In a recent decision, the Supreme Court held that although a company (the "Distributor") executed service agreements with its sales agents (the "Sales Agents") who worked in the Distributor's retail space at a department store, the Sales Agents were the Distributor's "employees" as defined under the Labor Standards Act and entitled to statutory severance from the Distributor. Although the Sales Agents were subcontracted to the Distributor and received a sales commission for selling products on its behalf to customers, the Supreme Court ruled in favor of the Sales Agents.

Factors considered:

Despite the Distributor and the Sales Agents' contractual arrangement, the Sales Agents were "employees" of the Distributor, since the Sales Agents were in a superior-subordinate relationship with the Distributor to receive wages.

The following factors ("Factors") were considered in reaching the decision: (i) the Distributor gave work orders to the Sales Agents through the Distributor's internal computer network; (ii) there was a cap on the sales commissions that could be earned, and the Sales Agents received a certain amount of compensation, even in cases of poor sales; (iii) employees from the Distributor's headquarters regularly examined how the Sales Agents performed their work; and (iv) the Distributor documented and managed the Sales Agents' attendance, such as tracking sick days and maternity leave.

Potential impact:

The Supreme Court's decision is expected to have a significant impact since many department stores and supermarkets similarly delegate and outsource certain tasks.

However, a court determination on whether or not an employment relationship exists is based on a number of factors, the most important factors being the scope and degree of supervision and control exercised. Therefore, this Supreme Court ruling is not dispositive, and does not mean that agents subcontracted to sell a product on a company's behalf in exchange for compensation will necessarily be classified as "employees" of that company.

On the other hand, this ruling does provide further guidance on the factors considered by the Court (and the degree thereof) in determining whether or not an employment relationship exists. Around the same time as this decision, the Supreme Court also reviewed similar cases involving subcontracted workers, and held that water cooler installation workers and credit card telemarketers are "employees" of the companies with which the individuals had executed service agreements. However, the Supreme Court held that Yakult sales agents (sales ladies who go door-to-door selling Yakult products, such as yogurt and dairy products) are not "employees" of the Yakult Company.

Based on these recent rulings, it appears that the Supreme Court is moving towards a broader interpretation of employment relationships, and stronger legal protection of individuals who perform certain functions for companies under a service agreement.

Concluding thoughts:

Given this trend, companies that delegate or outsource functions to individuals may wish to consider examining whether any of the Factors discussed above are present in their service agreements and/or practices, and if so, consider taking necessary measures to minimize the risk of a finding of an employment relationship.