Rule for converting employment contracts from fixed-term to indefinite-term

By Nobuhiro Kotou

Last month several major news reports were published regarding labour laws, including reports that the Japanese Trade Union Confederation (Rengo) had approved (and later retracted their approval of) the “highly-skilled professional system” (also reported as the “zero overtime pay system”) that excludes certain high-earning professionals from being subject to regulations regarding work hours, including the payment of overtime, as well as reports that the Ministry of Health, Labour and Welfare had issued warnings regarding illegal overtime to approximately 10,000 workplaces during the 2016 fiscal year. Yet, an event that will likely see reporting of much greater impact around April of next year is the “rule for converting labour contracts from fixed-term to indefinite-term” (i.e. the “indefinite-term conversion rule”) coming into practical effect.

Most readers may already be aware, but the “indefinite-term conversion rule” refers to Article 18 of the Labor Contract Act, which provides that where a fixed-term labour contract is repeatedly renewed for more than five years, then the employee may apply for the contract to be converted to an indefinite-term contract. Because this rule was established in the 2012 revision of the Labor Contract Act and applies to fixed-term labour contracts that commenced on or after 1st April 2013, most employees who have been employed on repeatedly renewed fixed-term contracts for five years since that date will be able to apply to convert to an indefinite-term contract from 1st April 2018.

Also, these fixed-term labour contracts include not only “full-time” contract employees, but also “part-time” employees on fixed-term contracts. In other words, employees who work short hours three or four days a week under a fixed-term contract will also be able to convert to an indefinite-term contract. Because most people working under a fixed-term contract will be able to exercise their right to convert to an indefinite-term contract after 1st April next year, this is being called the “Labor Contract Act 2018 Problem” by those on the employers’ side.

The methods for businesses to respond to this “indefinite-term conversion rule” can mainly be divided into (1) accepting the rule and establishing systems and working conditions for those employees who convert from fixed-term contracts to indefinite-term contracts, or (2) managing the employment of fixed-term employees so that the rule does not apply. On this point, statistics prepared by an organization related to the Ministry of Health, Labour and Welfare show that more than 60 percent of businesses which employ people on full-time fixed-term contracts intend to accept the indefinite-term conversion rule, which suggests a considerable number of businesses have accepted the indefinite-term conversion rule and are establishing systems in preparation for post-April 2018.

Hypothetically, even if a business does not take any action by April of next year and decides not to renew a contract after that date for the sole reason that they “do not want to be subject to the indefinite-term conversion rule”, this could be a breach of Articles 18 and 19 (termination of employment principles) of the Labor Contract Act, which means there is a high risk that the termination will not be recognized and the indefinite-term conversion rule will ultimately apply. Therefore, I think it is desirable for businesses which are yet to decide how they will respond to take at least some action to prevent the chaos that will arise from being subject to the indefinite-term conversion rule and the creation of a new category of indefinite-term contract employees.

The key response to the indefinite-term conversion rule is the preparation of rules of employment that will apply to employees that have converted to indefinite-term contracts, and it is important that a “mandatory retirement age” that applies to indefinite-term contract employees is defined within the rules. When deciding upon a “mandatory retirement age”, it is important to give prudent consideration to matters such as balance with the mandatory retirement age of so-called permanent employees and the relationship with the Act on Stabilization of Employment of Elderly Persons, and even if a mandatory retirement age (generally the age of 60 or 65 is most common) is established, measures such as those to address the situation where an employee is already older than the mandatory retirement age at the time of conversion to an indefinite-term contract.

Because the Ministry of Health, Labour and Welfare is putting an effort into the smooth implementation of the indefinite-term conversion, including the establishment of a portal website and hosting seminars, businesses should refer to this information and take steps that accord with the individual circumstances of their business by April next year.

(Translated from the original Japanese)