Can a Japanese Company Be Held Liable for its Employee's Wrongdoing? Understanding Employer's Liability (Shiyōsha Sekinin)

Businesses worldwide operate through their employees, and while this delegation of tasks is essential for growth and efficiency, it also carries inherent risks. One such risk is the potential for an employee's wrongful act to cause harm to a third party, leading to legal liability for the employer. In Japan, this area of law is primarily governed by Article 715 of the Civil Code, which establishes the principle of "Employer's Liability" (使用者責任 - shiyōsha sekinin), often referred to as vicarious liability.

Understanding the scope and conditions of employer's liability is crucial for any company operating in Japan, as it can have significant financial and reputational implications. This article delves into the key requirements for establishing shiyōsha sekinin, the influential "outer appearance theory," defenses available to employers (though rarely successful), and the rules regarding reimbursement between the employer and the wrongdoing employee.

1. The Basis of Employer's Liability (Shiyōsha Sekinin)

Article 715, paragraph 1 of the Japanese Civil Code states: "A person who employs others for a certain business shall be liable for any damages inflicted on a third party by his/her employee in the course of the execution of its business."

Several underlying rationales support this principle of holding employers liable for their employees' torts:

• Reward-Risk Theory (報償責任説 - hōshō sekinin setsu): Since the employer benefits and profits from the employee's activities conducted for the business, the employer should also bear the risks associated with those activities.
• Risk Creation/Control Theory (危険責任説 - kiken sekinin setsu): By expanding its operations through employees, the employer creates certain risks of harm to third parties. The employer is also generally in a better position than the individual employee to control these risks through training, supervision, and establishing safe working practices.
• Loss Distribution Theory (損害分散説 - songai bunsan setsu): Employers are typically better positioned to absorb and distribute losses caused by their employees' torts, for instance, through liability insurance or by incorporating such costs into the pricing of goods and services. This facilitates victim compensation.

It is important to note that the employer's liability under Article 715 is concurrent with the employee's own personal liability for their tort under general tort principles (e.g., Article 709 of the Civil Code). From the victim's perspective, the employer and the employee are often considered joint and several tortfeasors, meaning the victim can claim the full amount of damages from either party (or both).

2. Key Requirements for Establishing Employer's Liability

For a third party to successfully hold an employer liable under Article 715, several conditions must be met:

• A "Use Relationship" (使用関係 - Shiyō Kankei):
  There must be a relationship where one person (the employee) is "used" by another (the employer) for a "certain business." This is not strictly limited to formal employment contracts. A de facto relationship involving command, supervision, and control by the employer over the person performing the work can suffice to establish a "use relationship." However, independent contractors are generally excluded, unless the degree of control exercised by the principal over the contractor is so extensive that the relationship is, in substance, one of de facto employment.
• Employee's Tortious Act:
  The employee must have committed a tortious act that inflicted damage on a third party. This means the employee's conduct itself must satisfy the general requirements of a tort, typically under Article 709, which include:
  • Intent or negligence on the part of the employee.
  • Infringement of a right or legally protected interest of the third party.
  • Actual damage suffered by the third party.
  • A causal link between the employee's act and the damage.
• "In the Course of the Execution of its Business" (事業の執行について - Jigyō no Shikkō ni Tsuite):
  This is often the most contentious requirement. The employee's tortious act must have been committed "in the course of the execution of its business."
  • Strict Interpretation: This could be narrowly interpreted to mean acts that are directly within the scope of the employee's officially assigned duties.
  • The Outer Appearance Theory (外形標準説 - Gaikei Hyōjunsetsu): However, Japanese case law has significantly broadened this requirement through the "outer appearance theory." According to this theory, an act is considered to be "in the course of the execution of its business" if, when viewed objectively from an external perspective, it appears to be part of the employee's duties or closely related to them, even if it was, in fact, an abuse of authority, a deviation from instructions, or not strictly part of their job description. This theory was notably established by the Supreme Court judgment of November 30, 1965 (Minshū Vol. 19, No. 8, p. 2049). It aims to protect third parties who reasonably rely on the appearance that an employee is acting within the scope of their employment.
  • Transactional Torts (取引的不法行為 - Torihikiteki Fuhōkōi): The outer appearance theory is particularly relevant in cases of "transactional torts," where an employee commits a tort (such as fraud or misrepresentation) against a third party in the context of a transaction purportedly conducted on behalf of the employer. For example, an employee might exceed their actual authority but give the outward impression they are authorized to conclude a certain deal. The Supreme Court judgment of November 2, 1967 (Minshū Vol. 21, No. 9, p. 2278) affirmed that acts exceeding authority could fall under employer liability if they objectively appeared related to duties and were facilitated by the employee's position.
    • Victim's Bad Faith or Gross Negligence: In the context of transactional torts, if the third-party victim knew that the employee was acting improperly or outside their authority (bad faith - 悪意, akui), or was grossly negligent (重過失 - jūkashitsu) in not knowing this, the employer's liability under the outer appearance theory may be denied. This was established in cases like the Supreme Court judgment of April 20, 1967 (Minshū Vol. 21, No. 3, p. 697, concerning bad faith) and the Supreme Court judgment of November 21, 1969 (Minshū Vol. 23, No. 11, p. 2097, concerning gross negligence). "Gross negligence" is a high standard, often described as a lack of care almost equivalent to intentional wrongdoing (「故意に準ずる程度の注意の欠缺」- koi ni junzuru teido no chūi no kenketsu). Simple negligence on the part of the victim may not be sufficient to negate employer liability in these transactional tort scenarios, which can sometimes lead to different outcomes compared to claims based purely on apparent agency (where ordinary negligence by the third party can negate "justifiable grounds").

