Article 20 of the Japanese Labour Contract Act prohibits unreasonable differences in working conditions between permanent (‘regular’) employees and fixed term (‘non-regular’) employees. On 1 June 2018, the Supreme Court reached decisions in two cases involving interpretation of Article 20. This article discusses these two cases, which will serve as important precedents for Japanese employers.
1. Summary of Decisions
Article 20 of the Labour Contract Act requires fixed-term employees and indefinite-term employees be treated in a reasonable and balanced manner taking into account differences in their duties and responsibilities. On 1 June 2018 the Supreme Court issued decisions relating to the interpretation of Article 20 of the Labour Contract Act in the Hamakyorex case, which was originally brought by a driver hired as a non-regular, contract employee, and the Nagasawa-Unyu case, which was originally brought by drivers rehired as fixed-term employees after reaching retirement age.
First, in the Hamakyorex case, the Court held that while Article 20 of the Labour Contract Act takes into account the fact that working conditions between regular employees and non-regular employees may vary, it prohibits unreasonable differences in their working conditions, taking into account details of the employees’ duties, the extent of change to duties and work locations, and other circumstances (collectively known as the ‘Details of Duties’). It also requires employees be treated in a reasonable and balanced manner taking into account differences in the Details of Duties.
The Court then examined the rationale for each allowance paid only to regular employees and ruled that not paying non-regular employees five out of six types of allowances (perfect attendance allowance, clean driving record allowance, special work allowance, meal allowance and commuting allowance, but not housing allowance) was unreasonable. However, the Court held that the working conditions of non-regular employees should not be regarded as the same as those of regular employees. It ruled that damages should be awarded by way of compensatory relief. The Supreme Court subsequently reversed part of the High Court’s decision and sent it back for further consideration to determine whether or not the plaintiff was eligible for perfect attendance allowance.
In addition, in the Nagasawa-Unyu case, the Court held that whether a difference in wages between permanent employees and contract employees rehired as fixed-term employees after reaching retirement age is reasonable should be determined by taking into consideration the respective purpose of wages and other allowances. That being said, the Court found that although the Details of Duties and the extent those duties change do not vary between contract employees and regular employees, differences in wages are permissible depending on the conditions of rehiring. The Court then ruled that non-payment to contract employees of ‘perfect attendance allowances’, which are paid to those who have attended work on all business days, was unreasonable and illegal, and damages were awarded to the employees concerned. The issue of overtime allowances was sent back to the Tokyo High Court for further consideration to determine the specific amount.
Highlights of the two decisions are set out below.
The Court held that while Article 20 of the Labour Contract Act takes into account the fact that working conditions between regular employees and non-regular employees may vary, it prohibits unreasonable differences in their working conditions. The assessment of what are unreasonable differences will take into account details of employees’ duties, the extent of change of such duties and work locations, and other circumstances, and it requires employees be treated in a reasonable and balanced manner according to differences in the Details of Duties.
It ruled that in determining whether or not differences in wages between regular employees and non-regular employees are reasonable, comparison of total wages between them is not sufficient, and the respective purpose of wages and other allowances should be taken into consideration.
As for rehiring after reaching retirement age, the Court ruled that a reduction in wages, some allowances, and bonuses is not unreasonable, taking into consideration as ‘other circumstances’ the fact that long-term employment is not expected and that the employees may be entitled to receive a basic old-age pension. This ruling is considered to reflect actual practice, in which the base salary at retirement age is not supposed to be maintained when employees are rehired after reaching retirement age.
It also ruled that even if the difference in wages between regular employees and non-regular employees is unreasonable, Article 20 of the Labour Contract Act will not automatically bring the working conditions of non-regular employees in line with those of regular employees, but instead damages will be awarded. A Ministry of Health, Labour and Welfare notification states that working conditions that were rendered void by Article 20 of the Labour Contract Act will, in principle, be replaced with those applicable to indefinite-term employees. However, the Supreme Court’s decisions dismissed the idea expressed in this notification.
3. Relationship with the amended Part-time and Fixed-time Employment Act
The so-called Work-Style Reform bill was passed and enacted on 29 June 2018, and promulgated on 6 July 2018. As a result of this amendment, Article 20 of the Labour Contract Act will be deleted, and its provisions will be incorporated into Article 8 of the Part-time and Fixed-time Employment Act. Article 8 of this new Act ((the ‘Amended Act’, the full title of which is ‘Act on Improvement etc. of Employment Management for Part-time Workers and Fixed-term Workers’) which will come into effect on 1 April 2020, prohibits unreasonable differences between the working conditions of part-time employees and fixed-term employees. Article 8 of the Amended Act provides that reasonableness shall be determined ‘in terms of base salary, bonus and other allowances, respectively’, which is in line with the Supreme Court’s decisions.
Therefore, in light of the court decisions and the Amended Act discussed above, it is necessary to consider whether each element of remuneration, including base salary, bonus, and other allowances is reasonable based on their nature and purpose. Also, it should be noted that the ‘Draft Guidelines for Equal Pay for Equal Work’ will possibly be amended, and could serve as official guidelines.
It also needs to be noted that Article 14 of the Amended Act requires employers to be accountable for details of, and reasons for, differences in working conditions.
The Amended Act will come into effect in April 2020 for large companies and in April 2021 for small to medium-sized companies (with capital of up to JPY 300 million or up to 300 regularly employed workers).