Introduction

Under Article 20 of the Labour Contract Act, any difference in the employment conditions of fixed-term and permanent employees working for the same employer cannot be unreasonable in light of:

  • the details of the employees' services;
  • the responsibilities associated with such services;
  • the scope for change regarding the details of such services, the responsibilities associated with such services or where they are performed; and
  • other circumstances.

Article 20 prohibits the imposition of unreasonable employment conditions on fixed-term employees in order to ensure their fair treatment.

On 1 June 2018 the Second Petty Bench of the Supreme Court decided with respect to this matter in two notable cases.

Hamakyo-Rex

Facts A fixed-term employee alleged that there were differences in the employment conditions of fixed-term and permanent employees, specifically with regard to the:

  • non-accident allowance;
  • work allowance;
  • meal allowance;
  • housing allowance;
  • perfect attendance allowance;
  • commuting allowance;
  • family allowance;
  • bonuses;
  • periodical increase in salary; and
  • retirement allowance.

The fixed-term employee alleged that these differences violated Article 20 of the Labour Contract Act and sought:

  • a declaration that fixed-term employees had the same rights as permanent employees with respect to the above allowances under the fixed-term employment contract; and
  • payment of the balance between the non-accident, work, meal, housing, perfect attendance and commuting allowances paid to permanent employees and those which were paid to the fixed-term employee.

The work rules applicable to the fixed-term employee included no provision regarding the above allowances (other than the bonus and retirement allowances). Further, they provided that, in principle, no bonus or retirement allowance would be paid to fixed-term employees. Until December 2013, the commuting allowance paid to the fixed-term employee had been Y2,000 lower than that paid to permanent employees.

Decision The Supreme Court held that the fixed-term employee's claims for declaration and payment based on the employment contract had no grounds. However, the court:

  • confirmed the High Court's decision approving the fixed-term employee's claim for payment based on tort liability (other than for the housing and full attendance allowances); and
  • dismissed the portion of the High Court's decision regarding the full attendance allowance and sent the case back to the High Court.

In light of the Supreme Court's decision, differences in non-accident, work, meal, full attendance, commuting and family allowances are deemed unreasonable, but differences in housing allowances are deemed reasonable.

Nagahama Unyu

Facts A number of fixed-term employees who had retired on reaching retirement age and had subsequently been rehired alleged that there were certain differences in their employment conditions and those of permanent employees. Specifically, they alleged:

  • the non-payment of efficiency and job allowances and payment of percentage pay;
  • the non-payment of diligence, housing, family and position allowances;
  • the calculation of the overtime allowance in a manner that was disadvantageous to the fixed-term employees compared with permanent employees; and
  • the non-payment of bonuses.

The fixed-term employees alleged that these differences violated Article 20 of the Labour Contract Act and sought:

  • a declaration that they had contractual status under their employment contracts to which the work rules for permanent employees should be applied;
  • payment of the balance between the salary amounts that should have been paid to the fixed-term employees in accordance with such work rules and the amounts actually paid to the fixed-term employees; and
  • payment of delayed interest on such balance.

The work rules applicable to the fixed-term employees provided that they would receive no bonus and retirement allowance. There was no difference between the fixed-term and permanent employees in terms of:

  • the details of the employees' services and the responsibilities associated with such services; or
  • the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they were to be performed.

The fixed-term contract stated that the employees' workplace and assigned work could change for business reasons.

Decision The Supreme Court held that the fixed-term employees' claims for declaration and payment based on their employment contracts had no grounds. Further, the court approved the High Court's decision dismissing the fixed-term employees' claim for payment based on tort liability (other than for the diligence and overtime allowances). However, the Supreme Court approved the employees' claim for payment of the diligence allowance and sent the case back to the High Court, as the diligence allowance had not been not included in the calculation of their overtime allowance.

In light of the Supreme Court's decision, differences in diligence and overtime allowances are unreasonable, but differences in efficiency, job, housing, family and position allowances and bonuses are reasonable.

