Japan has a reputation for being a difficult jurisdiction for firing employees.  Accordingly, the use of fixed-term employment contracts has been a regular strategy for employers to maintain more discretion in whether to retain or terminate an individual’s employment.  However, beginning April 1, 2018, employees on a limited-term employment contract lasting more than five years with the same employer will gain the right to change their employment status to an open-ended term.  The law provides several limited exceptions that can only be used with government approval.  As the approval process takes time, employers that would like to apply for the applicable exemption should plan ahead and begin that process now.  Otherwise, they may find that their current fixed-term employees could become open-ended "permanent" employees in Japan.

The Law

The law provides that if: (1) the total duration of an employee’s employment on a fixed-term contract exceeds five years¹ with the same employer (including after one or more renewals); and (2) the employee applies for employment with an open-ended term prior to the date of expiration of the currently effective fixed-term, the employer must, by operation of law, accept the employee’s application for open-ended employment.  The new employment with an open-ended term would start the day following the expiration of the then-current fixed term.

How to Count Five Years  

This new employee right was introduced in the amendment to the Employment Contract Act, effective April 1, 2013.²  Employment terms, whether an initial term or extended term, that begin after April 1, 2013, must be counted.  For example, if the employee had an initial one-year term that began on June 1, 2012 and then renewed for another year, the period from which to count the five-year eligibility to convert to an open-ended term would begin on June 1, 2013, not on April 1, 2013, because the duration starting on June 1, 2013 is the initial term after the effective date of April 1, 2013.  Also, if more than six months lapses between employment terms, the term prior to the blank period does not count; only the term after the period of unemployment would count.   

Employment Terms and Conditions After Conversion

The conversion to an open-ended term occurs only when the employee actually applies to the employer for an open-ended term.  If the qualified employee applies for the conversion to an open-ended term, the employer must accept the conversion unless the employee falls into one of the exceptions.  The employment terms and conditions after conversion to an open-ended term must be the same as they had been for the previous fixed-term employment (other than the duration of the employment).  However, the terms can be changed by what is included in the employment contract, labor-management agreement, or Rules of Employment.  The Rules of Employment in Japan are similar to an employee handbook in the U.S.  However, the Rules of Employment are unique in that they automatically set the groundwork for the terms or conditions of employment, and are applied automatically to the employee if the Rules of Employment have more beneficial terms than the employment contract.  For example, if the employer has benefits or plans available to employees with an open-ended term in the Rules of Employment, the converted employees with an open-ended term will qualify for those benefits even if their individual employment contract does not offer such benefits.  Also, converted employees will have the same rights as other open-term employees when it comes to protection from termination, which always requires just cause.³  To be sure, the threshold for just cause is very high in Japan, and without just cause, the termination is simply invalid.  

Exceptions

Certain types of employment are exempted from this law:  

• Professional employees (e.g., Ph.D. holders, certified public accountants) working for a limited-term project with high compensation (i.e., their annual salary is more than 1,0750,000 Yen, which is approximately $99,000 USD).  To qualify under this exemption, the employee should be engaged in the fixed-term project for more than five years and less than ten years.  Also, the employer should take certain measures listed under the law for the professional employee (e.g., providing additional days off to enable the employee to go through professional training or providing professional training opportunities).  
• Employees who work after their retirement age, generally the age of 60, for the same employer or its group companies.  The employer is required to (1) implement a statutory system to promote the employment of older employees (e.g., raise the retirement age to 65, implement a re-hiring system after the age of 60 through 65); and (2) take measures to enhance the employment of older employees (e.g., appoint the officer to promote employment of post-retirement-age employees, give training to them).  

These two exceptions are not automatic, and may become effective only after the approval by the local Labor Office.  Employers wishing to use these exemptions should apply for approval to the Labor Office as soon as possible.  Otherwise, qualified individuals’ fixed terms will be automatically converted to an open-ended term on the relevant dates. 

Steps Going Forward

To be well prepared for April 1, 2018, employers operating in Japan should:

1. Review the workforce in Japan to understand where their company has employees with limited-terms and confirm (1) the duration of the employment terms; (2) the number of renewals being made to the employment contracts; (3) the types of jobs they are engaged in; and (4) the age of the employees.
2. Determine whether the employees will gain the right of conversion based on the information collected.
3. Decide whether the company wishes to use the exemptions listed above, and, if so, apply to the Labor Office for approval immediately.
4. Review company employment contracts, Rules of Employment, and applicable policy and labor-management agreements if the company has employees with the right to convert to open-ended terms to make sure there are no unanticipated applications of employment terms (e.g., salary, benefits). Employers should also revise the rules and policies, if necessary, following the required steps.