Considerations when rehiring an employee after their mandatory retirement age
- A reconsideration following the Supreme Court’s decision in the Nagasawa Unyu case

By Hirotaka Nakura

Introduction

Since my August 2015 column “Considerations when rehiring an employee after mandatory retirement age“, there has been a lot of movement in the debate regarding the equal treatment of indefinite-term and fixed-term contract employees. As well as an accumulation of court judgments concerning Article 20 of the Labour Contracts Act, the government published a draft guideline on equal pay for equal work in December 2016 and has introduced the “Work Style Reform Bill” to the national Diet.

Meanwhile, on 1st June 2018, the Supreme Court delivered its judgment in the Nagasawa Unyu case, which was a dispute regarding the difference in the amount of pay received by indefinite-term contract employees and those employees who were re-hired on fixed term contracts after having reached the company’s mandatory retirement age. In its decision, the court ruled on certain aspects of the labour conditions of employees who are re-hired after reaching mandatory retirement age.

Article 20 of the Labour Contracts Act

As the Nagasawa Unyu case centred around whether differences in pay between re-hired contract employees and indefinite-term contract employees violated Article 20 of the Labour Standards Act, I would first like to look at the details of that article.

Article 20 of the Labour Contracts Act (Underlining and numbering added by author)
If the labour conditions of an employee who has signed a fixed-term labour contract differ from the labour conditions of another employee who has signed an indefinite-term labour contract with the same employer, and those differences arise due to the existence of the fixed term, then such differences shall not be unreasonable, in consideration of:

(1) the content of the employees’ duties and the extent of the responsibility accompanying such duties,

(2) the scope of allowable change to the content of duties and work location, and

(3) other circumstances.

The first point to note from the above article is that it applies when there are differences between fixed-term and indefinite-term contracts “due to the existence of the fixed term”. Further, when examining whether the differences in the labour conditions are unreasonable, it is necessary to consider (1) the content of the employees’ duties and the extent of the responsibility accompanying such duties (i.e. the job description), (2) the scope of change to the job description and work location that is allowed (“allowable redeployment”), and (3) other circumstances.

The work style reform bill currently before the Diet will repeal Article 20 of the Labour Contracts Act and insert the same provision into the revised Part-Time Labour Law (formally, the “Act on Improvement, etc. of Employment Management for Part-Time Workers and Fixed-Term Employment Workers”).

An examination of the court’s judgment

(1) The Supreme Court’s decision has received a large amount of attention due to the circumstances of the case, including the plaintiff employees’ success in the initial trial in the Tokyo District Court (delivered 13th May 2016), followed by the company’s victory upon appeal to the Tokyo High Court (delivered 2nd November 2016), and the existence of the socially accepted practice of reducing an employee’s wages by 30% – 40% if they are re-hired after reaching mandatory retirement age, even if there is no change to their job description or allowable redeployment.

(2) I think there are two important points to take away from the portion of the judgment relating to the criteria applied in the case.

(a) First, it was determined that the fact that the fixed-term employees had been re-hired after reaching mandatory retirement age satisfied the “other circumstances” of Article 20 of the Labour Contracts Act. The judgements of the trial court and appeal court were divided on this point, but the Supreme Court ruled that the fact that the fixed-term employees had been re-hired after reaching mandatory retirement age was a circumstance that could be considered when determining whether the differences in the labour conditions of fixed-term and indefinite-term employees are reasonable.

(b) Next, when determining the reasonableness of the difference in pay between fixed-term and indefinite-term employees, the Supreme Court ruled that each element of renumeration should be considered individually, rather than simply comparing the total pay received. While both the trial court and appeal court focused their consideration on the overall pay received, yet reached opposite conclusions, the Supreme Court displayed an attitude of considering each element of renumeration individually and determining the reasonableness of any differences. This adopts the same approach as the draft guideline on equal pay for equal work and the Supreme Court’s decision in the Hamakyorex case that was delivered the same day.

(c) After considering the reasonableness of differences in each element of pay received by regular employees and contract drivers that had been re-hired post-retirement, the Supreme Court ruled that the only differences which were unreasonable were the perfect attendance allowance and overtime allowance. This ruling contains some elements that can be generally applied to a certain extent, but also some elements that are particular to the company in question.

