The Japanese Case Law on the The Japanese Case Law on the Application of Employment Rules to Application of Employment Rules to

Franchisees and on Vicarious LiabilityFranchisees and on Vicarious Liability

Prof. Souichirou Kozuka(Gakushuin University)

Two, unrelated developmentsTwo, unrelated developmentsIn 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 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)SC 12 April 2011 (Case No.1)New National Theatre Case

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)SC 12 April 2011 (Case No.2)INAX Case

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 2012SC 21 February 2012Victor Case

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 FormedThe Case Law Now FormedElements to be considered

1. Integrated as necessary labour force2. Conditions of work were uniformly

determined3. Remuneration paid in exchange for the labour4. Little room for declining the allotted work 5. Subject to the directions over the work6. Time and place of work was regulated

If the test is applied to individual franchisee?

Challenges to the practiceChallenges to the practiceWhat does “integrated” mean? –

Employers’ lawyer views it equivalent to “outsourcing” (but distinguished from “directions”) 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 responsesPossible responsesFocus on the “unless” part of Victor

decision - Suggestions by the Ministry’s Study Group 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 ActWorker under Labour Standards ActRecent cases deal only with the

applicability of the Labour Union ActThe 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 liabilityVicarious liabilityDilemma 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 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 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?When is the franchisor liable?Osaka DC, 31 July 2001

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?When is the franchisor liable?Kobe DC 19 October 2001

Grilled beaf restaurant caused bad smell The ventilation duct was not properly

designed Franchisor and franchisee were held jointly

liableImplications from two cases

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?When could the franchisor be liable?SC 30 November 1995

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 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 responsePractical responseThe case is applicable to franchise

contextShop sign distinguishing independent

tenants from corners of the supermarkets – feasible in franchising?

Make clear the “division of labour” between the franchisor and the franchisee in operation of the outlet in responding to the customer’s claim

ConclusionConclusionControl should not be too much or too little

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 Control over “franchise package” vs control

over daily operations Complication could arise with service sector