Japan PEO Services Now Require a Dispatch License

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Companies seeking to operate in Japan via a Professional Employer Organization (“PEO”), also known as an Employer of Record (“EOR”), are now required to work with a firm that has a license, commonly known as a “Hakken” or Dispatch License. In this article, we’ll explain when this regulation changed, why this license is required, what’s required to get certified, why the old “consulting/contracting” approach to utilizing a representative in Japan doesn’t work by either the foreign company directly or via a non-licensed firm, why proxy licenses (borrowing someone’s name) are common but dangerous to the ultimate employer and employee, and what to do when selecting a PEO in Japan to ensure they are compliant.

Why Japan’s PEO License Requirements Changed and Why a Dispatch License is Required

In September 2018, Japan made changes to the Dispatch License regulations under newly passed legislation called the Worker Dispatching Act and Enforcement Rules. Before these rules were put in place, a dispatch company didn’t need a license to dispatch workers who are employed as full-time employees by the dispatch company. However, as a result of numerous violations of the rules, the government made major changes. This dispatch license is now required even if the company they are being dispatched to are located overseas (where instruction is coming from) and is most common in a PEO model.

Some of the most common violations of the rules include the misclassification of workers as either employees or independent contractors. Contracting organizations are now subject to criminal and administrative penalties for these misclassifications.

Requirements for Securing a Japanese Dispatch License

A PEO with its own dispatch license gains a lot of credibility due to the challenges to acquire – and ongoing regulation of – the license and renewal process. The basic requirement is essentially substance in Japan.

requirements for a Japanese dispatch license

The minimum requirements to secure a license beyond governmental approval and physical inspection/interviews are an initial capital infusion of c. US$200,000 (one yen companies don’t work), a minimum ongoing cash balance to prove the ability to pay off over c. US$150,000, private and partitioned office space (more than one room is required with separate entrances), a full-time local legal representative that speaks Japanese as well as full-time in-house staff to manage the dispatch workers.This is all reported to the government and subject to flash audits at any time. Attendance is required in sanctioned Japanese-only training courses, and that person becomes the named representative of the dispatch license and the legally and criminally liable person for any infractions. This information is public and includes the individual’s home address.

Why the “Consulting” Approach Doesn’t Work

Foreign companies have frequently used individual consultants/contractors as local representatives in Japan. However, the Japanese government does not like this “consulting” approach because it creates a lack of clarity regarding who is ultimately responsible for company activities and workers’ rights and safety. There are also material tax risks with this approach. These “consulting” or independent contracting arrangements are easier to terminate than traditional employment contracts, placing workers in a vulnerable position and are therefore less desirable from the government’s perspective. PEO companies also used the “they are consultants working for the end client” approach to circumvent the dispatch rules. This is no longer acceptable, especially if direction is given by the end client. Direction given by the end client makes it a dispatch assignment and subject to dispatch regulations.

Why Proxy Licenses (Borrowing Someone’s Name) are Common but Dangerous

Many foreign companies in Japan have established and maintained operations in the country simply by securing another named entity, while not complying with other requirements associated with a Dispatch License. In other words, just being licensed on paper isn’t enough – there’s ongoing operational and reporting maintenance. The dispatch licensee must have a direct contract with the appropriate end client or legally authorized representative. And as we’ve detailed above, a full-time person must oversee the dispatch company, and office space must be secure, but often they’re not. Foreign companies must now be careful to avoid these violations as the client as well as the staff can be impacted by violation of these rules.

Ensure your Japanese PEO is Compliant

Japan’s new reinforcement of the Dispatch License means foreign companies must now be particularly careful when selecting a local PEO. For example, be sure to ask whether your PEO holds a Dispatch License directly or if it is borrowed. Ask to talk to the legal representative and see if you can communicate with them in English and if they are full-time. Ask to see the contracting arrangements between the licensee and the end client which you’re supposed to sign. Speak to other references of this dispatch company. Ask about the way the organization handles the 3/5 must hire rules. Dispatch Licenses granted are public and therefore searchable on Japan’s Government website (in Japanese). No longer can “paper companies” provide PEO services in Japan.