First, the court’s determination in relation to the perfect attendance allowance, overtime allowance, managerial allowance, housing allowance, family allowance and bonus do not involve circumstances especially particular to the case, so they can be applied generally to a certain extent. In other words, if a retirement allowance is paid upon retirement, and certain allowances such as an equalisation allowance are paid during the period until the employee starts receiving the proportional benefit portion of the old-age pension, then it seems that differences in managerial allowance, housing allowance, family allowance and bonus are unlikely to be deemed unreasonable, even if there is no change to the employee’s job description or allowable redeployment before and after their mandatory retirement.

On the other hand, because the court conducted a detailed examination of Nagasawa Unyu’s pay structure in order to find that the “base pay” (in the case of Nagasawa Unyu, the base pay, incentive pay, and service allowance paid to regular employees, and the base pay and percentage pay paid to contract drivers) portion of renumeration was not unreasonable, it is difficult to apply the finding as a general rule. When looking at the differences in base pay only, there was not a large gap between regular employees and contract drivers, and the pay structure used by Nagasawa Unyu could not be described as simply setting a lower pay for contract drivers.

(d) As a result, the Supreme Court rejected most of the plaintiffs’ claims, and based on the approach shown in the judgment, it will be necessary to consider both the fact that an employee has been re-hired following their retirement as well as the substance of each element of renumeration when examining the reasonableness of differences in pay between regular employees and re-hired employees. In this regard, it cannot be said that the Supreme Court’s decision is entirely favourable to employers.

Also, the Supreme Court did not address the appeal court’s finding that it is a socially accepted practice to reduce an employee’s wages by 30% – 40% if they are re-hired after reaching mandatory retirement age, even if there is no change to their job description or allowable redeployment, so setting a re-hired employee’s pay at a lower level based on these grounds is unlikely to be deemed reasonable.

In principle, employers should first establish distinctions in the job description and allowable redeployment of regular employees and employees who are re-hired after their retirement, then determine differences in pay based on those distinctions. If it is difficult to make distinctions in the job description and allowable redeployment (such as in the case of Nagasawa Unyu’s transportation business), then it will be necessary to establish a pay structure that is easy to accept as reasonable, with reference to the contents of the Supreme Court’s judgment.

Below is a summary of the judgment’s main points, which I hope will be a useful reference.

Summary of Supreme Court judgment

Outline of facts

* Nagasawa Unyu is a company engaged in the transportation business, including cement, liquified gas, and food, and had 66 employees as of 1st September 2015.

* The wages for employees who had signed indefinite-term labour contracts as drivers of bulk cement tank trucks and other trucks (“regular employees”) are defined in various documents including the company’s employment rules, pay provisions, and a labour-management agreement regarding bonuses. Further, the wages for employees who were employed under fixed-term labour contracts to continue driving trucks after having retired at the company’s mandatory age of 60 (“contract drivers”, who can renew their contract until the first September or March that follows their 65th birthday) are defined in the company’s contract employee employment rules and post-retirement re-hiring conditions. Based on these provisions, the contract drivers’ wages (annual income) was assumed to be approximately 79% of their pre-retirement wages.

The company and the labour union to which the company’s employees belong have engaged in collective bargaining on several occasions since March 2012, and as a result, have agreed that (1) the base pay of contract drivers is ¥125,000, (2) some of the coefficients used to calculate contract drivers’ percentage pay were adjusted in favour of the contract drivers, and (3) contract drivers are to receive a monthly ¥20,000 equalisation allowance during the period until the employee starts receiving the proportional benefit portion of the old-age pension. During the collective bargaining, the union demanded that retiring employees be re-hired at the same wage that they received pre-retirement, but the company rejected the demand.

* Each of the plaintiffs signed a fixed-term labour contract as a contract driver with the company following retirement at the company’s mandatory retirement age. Upon retirement, each plaintiff received a retirement allowance and also received an equalisation allowance during the period until they started receiving the proportional benefit portion of the old-age pension.

There was no difference in the job description and level of responsibility between the contract driver plaintiffs and regular employees. Further, the fixed-term labour contracts defined that the company could change an employee’s workplace and tasks based on the company’s requirements, which was the same as for regular employees.

* In their suit, the plaintiffs claimed that there were unreasonable differences in the labour conditions of contract drivers and regular employees, given that (1) contract drivers were paid a percentage pay instead of incentive pay and service allowance, (2) contract drivers were not paid a perfect attendance allowance, housing allowance, family allowance or managerial allowance, (3) contract drivers’ out-of-hours allowance was less than regular employees’ overtime allowance, and (4) contract drivers were not paid a bonus. As a premise to these assertions, the plaintiffs claimed that the differences in labour conditions compared to regular employees violated Article 20 of the Labour Contracts Act. Their primary claim was for a declaration that their contractual position was subject to the same employment rules as regular employees, and based on their labour contracts, payment of the difference between what they should have been paid under those employment rules and the amount they were actually paid. Their secondary claim was for the payment of damages equivalent to the aforementioned difference based in tort.

