As of 1 April 2013, Japan’s minimum retirement age will increase to 65 years, with further restriction on scope to refuse re-employment after an earlier company retirement age. New amendments to Japan’s Labour Contracts Act (“LCA”) will also come into effect, concerning fixed term employees and employment contracts.

  1. Labour Contracts Act

The position to date

To date in Japan, employers could increase flexibility to adjust their workforce and reduce the dismissal burden associated with hiring “permanent employees”, to a certain extent, by initially hiring employees pursuant to fixed term contracts of up to 3 years (5 years in certain circumstances).[1] The Japanese Supreme Court has made some invalid dismissal findings in favour of fixed term employees (see ”Codification of the Doctrine of ‘Refusal of Renewal”’ below). Further, standards established in recent years in this area by the Ministry of Health Labour and Welfare (“MHLW”) encourage longer term agreements. Nonetheless, even with these restrictions, employers had, and have, the flexibility to employ workers on fixed term employment contracts for up to 1 year, with up to 2 contract renewals, and still end such arrangements simply by choosing not to renew the employment contract at the end of a term. However for renewals beyond this, it has not always been clear whether, and which, fixed term employees could successfully challenge a notice of non-renewal at the end of a fixed contract term in court, based on the Supreme Court’s judgements to date.

Amendments to the LCA discussed below will change this legal landscape, by, among other amendments, offering all fixed term employees who have been with the same employer for 5 years or more the automatic opportunity to apply for “permanent” employee status.

Converting to permanent employment contracts

Where an employee on a fixed term contract has had a total period of continuous employment of five years or more with one employer, that employee will now be entitled to apply for an indefinite term employment contract (“Permanent Contract”). For employment of 10 months or longer pursuant to fixed term contracts, the employment ceases to be “continuous” for the purposes of the 5 year rule if there is a break of 6 months or more (the required break is shorter in the case of total continuous employment periods of less than 10 months immediately prior to the break). Actual conversion to a Permanent Contract will take place upon the expiry of the fixed term contract which results in continuous employment of more than 5 years, but an employee will be able to instigate their application to convert to a Permanent Contract from the first day of any fixed term contract whose term, if completed, would result in continuous employment with the same employer of more than five years (“Permanency Application”).

Once an employee makes a Permanency Application, the employer can only terminate on expiry of the fixed term contract in question in circumstances which would be lawful grounds for termination of a permanent employee (a very high threshold). The new provisions will only apply to contracts which commence on or after 1 April 2013. Fixed term employment contracts which commence before 31 March 2013 will not count towards the required 5 year continuous employment period.

Prohibition on unreasonable terms and conditions of employment

The amended LCA also prohibits having unreasonable differences in terms and conditions of employment between permanent and fixed term employees. The prohibition extends beyond the basic terms and conditions of employment to compensation packages which are mentioned in the employment contract, such as accident compensation and benefit packages. Whether or not differences are considered to be unreasonable will be determined based upon all the facts of each case, including the employee’s scope of work and level of responsibility.

Codification of the doctrine of “Refusal of Renewal”

The above two amendments, which become effective on 1 April 2013, build on the amendment to the LCA regarding ‘refusal of renewal’, which became effective on 10 August 2012. That amendment codified previous decisions of the Japanese Supreme Court (mentioned above) which held that, in some instances, an employer’s refusal to renew a fixed term contract would be void. In particular, the law now provides that a fixed term employment contract cannot be terminated at the end of a term where

  1. the termination is “equivalent” to termination of a permanent employee (due to repeated and automatic renewals of the fixed term employee’s contract to date etc); or
  2. the employee had reasonable grounds to expect that their contract would be renewed (given the overall circumstances in the case in question, including discussions and practices as between the parties).

In the above circumstances, the contract will be treated as renewed based on terms and conditions of employment equivalent to those the employee has enjoyed to date.

Practical Implications for Employers

The LCA essentially establishes rules which are to be followed by employers and employees when entering into, acting pursuant to, or ending employment contracts in Japan. A failure to comply with the “rules” set out in the LCA does not result in administrative or criminal penalties for employee or employer. Rather, one party to an employment contract can challenge the legality of actions of the other party, in court or in a labour tribunal, by arguing that such actions are in breach of the LCA and are therefore legally invalid.

In this context, in effect, an employer’s failure to convert a fixed term employee to a Permanent Contract, even though the employee has made a Permanency Application, and the contract which puts them over 5 years of service is about to end, will only have legal ramifications if the employee challenges the decision in a court or tribunal. Even if the employee does not challenge immediately however, they may still bring a claim at any time in the ensuing two years (until the statute of limitations (jikou) expires).

