Franchise Employment Rules & Vicarious Liability in Japanese Case Law

1. The Japanese Case Law on the Application of Employment Rules to Franchisees and on Vicarious Liability Prof. Souichirou Kozuka (Gakushuin University)

2. 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

3. 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. 9In 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.

4. 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

5. 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

6. SC 21 February 2012 • Victor 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

7. The Case Law Now Formed • Elements to be considered • 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?

8. Challenges to the practice • What 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”?

9. Possible responses • Focus 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?

10. 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

11. 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 • Respondeat superior (Civil Code, art.715) • Ostensible liability (Companies Act, art.9; Commercial Code, art.14) • Negligence by franchisor itself (Civil Code, art.709)

12. 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 709A 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.

13. 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

14. 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 liable • Implications 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

15. 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

16. Companies Act • Article 9Any 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.

17. 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 • in operation of the outlet • in responding to the customer’s claim

18. Conclusion • Control 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