3. The (Largely Illusory) Employer's Defense of Due Care

Article 715, paragraph 1, proviso, offers a theoretical escape route for employers. It states that the employer is not liable if they can prove that they "exercised due care in the appointment of the employee and in the supervision of the business," OR if they can prove that "the damage would have occurred even if due care had been exercised."

However, in practice, Japanese courts have set an extremely high standard for establishing this defense. It is very rare for an employer to successfully invoke this proviso. Consequently, employer's liability under Article 715 is often characterized as being very close to strict liability, with the "due care" defense being largely a "dead letter" (死文化する - shibunka suru) in practical terms. The underlying policy is generally geared towards ensuring victim compensation by holding the (usually more financially capable) employer responsible.

4. Reimbursement (Kyūshō - 求償) Between Employer and Employee

When an employer is held liable and compensates the victim for damages caused by an employee's tort, the legal relationship between the employer and the employee comes into question.

• Employer's Right of Reimbursement from Employee (Article 715, paragraph 3):
  The Civil Code explicitly grants the employer who has paid damages to the third party a right to seek reimbursement (求償 - kyūshō) from the wrongdoing employee.
• Limitation on Employer's Reimbursement:
  However, this right of reimbursement is not absolute or unlimited. The Supreme Court judgment of July 8, 1976 (Minshū Vol. 30, No. 7, p. 689) established a crucial limitation: the employer's right to seek reimbursement from the employee is restricted to a "reasonable extent" that is considered fair from the perspective of an equitable distribution of loss between the employer and the employee. In determining this "reasonable extent," courts consider a variety of factors, including:
  • The nature and scale of the employer's business.
  • The employee's duties, working conditions, and general conduct (e.g., was it a momentary lapse or a malicious act?).
  • The foreseeability of the harm and the nature of the employee's tortious act.
  • The employer's efforts to prevent such harm (e.g., through training and supervision) or to distribute the potential loss (e.g., through liability insurance).
    For example, if an employee causes an accident due to simple negligence while working under strenuous conditions, and the employer had not taken adequate steps to mitigate risks (like providing sufficient rest or carrying appropriate insurance), a court would likely significantly limit the amount the employer could recover from the employee. This principle of limiting reimbursement also applies if the employer sues the employee directly for damage caused to the employer's own property due to the employee's negligence in the course of employment.
• Employee's "Reverse Reimbursement" Claim Against Employer (逆求償 - Gyaku Kyūshō):
  What if the employee directly compensates the victim? Can they then seek a contribution from the employer? For a long time, this was a debated issue. However, a relatively recent Supreme Court judgment of February 28, 2020 (Kin'yū Hōmu Jihō No. 1598, p. 8) recognized that an employee who has compensated a victim for a tort committed in the course of employment can, in turn, seek reimbursement from their employer for a portion of that payment. This "reverse reimbursement" is also determined based on the same principles of fair loss distribution that limit the employer's reimbursement right against the employee. This ensures consistency and fairness regardless of which party (employer or employee) initially pays the victim. This development reinforces the idea that the ultimate burden of loss is to be shared equitably based on the overall circumstances.

Conclusion: Broad Liability with Internal Adjustments

Employer's liability (shiyōsha sekinin) under Japanese law is a broad concept, reflecting a strong policy of protecting victims of torts committed in a business context and distributing losses to the party often best able to bear or insure against them. The "outer appearance theory" significantly expands the scope of acts considered "in the course of business," making it challenging for employers to avoid liability for employee misconduct that has some connection to their employment. While the statutory defense of "due care" is rarely successful, the legal framework does provide for a nuanced approach to the internal allocation of the ultimate financial burden between the employer and the employee through the rules on limited reimbursement. For businesses in Japan, robust internal controls, proper training and supervision of employees, and adequate insurance coverage are essential measures to mitigate the risks associated with this far-reaching form of liability.