Framework of decisions

Purpose of Article 20 of Labour Contract Act In both of the above cases, the Supreme Court positioned Article 20 as a provision that must be weighed up according to differences in:

  • the details of the employees' services and the responsibilities associated with such services; or
  • the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they are be performed.

Effect of violation In both of the above cases, the Supreme Court held that even if the differences in the employment conditions of the fixed-term employees and the permanent employees had violated Article 20, the fixed-term employees' employment conditions could not be considered to be the same as those of the permanent employees to which they had been compared. As such, their claim for a declaration that they had the same status and rights of the permanent employees had no grounds.

Meaning of "due to the existence of a contract term" In both of the above cases, the Supreme Court held that the phrase "due to the existence of a contract term" provided for in Article 20 means that the difference in the employment conditions of the fixed-term and permanent employees had to have arisen due to the existence or non-existence of a contractual term. In Hamakyo-Rex, the Supreme Court held that a certain level of association may be taken into account when determining whether a difference in employment conditions is unreasonable.

Meaning of unreasonableness In both of the above cases, the Supreme Court held that the use of the term 'unreasonable' in Article 20 means that a difference in employment conditions can be judged to be unreasonable.

Other circumstances In Nagahama Unyu, the Supreme Court held that the 'other circumstances' to be considered when determining whether a difference in employment conditions is unreasonable are not limited to circumstances concerning:

  • the details of the employees' services;
  • the responsibilities associated with such services; and
  • the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they are performed.

Rather, such circumstances included the fact that the fixed-term employees had been rehired after retirement due to reaching retirement age.

Individual approach In Nagahama Unyu, the Supreme Court held that when determining whether a difference in the individual salary items of fixed-term and permanent employees is unreasonable, the total salary amount and the purpose of the relevant salary item should both be reviewed individually. In this case, the Supreme Court clarified its position on reviewing each salary item individually (which was the same as its position in the Hamakyo-Rex). This position differs to that of the High Court.

Responsibility for assertion and proof In Hamakyo-Rex, the Supreme Court held that since a decision as to whether a difference in employment conditions should be accompanied by a normative evaluation, evidence that such a difference is unreasonable should be asserted and proved by the party claiming the violation of Article 20. Further, evidence that such a difference is not unreasonable should be asserted and proved by the party contesting the violation of Article 20.

Individual analysis

Hamakyo-Rex Housing allowance The difference between the housing costs incurred by the fixed-term employees, whose workplace was not expected to change, and permanent employees, who were expected to change their residence due to the relocation of their workplace, had the potential to be substantial. Therefore, the employer's payment of the housing allowance to permanent employees only had not been unreasonable.

Full attendance allowance The full attendance allowance aimed to ensure attendance by a certain number of employees. In this case, the employer's need to ensure attendance by a certain number of employees was not affected by the details of the employees' services and the responsibilities associated with such services (as there was no difference between the fixed-term and permanent employees in terms of the details of their services or the responsibilities associated with such services) or the possibility of a transfer, secondment or promotion. In addition, full attendance had not been considered with regard to promotions. As such, the employer's payment of the full attendance allowance to permanent employees only was deemed unreasonable.

Non-accident allowance The non-accident allowance aimed to develop better drivers and obtain customer trust with regard to safe transportation. The employer's need for its employees to drive safely and prevent accidents was not affected by the details of the employees' services and the responsibilities associated with such services (as there was no difference in the details of the services and the responsibilities associated with such services of the fixed-term and permanent employees) or the possibility of a transfer, secondment or promotion. In addition, no other circumstances justified the difference in the non-accident allowance. Therefore, the employer's payment of the non-accident allowance to permanent employees only was deemed unreasonable.

Work allowance A work allowance was paid as consideration for specific work. There was no difference between the fixed-term and permanent employees in terms of the details of their services and the responsibilities associated with such services. Further, a difference in the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they were performed did not affect the economic evaluation of the work performed, and no other circumstances justified the difference in the work allowance. Therefore, the employer's payment of the work allowance to permanent employees only was deemed unreasonable.

