The Japan Fair Trade Commission (JFTC) released a comprehensive recommendation to COVER Corp., the parent company of VTuber agency Hololive, regarding several violations of the country’s Subcontract Act. In the report, the JFTC stated that COVER Corp failed to pay contractors by the agreed-upon payment deadlines and accrued late interest.
For context, Cover Corp has commissioned the creation of illustrations, 2D models, and 3D models for VTuber videos from subcontractors who are individuals or corporations with a capital of 500 million yen or less.
What’s in the Japan Fair Trade Commission’s Recommendation to COVER Corp?
The recommendation report from the JFTC states that from April 2022 to December 2023, Cover required subcontractors to perform unpaid rework after receiving their deliverables (a total of 243 times involving 23 subcontractors). In the report, there were two specific cases highlighted:
- The first case involved COVER ordering the creation of a 2D model from a subcontractor on April 8, 2022, and receiving the deliverable on April 18, 2022. However, COVER had the subcontractor perform seven rounds of unpaid revisions (from April 18, 2022, to September 15, 2022) that were not necessary according to the specifications indicated in the order. It has been also noted that due to oversight in COVER’s accounting, the payment for this subcontracting was made 619 days after the receipt of the deliverable, specifically on December 27, 2023.
- The second case involved COVER ordering the creation of another 2D model from a subcontractor and receiving the deliverable on November 21, 2022. Between that date and May 23, 2023, COVER had the subcontractor perform five rounds of unpaid rework that were not necessary according to the specifications indicated in the order.
JFTC shared that COVER Corp has not paid subcontracting fees by the predetermined payment deadlines despite receiving deliverables from subcontractors from July 2022 to February 2024 due to the aforementioned actions. In this case, the total amount of late interest was 1,152,642 yen (around $7,500) for 29 subcontractors. COVER Corp has paid the late interest amount by September 17 this year.
What Should COVER Do?
JFTC has emphasized that COVER should promptly address any overdue payments to subcontractors, including adding interest for late payments where applicable. Additionally, the Commission advised COVER to stop requesting subcontractors to redo tasks without clear justification, ensuring any modifications align with the original contract agreements.
To prevent future issues, COVER was also asked to conduct targeted training for employees responsible for subcontractor dealings, particularly focusing on compliance with the Subcontract Act.
Furthermore, the JFTC recommended that COVER establish clear internal policies to maintain compliance, such as enforcing proper management of subcontractor projects and payment processes. COVER is encouraged to review its practices between April 1, 2022, and October 25, 2024, for any issues under the Act and to take corrective steps to protect subcontractor interests if concerns are identified.
As part of the response, COVER is also required to inform its officers, employees, and subcontractors of the Commission’s directives and report back on the progress, enabling the JFTC to monitor and ensure full adherence to the recommended measures.
COVER Corp Responds: “We’re Taking These Recommendations Very Seriously”
Following JFTC’s recommendation released on October 25, COVER Corp responded with an acknowledgment of the commission’s recommendations. The company offered its sincerest and deepest apologies to its contractors and all related parties.
In the statement, COVER stated that a surge in transaction volume driven by a rapid business expansion led to delays and occasional oversights in contractor dealings, as well as gaps in the internal systems and employee training. This is especially worth mentioning considering how the company continues to ramp up its global presence, most recently opening its first overseas branch in the United States.
The company has also committed to implementing improvements across the board, including hiring additional staff, streamlining transaction workflows, and enhancing internal processes, particularly in staff communication and training. It has also settled all late payments (late payment interest) for those transactions subject to the JFTC’s recommendations: however, it will continue to provide updates on any matters that arise in the future.
Here at COVER, we are taking these recommendations very seriously, and take full responsibility for our actions. We recognize that, with the new Act on the Improvement of Transactions between Freelancers and Undertakings (commonly referred to as the Freelance Act) scheduled to take effect from November 2024, we are required to have structures in place to ensure that transactions with all of our creators and contractors can be conducted smoothly and carefree.
Therefore, we will continue to make improvements to strengthen our compliance and prevent any recurrence of the mentioned violations. In addition to complying with all laws and regulations, we intend to strengthen our internal structures and introduce preventive measures for monitoring, as well as continue to have directors and employees undergo further training.
Statement from COVER Corp.
The company’s CEO, Motoaki Tanigo, has also posted on his official X (Twitter) account apologizing to fans and their business partners regarding this update, and that they are taking the commission’s and public’s feedback seriously.
An Overview of Japan’s Subcontractor and Freelancer Laws
In the report, the Japan Fair Trade Commission specifies that COVER Corp violated the provisions of Article 4, Paragraph 1, Item 2 (Delay in Payment of Subcontract Proceeds), and Article 4, Paragraph 2, Item 4 (Prohibition of Improper Changes to Work or Rework). The act, that first materialized as Act No. 120 of June 1, 1956, mandates that transactions between main subcontracting entrepreneurs and subcontractors are fair and that it is centered around protecting subcontractors.
On top of this, a new law dedicated to local freelancers, Act on Ensuring Proper Transactions Involving Specified Entrusted Business Operators, will take effect on November 1 this year. For the national government, the refined law will aim at optimizing transactions and improving the work environment for freelancers. Moreover, it obligates client enterprises to clearly state the contract details and pay remuneration to freelancers within 60 days after the completion of the work or delivery of the product.
Prior to the new law this year, freelancer protection laws in Japan have long been changing to reflect changes in Japan’s growing “gig and freelancer economy.” In March 2021, the country introduced the Guidelines for Secure Working Conditions for Freelancers, which clarified approaches to the application of the Japan Fair Trade Commission’s Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Antimonopoly Act, the provisions on the unjust use of a superior bargaining position) as well as the old Subcontract Act.
As VTubing industry expands to more global markets it continues to rely on freelancers to create the creative foundations of VTubers: from 2D and 3D models, background music composition, stream overlays, and special artwork for milestones, among others. Stringent measures and warnings like those of the JFTC serve as a reminder for VTubing agency giants to always balance their relationship with subcontractors and stakeholders to ensure a fair market for all parties involved.
Source: JFTC Statement, COVER Corp. Press Release
© 2016 COVER Corp.
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