The Japanese Case Law on the
Application of Employment Rules to
Franchisees and on Vicarious Liability
Prof. Souichirou Kozuka
(Gakushuin University)
Two, unrelated developments
In 2009, some franchisees established an
association and requested the collective
bargaining, alleging that it is the labour union
 The Supreme Court held two decisions on the
qualification of a worker under the Labour
Union Act on 12 April 2011


Labour Union Act
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
Art.3 The term "Workers" as used in this Act shall
mean those persons who live on their wages,
salaries, or other equivalent income, regardless of
the kind of occupation.
Labour Standards Act

Art. 9 In this Act, worker means one who is
employed at an enterprise or office (hereinafter
referred to as "enterprise") and receives wages
therefrom, without regard to the kind of
occupation.
SC 12 April 2011 (Case No.1)

New National Theatre Case
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Some members of the opera chorus were on
contracts with the theatre, while others were
“registered” and called for from time to time
A singer who was on a contract sought for the
collective bargaining when his contract was not
renewed
The Court affirmed that he was a worker
SC 12 April 2011 (Case No.2)

INAX Case
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Manufacturer of bathroom fixtures was on
contracts with the engineers for repair works
The contract was titled as “Outsourcing contract”
The engineers claimed for the collective
bargaining about guarantee of the minimum
annual sales etc
The Court affirmed that the engineers were
workers
SC 21 February 2012

Victor Case

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Manufacturer of audio equipment contracted
with individual repairers as “agents”
Some of the agents were incorporated
The agents requested collective bargaining over
the improvement of their contract conditions
The Court affirmed that the individual agents
were workers unless circumstances indicated that
they were business owners
The Case Law Now Formed

Elements to be considered
1.
2.
3.
4.
5.
6.

Integrated as necessary labour force
Conditions of work were uniformly determined
Remuneration paid in exchange for the labour
Little room for declining the allotted work
Subject to the directions over the work
Time and place of work was regulated
If the test is applied to individual franchisee?
Challenges to the practice

What does “integrated” mean? – Employers’
lawyer views it equivalent to “outsourcing”
(but distinguished from “directions”)
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Franchising is different from outsourcing
Can this argument be maintained in case of
service franchising as well?
The detailed manuals, uniform wears, shop signs
imply “uniform work conditions” or “directions”?
Possible responses

Focus on the “unless” part of Victor decision Suggestions by the Ministry’s Study Group
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Can the franchisee affect the earnings and losses?
Does the franchisee get the unexpected profits
(and bear the unexpected loss)?
Does the franchisee have the power to employ its
own employees?
Or requiring the franchisee to incorporate
solves the problem?
Worker under Labour Standards Act
Recent cases deal only with the applicability
of the Labour Union Act
 The Labour Standards Act may have a
narrower applicability (though the same term
“worker” is used)
 Implications: outsourcing is OK (to avoid
regulation over dismissals), but the protection
through collective bargaining must be given

Vicarious liability
Dilemma of the franchisor - lack of control on
franchisees could lead to vicarious liability
(while too much control could turn franchise
agreement into labour contract)
 Source of liability
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Respondeat superior (Civil Code, art.715)
Ostensible liability (Companies Act, art.9;
Commercial Code, art.14)
Negligence by franchisor itself (Civil Code,
art.709)

Civil Code
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Article 715 (1) A person who employs others for a
certain business shall be liable for damages inflicted
on a third party by his/her employees with respect to
the execution of that business; provided, however,
that this shall not apply if the employer exercised
reasonable care in appointing the employee or in
supervising the business, or if the damages could not
have been avoided even if he/she had exercised
reasonable care.
Article 709 A person who has intentionally or
negligently infringed any right of others, or legally
protected interest of others, shall be liable to
compensate any damages resulting in consequence.
When is the franchisor liable?

Osaka DC, 31 July 2001
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Customer slipped on the floor of the convenience
store on a rainy day and was injured
The floor was wet after cleaning by the employee
Floor materials were determined, and cleaning
mop was provided, by the franchisor
Franchisor held liable for the failure to give proper
directions
When is the franchisor liable?

Kobe DC 19 October 2001
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Grilled beaf restaurant caused bad smell
The ventilation duct was not properly designed
Franchisor and franchisee were held jointly liable
Implications from two cases
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The role of the franchisor: properly design the
business format and implement the store policy
Failure to do so could make franchisor liable
When could the franchisor be liable?
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SC 30 November 1995
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Pet shop within the supermarket sold a bird
having a disease and the purchaser’s family
became ill
Legally speaking, pet shop was not part of the
supermarket but an independent merchant
The Court applied “by analogy” the provision on
liability for licensing the trademark and
misleading the customer into a wrong
understanding about the counterparty

Companies Act
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Article 9 Any Company who has permitted
others to carry out a business or engage in any
enterprise by using the Company's own trade
name shall be jointly and severally liable together
with such others, vis-a-vis any person who has
transacted with such others based on
misunderstanding that such Company carries out
such business, for the performance of any
obligations which may arise from such
transaction.
Practical response
The case is applicable to franchise context
 Shop sign distinguishing independent tenants
from corners of the supermarkets – feasible in
franchising?
 Make clear the “division of labour” between
the franchisor and the franchisee
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in operation of the outlet
in responding to the customer’s claim
Conclusion
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Control should not be too much or too little
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too much control turns franchisee into a worker
too little control could make the franchisor liable
toward the customer / third party
They are not incompatible: the roles of
franchisor and franchisee must be made clear
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Control over “franchise package” vs control over
daily operations
Complication could arise with service sector