Court’s decision

* The phrase “due to the existence of the fixed term” in Article 20 of the Labour Contracts Act is understood to refer to differences in labour conditions between fixed-term employees and indefinite-term employees that arise in relation to whether a term of employment is defined, and in this case, the differences in labour conditions related to payment between Nagasawa Unyu’s contract drivers and regular employees can be said to be such a difference.

As there was no difference in the duties and level of responsibility between the company’s contract drivers and regular employees, nor was there any difference in the company’s ability to order an employee to work at a different location, there was no difference in the job description or scope for change in job description (i.e. the “job description and allowable redeployment”). On the other hand, as Article 20 of the Labour Contracts Act identifies “other circumstances” as one of the items to consider when determining whether the differences in labour conditions between fixed-term employees and indefinite-term employees are unreasonable, there is no reason to limit the consideration to circumstances that are related to the job description and allowable redeployment. The fact that the fixed-term employees were re-hired after reaching mandatory retirement age can be taken into consideration as an “other circumstance” when determining whether the differences in labour conditions between fixed-term employees and indefinite-term employees are unreasonable under Article 20 of the Labour Contracts Act.

When determining whether the differences in labour conditions related to each element of renumeration of fixed-term employees and indefinite-term employees are unreasonable, the consideration should not be limited to the total amount of payment received by each person; rather, the tenor of each element of renumeration should be considered individually.

Specific findings (reasons are omitted)

 

Element

Regular employee Contract employee Supreme Court’s judgment
Base salary/Base wage <Base salary>* Seniority payment (¥81,900 in the first year of employment, increased by ¥800 per year and capped at ¥121,100 in the 41st year of employment.) * Age payment (¥0 for 20 years old, increased by ¥200 for each year, capped at ¥6,000 for 50 years old) <Base wage>¥ 125,000 per month Not unreasonable
Incentive pay / Percentage pay(Calculated by multiplying the amount of work performed in a month and a coefficient based on the type of vehicle) <Incentive pay>10-tonne cement truck: 4.6% 12-tonne cement truck: 3.7% 15-tonne cement truck: 3.1% Cement truck trailer: 3.15% <Percentage pay>12-tonne cement truck: 12% 15-tonne cement truck: 10% Cement truck trailer: 7%
Service allowance 10-tonne cement truck: ¥76,95212-tonne cement truck: ¥80,552 15-tonne cement truck: ¥82,952 Cement truck trailer: ¥82,900 Nil
Perfect attendance allowance ¥5,000 per month Nil Unreasonable
Housing allowance ¥10,000 per month Nil Not unreasonable
Family allowance ¥5,000 per month for spouse¥5,000 per month for each child (up to two) Nil Not unreasonable
Managerial allowance Group leader: ¥3,000 per monthForeman: ¥1,500 per month Nil Not unreasonable
Overtime/Out-of-hours allowance Overtime paid Out-of-hours allowance paid (perfect attendance allowance not included in the calculation) The perfect attendance allowance being excluded from the calculation is unreasonable
Bonus 5 months of base salary Nil Not unreasonable

 

About the basis of the claim

The differences in labour conditions between the contract drivers and regular employees relating to the payment of perfect attendance allowances and overtime (out-of-hours) allowances are unreasonable under Article 20 of the Labour Contracts Act, but even if those differences are a violation of the Article, due to the effect of the Article, it is appropriate to find that the labour conditions of the relevant fixed-term employees that are subject to comparison are not the same as the labour conditions of indefinite-term employees, and that the contractual position of being able to receive the same perfect attendance allowance and overtime (out-of-hours) allowance as regular employees was not upheld (i.e. the primary claim was dismissed).

On the other hand, because the company’s non-payment of a perfect attendance allowance to the Plaintiffs is both illegal and negligent, there are grounds for the claim of damages based in tort for payment of an amount equivalent to the perfect attendance allowance that regular employees can receive. Further, because the exclusion of the perfect attendance allowance from the calculation of the out-of-hours allowance is both illegal and negligent, the company should pay the plaintiffs for the damage they suffered based in tort (i.e. this portion was quashed and remanded to the lower court).

(Translated from the original Japanese)