Japan recently amended the Worker Dispatch Act, simplifying regulations governing temporary workers (“dispatch workers”).  Among other things, the amendment, which took effect September 30, 2015, loosened existing restrictions on employing dispatch workers, especially restrictions on the length of time they may be employed.

Background:  Is Japan still a “lifetime employment” Country?

Japan is famously considered a “lifetime employment” country, meaning the Japanese employment scheme anticipates employment for the entire working life of the employee except where certain specific and extreme circumstances require otherwise.  Japanese law distinguishes between “regular” employees (individuals employed indefinitely) and “irregular” contingent workers (individuals employed for a limited term, part-time, or as dispatch workers). 

One singular and important trend is that the number of irregular employees has increased every year over the last several decades, reaching, in 2014, an unprecedented 37.4% of the Japanese workforce.¹  Irregular workers do not enjoy the same “lifetime” employment protections as regular employees.   

What are Dispatch Workers in Japan?

In 2014, dispatch workers constituted 2.2% of all employees in Japan,² and nearly 11% of Japanese employers retained dispatch workers.  The information technology industry employs the highest percentage of dispatch workers (26.9%) while the finance industry employs the second highest percentage (19.1%).  Not surprisingly, the larger employers in Japan tend to have more dispatch workers than smaller employers as reflected by the fact that 80.5% of employers with at least 1,000 employees use dispatch workers.³

Dispatch workers’ employment contracts are entered directly with a staffing company, rather than with the entity for whom the workers render services.  This entity is called the “client company.”  The staffing company dispatches the dispatch workers to the client company based on a service agreement between the staffing company and the client company.  The client company, rather than the staffing company, directly controls and instructs the dispatch workers.

Client companies prefer to use dispatch workers, in large measure, because the client companies enjoy greater flexibility when it comes to terminating these workers. Japanese labor law sets a high threshold for employers to justify unilaterally terminating a regular employee.  But, these thresholds do not apply to dispatch workers because client companies have no employment contract with the dispatch worker.

Brief History of the Worker Dispatch Act

The Worker Dispatch Act, first enacted in 1986, has been amended many times.  The amendments have expanded the ability of employers to utilize dispatch workers.  At the same time, there exists strong public opinion that companies should not be permitted to retain dispatch workers, because the relationship endangers the workers’ benefits and job security. 

In 2012, the Democratic Party of Japan (the ruling party at the time) passed an amendment to the Worker Dispatch Act that tightened regulations on these arrangements.  In 2015, however, the Liberal Democratic Party (the current ruling party) has attempted to undo some of the 2012 regulations by simplifying and loosening the rules, in favor of employer flexibility.  The amendments passed over strong objection from the opposition, despite its failure in the last two sessions of Congress.

Previous Regulations on the Term of Dispatch Workers

Previously, there was no time limit on how long a client company could employ dispatch workers who fit within the scope of the Act’s professional “26 business areas.”⁴ The reasoning was that these 26 areas were considered to be professional categories, and therefore there was little risk of replacing lifetime employees with dispatch workers. 

If the dispatch worker’s job did not fit in one of the identified 26 areas, the dispatch worker was limited to a term of one to three years, depending on the consent of the employees of the client company.  Calculating this term was complicated. The term was not calculated on a per-person basis, but rather on a position basis.  In other words, if a dispatch worker worked for two years and was replaced by another dispatch worker for the third year, the three-year term would be considered completed and the client company could no longer use dispatch workers for that position.   

Changes to the Worker Dispatch Act

The recent amendments abolished the “26 business areas,” instead creating the following new rules applicable to all areas of business:

• A term limit of three years per person; calculation of the term starts over if a new dispatch worker replaces a prior dispatch worker.
• A term limit of three years per position for dispatch workers, which can be renewed for another three years, subject to the consent of the employees with a client company. There is no limit to the number of times the term may be renewed.

All staffing companies will now be required to obtain licenses.  Previously, some had been required to provide only “notifications” to the government.  In addition, staffing companies must now take measures to secure employment opportunities for dispatch workers who finish their term.

Risks Associated with Non-Compliance

In the event the client company does not follow the new regulations for dispatch workers, the Act provides that the employment relationship may be deemed to exist directly between the dispatch worker and the client company.  The client company may also be subject to administrative orders and fines.⁵ In other words, the client company will be deemed to have hired the dispatch workers directly and will lose the previously enjoyed flexibility to terminate their employment.  

Action Items

If your Japanese subsidiary retains any dispatch workers from a staffing company, the following steps are recommended:

• Determine whether your dispatch workers will be covered by the new law and regulations.  Some dispatch workers, such as those who have an unlimited term employment contract with their staffing company, will be exempt.
• If your dispatch workers are not exempt, review their job descriptions in the service agreement with the staffing company and determine whether your dispatch workers are within the prior 26 business areas.
• If the dispatch workers are within the prior 26 business areas, you may have expected to keep them long term.  Under the new regulations, however, you will not be able to keep these dispatch workers beyond three years in the same position.  Accordingly, if you still need the particular dispatch worker in the same position, you must directly employ him or her, or replace the dispatch worker with a new dispatched worker.
• If the dispatch workers are not within the “26 business areas,” those dispatch workers still remain subject to the three-year limitation under the prior version of the Act; however, you will now have more flexibility to use new dispatch workers in the same position given the new method for calculating term limits.
• Check with the staffing company to ensure they have the appropriate license and that they are prepared to take appropriate measures to secure employment opportunities to comply with these new laws and regulations.