Further, as the 5 years of continuous service starts being counted from 1 April 2013 at earliest, the first of such employees to apply will only be converted to a Permanent Contract after April 2018 (for fixed contracts of less than 1 year), or 1 April 2019 at earliest in the case of repeated renewal of 1 year contracts.

Finally, if a fixed term employee does not make a Permanency Application, despite being eligible, employers will be able to keep such employees on fixed term contracts, even after 5 years of continuous service. However even here, the employee’s right to make a Permanency Application remains valid, as long as the 5 years continuous employment requirement continues to be met.

It remains to be seen whether these amendments to the LCA will increase the existing tendency toward courts finding that employees with 5 or more years of continuous service on fixed contracts should be deemed “permanent” employees. In some senses this trend has already been fairly strong, for all the reasons described in “The position to date” above. In this sense the current amendments are merely making it easier for long-term fixed term employees to confirm their “permanent” status, and creating further legal incentive for employers to recognise this transition after 5 years of service.

  1. Amendments to the Act of Stabilization of Employment of Aged Persons

In addition to the LCA amendments, amendments to the Act of Stabilization of Employment of Aged Persons (the “SEAP Act”) will also come into effect on 1 April 2013. Pursuant to the SEAP Act prior to these amendments, the statutory minimum retirement age in Japan was already due to rise from 64 to 65 years on 1 April 2013. However, following the August 2012 amendments, this change will be accompanied by measures which will gradually do away with the option to refuse re-employment to employees younger than 65years of age, where they do not meet agreed re-hiring requirements after reaching a company’s early retirement age (“Conditional Re-Employment System”).

Practical Implications for Employers

The amendments effectively mean that from 1 April 2013, employers who do not already have a Conditional Re-Employment System in place will no longer have the option to establish one. That is, these companies will not be able to enter into a labour management agreement with an employee representative or union representing the majority of their employees in each workplace (”LMA”), and effectively refuse to re-hire employees who have reached the company’s compulsory retirement age (under 65) and who do not meet any one of the performance, health and fitness or other re-hire requirements agreed in the LMA.

It is worth noting however that the amendments do not prohibit the new establishment of an early retirement age plus re-employment system per se. The amendments merely prohibit the inclusion of conditions as part of such systems, which may prevent some employees who are younger than 65 years and wish to be re-employed, from obtaining a job. Consequently, employers who now wish to increase their flexibility to employ 60-65year old employees on terms different from their previous employment contract can still do so by newly introducing an earlier retirement age plus a re-employment system after 1 April 2013 (as discussed further below). It should be noted however that where this change to Work Rules policy is disadvantageous to employees (e.g. reduces the company retirement age), certain procedural requirements will need to be met to ensure the change and its method of implementation are “reasonable” pursuant to labour laws, to avoid the need for individual consent from affected employees.

For employers who already have a Conditional Re-Employment System in place, the change will be phased in gradually to lessen any sudden impact. Such employers will be given until 31 March 2025 to gradually phase out their existing post-retirement re-employment requirements (which exclude some under 65′s from being re-employed). The SEAP Act, as amended, requires such employers to set out the details of how the phase-out will be implemented, in amendments to their current LMA’s on this topic. In the transition period of 12 years between 1 April 2013 and 1 April 2025, the requirements for post-retirement re-employment may continue to be applied only to employees who are eligible to receive the earnings-related component of the national pension.

Even after 1 April 2025, employers with existing Conditional Re-Employment Systems will still reap some benefits by maintaining such systems, minus the requirements to be met in order to be re-employed. This is because even after the current amendments come into force, employers with re-employment systems will still be free to negotiate different terms and conditions of employment from those their employees enjoyed prior to reaching the company’s retirement age, for the period between company retirement age and 65years. This means employers with such systems will have greater flexibility (than employers with automatic on-going employment on the same terms until 65 years) to switch post-company retirement age employees onto fixed term or part time contracts, and re-negotiate benefits, salary and role. Procedures on how such terms are to be decided will need to be set out in the LMA or company Work Rules, but assuming this is done, the only restriction on the form and terms of employment are that they must be “reasonable”. That is, reasonable terms and conditions overall in the given industry, in light of the employee’s proposed role, responsibilities and (differently from pre-retirement employees) also in light of their financial situation after receipt of company retirement benefits at the company’s early retirement age.

With respect to penalties for non-compliance with the amended law, permanently retiring an employee younger than 65 years does not automatically render the retirement itself void, resulting in a right to be re-employed. It is however in contravention of the SEAP Act, and consequently may result in administrative guidance from labour authorities requiring an employer to change their practices, or, in cases where such guidance is ignored, resulting in publication of the name of a non-compliant business (so-called “name and shame” disincentives).

This note was prepared in conjunction with Mr Katsuya Natori, attorney-at-law admitted in Japan, of Natori Law Office.