Archive for August, 2015

Considerations when rehiring an employee after mandatory retirement age

By Hirotaka Nakura
 

Introduction

Since the revisions to the Act on Stabilization of Employment of Elderly Persons (“the SEEP Act”) came into force in 2013, which made it an obligation to provide continuous employment to employees until 65 years of age, the number of companies that have increased their mandatory retirement age to 65 has gradually increased. However, the general practice has been for companies to implement a system (“re-employment system”) where 60 is maintained as the mandatory retirement age, and those employees who wish to work beyond 60 years of age are signed to new fixed-term contracts that are renewed until the employee reaches 65 years of age.

In this column I would like to discuss two points that are important to consider when implementing such a re-employment system, namely (1) working conditions that apply to re-employment and (2) the term of continued employment.

 

 Working conditions that apply to re-employment

  1. Regarding the working conditions under a re-employment contract signed by an employee that has reached mandatory retirement age, a Q&A on the SEEP Act published by the Ministry of Health, Labour and Welfare says that “as long as the purpose of the SEEP Act is considered and the rules such as minimum wage rates are complied with, the employer and employee can determine the terms such as working hours (full-time or part-time), wages and treatment.” Further, in response to the question “is it a breach of the SEEP Act if the employer and employee cannot agree on the working conditions and continued employment is rejected?”, the Q&A provides an answer that  “what the SEEP Act requires is that by introducing a continued employment system, the employer is not obliged to provide employment that meets the employee’s desired working conditions; if the employer offers conditions that are within the reasonable discretion of the employer but the parties are unable to reach an agreement, which results in the employee refusing the continued employment, this is not a breach of the SEEP Act.”
  2. In this way, a certain degree of flexibility is expected in the setting of working conditions for re-employment. However, the “X Transport” case (Nara District Court, 18 March 2010 and Osaka High Court, 14 September 2010) is an example of the problem of reasonableness of re-employment working conditions.
    In this case, the company had a post-retirement re-employment system (“senior employee system”) which was used to sign fixed-term employment contracts with employees. Although the employees’ work duties were basically the same both before and after reaching the mandatory retirement age, the wages of senior employees were 54.6% of that of regular employees, which raised the issue of whether this was a breach of the equal treatment principle (Article 3(2) of the Labour Contracts Act, Article 8 of the Act on Improvement, etc. of Employment Management for Part-Time Workers) or a violation of public order and morals.  On this point, the Osaka High Court determined that X Transport’s system did not violate the public order and morals, having identified (1) that the wages of a person re-employed within the same company will be lower than what they received before reaching the mandatory retirement age is a fact incorporated within the system when the method for calculating allowances that are paid to re-employed elderly people under the Employment Insurance Act is considered; (2) the employment rates of people post-mandatory retirement and the country’s current conditions; (3) nine out of ten companies have introduced a re-employment system and of those, 44.4% of companies pay their elderly employees 60-70% of what they earned before reaching the mandatory retirement age, and a further 20.4% pay their elderly employees approximately half of what they were previously earning; and (4) looking at the senior employees’ wages, they were not at such a low level as to defeat the purpose of the SEEP Act when compared to wage levels within the prefecture.
  3. This decision was delivered in 2010, and since April 2013 there have been changes such as a staged increase in the age when people can commence receiving special payments from the old-age pension. However, it seems to generally be the case that wages are reduced by about 30% to 40% when an employee is re-employed to perform the same work duties after reaching their company’s mandatory retirement age. Since it is difficult for an employee to be satisfied with this major reduction in wages when there is no change to the person’s work duties, it may be better to change their duties if such reassignment is possible.
    In practice, not all employees want to continue working in the same role and under the same conditions that they previously worked under. Further, as identified in the above judgment, eligibility for a public allowance may affect the determination of the working conditions. Therefore, establishing an opportunity to listen to the employee’s wishes and explain the company’s position should be provided as early as possible (6 months to 1 year before the mandatory retirement date is a good guide) and trying to reconcile the needs of the employee and company in relation to the post-retirement employment conditions are important, in order to avoid trouble regarding the employment conditions.

 

Length of re-employment

  1. As described above, the SEEP Act requires the introduction of a system that provides continued employment until 65 years of age, but particularly for small and medium enterprises, cases are seen where fixed-term contracts are extended beyond five years (that is, after the employee has reached 65 years of age) for reasons such as personnel shortages or to provide a period for handing over the employee’s responsibilities to a successor.
    In these sorts of cases, the “Fixed-Term to Indefinite-Term Conversion Rule” contained in Article 18 of the revised Labour Contracts Act, which came into force in April 2013, becomes a problem. This rule provides that “where an employee whose fixed term employment contract starts (or is renewed) after April 1, 2013 and is continuously renewed for 5 years or more in total with the same employer, the employment contract will convert to an indefinite term employment contract upon the request of the employee.” Applying this rule to the above case, if an employee who reached the mandatory retirement age after April 2013 and has thereafter been employed on fixed-term contracts for more than five years applies to convert to an indefinite term contract, then the employer must enter into an indefinite-term contract with the said employee, who by that time is at least 65 years of age.
  2. To avoid this situation, an obvious option to consider is to limit the renewal of fixed-term contracts to within 5 years. But if a company needs an employee to remain for more than 5 years after reaching the mandatory retirement age, there is also the option of receiving approval from the Director of the Prefectural Labour Bureau in accordance with the “Act on Special Measures Concerning Fixed-term Employees with Expert Knowledge and Skills” (Act No. 137 of 2014, hereafter the “Special Measures Act”) that came into force on April 1, 2015.  According to the Special Measures Act, if (1) a companies prepares an appropriate employment administration plan and receives the Director of the Prefectural Labour Bureau’s approval, and (2) an employee continues to be employed as a fixed-term contract employee after reaching mandatory retirement age, then the right to request conversion to an indefinite-term contract pursuant to Article 18 of the Labour Contracts Act will not arise during the period that the employee continues to be employed by that companies.
    Having an “appropriate employment administration plan” requires adopting one of the measures to secure the employment of elderly people that are defined in the SEEP Act (i.e. raising the mandatory retirement age or introducing a re-employment system) as well as implementing one of the following measures;
    (1) appointment of an elderly employment promoter (Article 11 of the SEEP Act),
    (2) education and training to develop and improve vocational skills,
    (3) improvement of work facilities and methods,
    (4) consideration of health management and occupational safety and health,
    (5) expansion of the occupational field,
    (6) promotion of methods to utilize knowledge and experience,
    (7) review of wage systems, or
    (8) making the system of working hours flexible.Because most companies have probably already adopted at least some of these measures when introducing a re-employment system, and the hurdle for having a plan approved is otherwise not that high, there may be value in considering whether to seek approval under the Special Measures Act if there are needs to retain employees that are beyond the age of 65.

 

(Translated from the original Japanese)