Meal allowance A meal allowance was paid to subsidise employees' meals. There was no difference between the fixed-term and permanent employees in terms of the details of their services or the responsibilities associated with such services, and a difference in the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they were performed was unrelated to the need to eat meals during work hours or the degree of need. Further, no other circumstances meant that the employees' working styles were different or justified the difference in the meal allowance. Therefore, the employer's payment of the meal allowance to permanent employees only was deemed unreasonable.

Commuting allowance A commuting allowance was paid to subsidise employees' commuting expenses. These expenses were the same regardless of whether an employee had a permanent contract. Further, a difference in the scope of change regarding the details of the employees' services, the responsibilities associated with such services or where they were performed did not directly relate to their commuting expenses, and no other circumstances justified the difference in the commuting allowance. Therefore, the employer's payment of the commuting allowance to permanent employees only was deemed unreasonable.

Nagahama Unyu Efficiency and job allowances The basic salary and efficiency and job allowances paid to permanent employees corresponded to the basic pay and percentage pay paid to the fixed-term employees. Even though there was no difference in the details of the fixed-term and permanent employees' services or the scope for change regarding the details of the employees' services, the responsibilities associated with such services or where they were performed, the employer's payment of the efficiency and job allowances to permanent employees and its payment of percentage pay in place of these allowances to fixed-term employees was deemed reasonable, as:

  • the fixed-term employees' basic pay (fixed amount) was higher than their basic salary at the time of retirement;
  • the multiplier applicable to the percentage pay was more advantageous than the multiplier applicable to the efficiency allowance (the balance of the total difference between the two was between 2% and 12%); and
  • the fixed-term employees had been paid an adjustment allowance of Y20,000 until they began receiving their old age welfare pension benefits (earning-related portion).

Diligence allowance A diligence allowance was paid to encourage full attendance. Since the details of the fixed-term employees' services and the responsibilities associated with such services were the same as those of the permanent employees, there was no difference in the need to encourage full attendance by both types of employees (it could not be argued that the employer's non-payment of the diligence allowance to the fixed-term employees was not unreasonable because of the difference in the multiplier applicable to the percentage pay and the efficiency allowance). Therefore, the employer's payment of the diligence allowance to its permanent employees only was deemed unreasonable.

Housing and family allowances Housing and family allowances were paid as welfare benefits and life security. The employer had due reason to subsidise the housing and living expenses and support the family members of permanent employees. Further, the fixed-term employees had retired on reaching retirement age after working as permanent employees and were expected to receive old age welfare pension benefits. They also received an adjustment allowance until they received such benefits. As such, the employer's payment of the housing and family allowances to permanent employees only was deemed reasonable.

Position allowance As the position allowance was paid to employees in certain positions who had been selected from the employer's permanent employees in light of eligibility and the details thereof, the employer's payment of the position allowance to permanent employees only was deemed reasonable.

Overtime allowance Since the employer's non-payment of the diligence allowance to fixed-term employees was deemed unreasonable, the inclusion of the diligence allowance in the calculation of the overtime allowance for permanent but not fixed-term employees was also considered unreasonable.

Bonus The employer's payment of bonuses to permanent employees only was not deemed unreasonable, as the fixed-term employees had received a retirement allowance and been expected to receive old age welfare pension benefits. They had also received an adjustment allowance until they began receiving such benefits. Further, the fixed-term employees' salary was approximately 79% of their salary before retirement.

Comment

Japanese employers with both fixed-term and permanent employees should carefully review whether differences in the individual employment conditions of each type of employee is not unreasonable with regard to:

  • the details of the employees' services;
  • the responsibility associated with such services;
  • the scope for change regarding the details of the employees' services and the responsibilities associated with such services or where they are performed; and
  • other circumstances.

Where fixed-term employees have reached retirement age, if they are rehired after retirement, this will constitute other circumstances.

Even if a difference in the employment conditions of fixed-term and permanent employees violates Article 20 of the Labour Contract Act, a fixed-term employee's employment conditions will not be considered to be the same as those of a permanent employee to which they are compared.

For further information on this topic please contact Yoshikazu Sugino at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or email (y_sugino@noandt.com). The Nagashima Ohno & Tsunematsu website can be accessed at www.noandt.com.

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