it demanded three rounds of rework without showing clear reasons. No additional fees were paid, and the designer's work time became three times the original estimate.

The unreasonable rework demand was recognized as such following a report from the subcontractor. Payment for the additional work plus late payment interest was ordered.

Preventive measure: Define an upper limit on revision rounds in the contract, and build a mechanism for paying additional fees when the limit is exceeded.

Common Thinking Pitfalls Companies Fall Into

The Misconception That "The Other Party Is Also a Business So It's Fine"

Even sole proprietors and small corporations are protected parties under the Subcontract Act. It is necessary to understand that the law corrects the inequality of power imbalance regardless of the scale of the transaction.

The Overconfidence That "Having a Contract Is Sufficient"

Even if specified in a contract, content that violates the Subcontract Act is void. The Subcontract Act takes precedence over freedom of contract.

The Judgment That "It's Industry Practice So It's Fine"

Industry practices like "it's normal in the web industry" or "that's common sense in this industry" are not a get-out-of-jail-free card for Subcontract Act violations. There are cases where illegal acts are widespread across an entire industry.

The Recognition That "The Other Party Agreed So It's Fine"

Even if the subcontractor has agreed, a Subcontract Act violation may still exist. The purpose of the Subcontract Act is to prevent situations where subcontractors with weaker positions agree against their will.

In transactions subject to the Subcontract Act as a service agreement, it must be strongly recognized that public regulation applies even in private contracts, and building a compliance framework is urgently needed.

This section presents practical action plans and internal system building for ongoing legal compliance.

To prevent Subcontract Act violations, it is necessary to build an organizational compliance framework rather than relying on individual staff knowledge and care. Here is a practical approach by company size.

Framework for Small Companies (fewer than 50 employees)

Clarifying Responsibility

Appoint a Subcontract Act compliance officer at the representative or executive level. If there is no legal staff, a general affairs officer can serve concurrently.

Minimum Checking System

Use an order-time checklist, monthly payment status confirmation, and semi-annual in-house training as a basic set. Create the checklist in Excel format and make completion mandatory at each order.

Utilizing External Specialists

Ask a legal advisor or social insurance labor consultant to perform an annual Subcontract Act check and conduct objective auditing. This can be handled at an annual cost of approximately 200,000 to 500,000 yen.

Framework for Mid-Sized Companies (50 to 300 employees)

Establishing a Subcontract Act Management Department

Assign a dedicated Subcontract Act staff member within the legal or general affairs department. This person centrally manages in-house Subcontract Act education, operation of the checking system, and response when problems occur.

System-Based Management

Incorporate Subcontract Act checking functions into the order management system. Build a system where capital information, transaction values, and payment deadlines are automatically checked, and alerts are generated when there is a violation risk.

Staged Approval Process

Set an approval flow that requires confirmation of Subcontract Act applicability for orders above a certain amount. Confirmation goes in order: staff member → section chief → department head → Subcontract Act management officer.

Framework for Large Companies (300 or more employees)

Establishing a Compliance Committee

Establish a Subcontract Act compliance committee with a director-level chair, and review the operational status quarterly. Select compliance promotion staff from each business division to build a cross-sectional framework.

Conducting Internal Audits

Conduct an annual internal audit of Subcontract Act compliance. Systematically check document delivery status, payment status, and prohibited act compliance, and develop a remediation plan if problems are found.

Building an Education Program

Incorporate Subcontract Act education into new employee training, mid-career hire training, and management training. Use e-learning systems to administer understanding tests.

Practical Action Plan

Phase 1: Assess Current Situation (1 month)

1. Inventory all service agreements from the past year
2. Identify transactions subject to the Subcontract Act
3. Confirm the current status of document delivery, payment deadlines, etc.
4. Extract transactions that are in violation or in a grey zone

Phase 2: Emergency Response (1 month)

1. Correct obvious violations (if payment is delayed, pay immediately)
2. Deliver order documents retroactively where they have not been delivered
3. Explain and apologize to counterparties as necessary
4. Obtain emergency advice from legal specialists

Phase 3: Build the Framework (3 months)

1. Appoint a compliance officer and clarify authority
2. Revise the ordering process and introduce a checking system
3. Establish internal rules (enact a Subcontract Act compliance regulation)
4. System modification or tool adoption

Phase 4: Begin Operations (ongoing)

1. Begin ordering under the new process
2. Monthly compliance status confirmation
3. Quarterly reporting to management
4. Annual external audit

Setting KPIs for Continuous Improvement

Quantitative Indicators

• Document delivery rate: maintain at 100%
• Payment deadline compliance rate: maintain at 100%
• Subcontract Act training completion rate: 100% of target staff
• Internal audit findings: year-on-year reduction

Qualitative Indicators

• Number of complaints from counterparties: maintain at zero
• Inquiries from the Fair Trade Commission: maintain at zero
• Improved compliance awareness in-house

Subcontract Act compliance is not a one-time achievement — it requires ongoing review as the business expands and transaction forms change. In particular, when starting new businesses or new transaction forms, always confirm Subcontract Act applicability and adjust the framework as necessary.

The most important thing for ordering parties is to understand the Subcontract Act not as a "regulation" but as "rules for building fair transactional relationships," and to connect this understanding to strengthening trust with counterparties. Appropriate compliance systems contribute not only to reducing corporate risk, but also to building long-term partnerships with outstanding freelancers and partner companies.

References

Overview of the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors (2024)

Subcontract Promotion Seminar Text (2024)

Overview of the Act on Proper Transactions with Specified Consignees (2024)

Guidelines for Creating an Environment Where Freelancers Can Work with Peace of Mind (2021)