Lecture 1: Current status and legal system of fixed-term labor contracts in Japan

February 18th, 2022 [No. 95-2021]

Professor SHIMADA Yoichi,
Faculty of Law, Waseda University




Fixed-term Labor Contracts in Japan

Lecture 1: Current status and legal system of fixed-term labor contracts in Japan


1. Current status of fixed-term labor contracts in Japan

 Currently in Japan, the number of non-regular employees (non-regular workers) accounts for 37.2% of the total number of employees (in 2020), and the number of fixed-term workers accounts for 58% of the total number of non-regular employees (in 2018). Contract employees who work in line with the same prescribed working hours as those of regular employees within a fixed term, temporary employees who are re-employed after retirement, and most of part-time and dispatched employees may be considered fixed-term workers. Not a few non-regular employees are employed for indefinite terms; however, fixed-term employment has been understood to be a standard category for non-regular employees that is different from the category for regular employees.

Table: Ratio of non-regular employees by type of employment
Part-time employees 70.5%
Contract employees 13.4%
Temporary employees 5.7%
Dispatched employees 6.3%
Others 4.1%

 Since the mid-1990s, in a severe business environment, the management at most Japanese corporations relied heavily on non-regular employees who were hired with lower wages and less employment stability. As a result, nearly 40% of the employment structure became occupied by non-regular employees. It is contemplated that corporations had to rely on fixed-term workers because it has been legally and practically difficult to dismiss regular employees, who are employed on an indefinite basis, and because they intended to maintain the liquidity of labor costs. In fact, while 80% of male employees earn not less than 3,000,000 yen annually (45% earn 5,000,000 yen or more annually), 90% of non-regular employees earn 3,000,000 yen or less annually. The employment practices specific to regular Japanese employees has been the underlying reason for the fact that corporations have increased the number of non-regular employees, such as fixed-term workers, since the mid-1990s and that a great disparity has been created in work conditions between regular and non-regular employees.

2. Japanese-style employment practices and fixed-term employment

 It is common in Japanese society that, upon graduation from high school or university, people gain employment with a corporation as regular employees. In this recruitment practice, corporations do not expect the skills required for specific jobs; rather, they hire new graduates without defining the job for each of them, expecting their potential abilities to result in skill development. Therefore, new graduates are customarily supposed to undertake a job that is provided by the company in return for long-term employment. Companies have made investments in educational training for those new regular employees and have provided them with seniority-based wages and a fulfilling welfare program on the basis of the assumption that they will work for the company for the long term. This Japanese-style employment practice has supported the high performance of Japanese corporations; however, this has turned into a burden for them since the mid-1990s. Furthermore, it has been practically and legally difficult to undertake reforms that make the employment of already hired regular employees unstable.

 In this section, we will discuss the issue from a legal perspective. In relation to dismissal under a labor contract without a fixed term, the contract may be terminated at any time under the Civil Code, and the termination will become effective two (2) weeks after the day of a request to terminate. (Article 627, paragraph (1), of the Civil Code). This means that, under the Civil Code, employers have the right to dismiss workers without specific reasons. For a long period of time, Japanese labor legislation withheld the making of any reforms to the employers’ right of dismissal other than to add some partial restrictions, such as the notice period for dismissal (one (1) month; Article 20 of the Labor Standards Act). On the other hand, court precedents have established a doctrine that dismissal requires an objective and reasonable reason by applying the doctrine of the abuse of rights (Article 1, paragraph (3), of the Civil Code) to the exercise of the right of dismissal by employers with a focus on the social and economic difficulties that have been brought by the dismissal of regular employees under Japanese employment practices. This doctrine has been called the doctrine of the abuse of the right of dismissal, which was put in statutory form in the amended Labor Standards Act in 2003; and the provision has been transferred to the Labor Contracts Act, which was enacted in 2007 (Article 16 of the Labor Contracts Act). Although it is not possible to introduce the doctrine here in detail, the doctrine has maintained the cautious stance toward the effectiveness of dismissal in the case of a worker’s lack of skills or dismissal for the purpose of reorganization (or corporate downsizing). In addition, unlawful dismissal is considered invalid, and in a lawsuit, confirmation of the position as an employee and a claim for wages during the term of dismissal will be granted.

 As a result, many corporations have come to adopt a form of human resources management in which they secured the necessary human resources with non-regular employees, such as fixed-term workers, by hiring fewer new graduates and reducing the ratio of regular employees. This has brought about considerably poorer work conditions and instability of employment to fixed-term workers compared to regular employees, and it has gradually drawn attention as a social problem.

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