Background and Purpose of the Reform
The Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors (the "Subcontract Act") aims to ensure fairness in transactions between principal enterprises and subcontractors. Historically, the Act's regulatory scope was centered on manufacturing subcontracts and repair subcontracts, but the growth of the service economy and digitalization created an urgent need to protect freelancers and small businesses engaged in creative services, consulting, and IT-related work.
The 2026 reform responds to these structural economic changes by expanding the definition of subcontracting under Article 2 and further strengthening transaction transparency and fairness.
Expanded Scope of Covered Services (Article 2 Amendment)
Newly Covered Service Categories
The amended Article 2 now explicitly covers the following services in addition to the four existing transaction types (manufacturing, repair, information product creation, and service provision subcontracts):
| Service Type | Examples | Previous Treatment |
|---|---|---|
| Creative services | Design, video production, writing, photography | Partially covered as information product creation → Now fully clarified |
| Consulting services | Management consulting, IT consulting, marketing support | Unclear applicability → Now explicitly covered |
| IT-related services | System development, website creation, app development, SaaS | Partially covered → Scope expanded |
| Professional services | Translation, interpretation, training, research & analysis | Sometimes excluded → Now explicitly covered |
Capital Threshold Maintained
The capital requirements for application (principal enterprise with over ¥300 million capital / subcontractor with ¥300 million or less, etc.) remain unchanged. However, transactions that do not meet the capital threshold may still be regulated under the Freelance Protection Act (Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators).
Free Tool Related to This Article
Contract Risk Checker
Try our free simulator related to this topic.
Try for free →Digital Compliance for Document Delivery (Article 3 Amendment)
Overview
Article 3 requires principal enterprises to deliver written documentation to subcontractors at the time of ordering. The amendment formally authorizes delivery via electromagnetic methods (email, electronic contract systems, cloud services, etc.).
Requirements for Electronic Delivery
| Requirement | Details |
|---|---|
| Subcontractor consent | Prior consent from the subcontractor is required for electronic delivery |
| Complete required items | Electronic documents must include the same items as traditional Article 3 documents (scope of work, delivery date, subcontract price, etc.) |
| Retention obligation | Principal enterprises must retain electronic records for 5 years (amended Article 5) |
| Accessibility | Subcontractors must be able to view and print documents at any time |
Practical Considerations
While digitalization is expected to promote paperless ordering, it does not resolve longstanding issues such as retroactive documentation of verbal orders or vague specifications. Even with electronic delivery, the obligation to specify the scope of work and subcontract price at the time of ordering remains unchanged.
Strengthened Price-Squeeze Regulations (Article 4(1)(v))
Key Changes
Article 4(1)(v) prohibits principal enterprises from setting subcontract prices significantly below the normally paid consideration (so-called "price squeezing" or "kaitataki").
The reform strengthens this regulation in several ways:
- Enhanced monitoring of unilateral price reductions: Cases where principal enterprises maintain or reduce unit prices despite rising material and labor costs are now subject to stricter enforcement
- Substantive consultation required: Records demonstrating sufficient consultation with subcontractors regarding price determination must be maintained
- Expanded JFTC investigative powers: The Japan Fair Trade Commission's authority for on-site inspections and document investigations has been expanded
Examples of Price-Squeeze Violations
| Scenario | Assessment |
|---|---|
| Raw material costs increased 20% but subcontract price was frozen | Likely violation |
| Unit price reduced citing "industry price decline" without evidence | Violation |
| Prices determined after obtaining quotes from multiple subcontractors | Lawful |
| Price revised through sufficient consultation and mutual agreement | Lawful |
Stricter 60-Day Payment Deadline (Articles 2-2 and 4(1)(ii))
Reform Details
The Subcontract Act has always required payment within 60 days from receipt of goods or services (Article 2-2), but in practice, many principal enterprises used the "inspection completion date" as the starting point, effectively exceeding the 60-day limit.
The reform clarifies the following:
- Starting date clarified: "Date of receipt" means the date goods were delivered or services were completed, not the inspection completion date
- Strict application of late payment interest: The obligation to pay late interest at 14.6% per annum for payments beyond 60 days is strictly enforced
- Enhanced administrative guidance: The JFTC will issue recommendations and public announcements more promptly
Risks of Non-Compliance
| Measure | Details |
|---|---|
| Recommendation | Corrective recommendation by the JFTC (with public disclosure of company name) |
| Late interest | Obligation to pay late interest at 14.6% per annum |
| Penalties | Failure to deliver Article 3 documents may result in fines of up to ¥500,000 (Articles 10-11) |
Relationship with the Freelance Protection Act
How the Two Laws Interact
The Freelance Protection Act (effective November 2024) regulates all transactions with freelancers regardless of capital requirements. The 2026 Subcontract Act reform clarifies how these two laws interact:
| Aspect | Subcontract Act | Freelance Protection Act |
|---|---|---|
| Applicability | Capital threshold required (¥300M+ for principal) | No capital threshold (employee count only) |
| Covered transactions | Four types of subcontracts | All outsourced work |
| Documentation | Article 3 documents (detailed requirements) | Obligation to clarify terms of engagement |
| Payment deadline | Within 60 days | Within 60 days |
| Prohibited acts | 11 types under Article 4 | 7 types including refusal to accept, payment reduction, returns |
| Enforcement | JFTC | JFTC and Ministry of Health, Labour and Welfare |
Practical Considerations
- Where both laws apply: When the capital threshold is met and the counterparty is a freelancer, both laws apply simultaneously. Businesses must comply with the stricter of the two
- Where the Subcontract Act does not apply: Even without meeting capital requirements, the Freelance Protection Act still provides protections
- Harassment prevention: Unique to the Freelance Protection Act, ordering parties have an obligation to implement harassment prevention measures for freelancers
Recommended Actions for Businesses
Compliance Checklist
- Review business partners: Determine whether outsourced creative, consulting, and IT service providers fall under the expanded scope
- Update contracts and purchase orders: Verify that Article 3 documentation requirements are met, including electronic delivery compliance
- Review payment terms: Ensure payments are completed within 60 days of the date of receipt
- Establish price-determination procedures: Build systems to record and retain consultation records with subcontractors
- Conduct internal training: Educate procurement and purchasing departments on the key points of the Subcontract Act reform
---
*Houritsu no Mikata Editorial Team | Published April 26, 2026*
