Introduction to Japanese Labor Regulations

This column offers a concise introduction to Japanese labor laws for international corporations considering operations in Japan through a local branch or subsidiary. Please note that due to the focus of this column, we do not aim to provide an exhaustive or precise overview of Japanese labor regulations. Our priority is to ensure simplicity. Therefore, we strongly advise consulting with an expert for guidance on any specific issues you may encounter. We hope this column helps international corporations to understand a rough outline of complicated Japanese labor regulations.

Table of Contents

Chapter 1: Hiring New Employees

Chapter 2: Regulations of Fixed-Term Employment

Chapter 3: Rules of Employment

Chapter 4: Working Hours

Chapter 5: Salaries

Chapter 6: Terminating Permanent Employment

Chapter 1: Hiring New Employees

1. Freedom of Hiring and its Limitation

Under the “principle of freedom of contract,” employers have broad discretion in hiring decisions. However, this freedom comes with legal boundaries that must be observed.

For instance, the Equal Employment Opportunity Act for Men and Women (Act No. 113 of 1972, as amended) mandates equal hiring opportunities irrespective of gender. Furthermore, it also prohibits employers from setting certain job requirements that could lead to gender discrimination (i.e., indirect discrimination), such as certain specific physical attributes or relocation availability, except in exceptional cases. The Employment Measures Act (Act No. 132 of 1966, as amended) restricts age discrimination in hiring practices, barring a few exceptions.

2. Forming an Employment Contract

Employment contracts of mid-career hires—a common practice for international companies entering Japan—would be typically deemed to form when a job offer with key terms, like salary, is extended by the employer and accepted by the candidate. Once formed, these contracts cannot be unilaterally terminated by the employer without a valid reason or the employee’s consent, even though the working start date has not arrived. Conversely, employees under permanent contracts may resign with two weeks’ notice at any time.

Employer is required to specify certain job terms to the employee in writing, at the timing of formation of employment contract between these two. Item which should be specified are term of employment, place of work, job duties, working hours, salary, and certain other job terms. Employers must also clarify any future rights to modify place of work or job duties. During the recruitment phase, similar requirements could apply. If certain details, such as salary, are undecided during early stages, this should be clearly communicated and finalized upon job offer at the latest.

Although not legally required, written employment contracts are standard practice. If all of the required items are set forth in the written employment contract sent to the employee along with the formal job offer, such “specification” obligation is deemed fulfilled. Alternatively, this obligation can be fulfilled by sending an “rules of employment” (shugyo kisoku) document, with relevant sections specified and additional conditions outlined separately.

3. Probation Periods

Employers may implement a probationary period to assess a candidate’s suitability. While there’s no fixed length for this period, excessively long durations, such as those exceeding one year, may be considered invalid. A typical probation period in Japan is three months.

Employer’s refusal of fully employing the probationary employee constitutes a dismissal, and employer cannot do so freely. However, discretion of employer is broader compared with usual dismissal. If, during the probation period, an employer finds any fact it cannot know in advance and making continued employment inappropriate, the employer may refuse to fully employee the probationary employee.

Chapter 2: Regulations of Fixed-Term Employment

1. Employment Contract Term: Permanent vs. Fixed-Term

Employment contracts in Japan can be either permanent or fixed-term. Unlike some EU countries, fixed-term contracts may be used for positions typically considered permanent. However, in practice, the majority of full-time employment contracts in Japan are permanent employment.

Permanent employment contracts offer job security, with termination by the employer only permissible under reasonable grounds, which will be discussed later. Conversely, employees can end their permanent contracts by providing two weeks’ notice.

Fixed-term contracts are more rigid during the contract period: neither party can terminate the agreement prematurely unless there is an “unavoidable reason” (Article 628 of the Civil Code and Article 17 of the Labor Contract Act). This term encompasses extreme circumstances such as the employee’s inability to work, significant legal violations by the employee, or severe financial distress of the employer that makes the continuation of employment untenable. Generally, fixed-term contracts are limited to a maximum of three years (or in regard to certain types of job, five years), to prevent long-term employment restrictions. In addition, employees can terminate these contracts after one year, as transitional measures are effective with an unspecified end date. Although there’s no legal minimum for the contract duration, excessively short terms leading to frequent renewals are discouraged under Japanese labor regulation (cf. Article 17, Paragraph 2 of Labor Contract Act). Typically, fixed-term contracts range from six months to one year.

2. Renewal of Fixed-Term Employment Contracts

Upon expiration of a fixed-term contract, the employer typically has the discretion to renew. However, Japanese labor laws impose conditions to prevent abuse of this system as a means to circumvent the strict termination rules applied to permanent contracts. Specifically, an employer cannot unreasonably deny renewal if:

– The contract has been repeatedly renewed, making non-renewal tantamount to permanent employee dismissal; or

– The employee has an expectation of renewal with reasonable ground.

Factors that could be considered in these decisions include the nature of the job (temporary/seasonal vs. permanent), the history of communication and mutual understanding between the parties, and the renewal process itself (e.g., the number of renewals, formal procedures, past refusals).

Moreover, the Ministry of Health, Labor and Welfare mandates that employers must clarify the renewal possibility and criteria upfront. Upon refusal, employers are required to provide explanations if requested by the employee.

Significantly, if the total duration of successive fixed-term contracts exceeds five years, the employee gains the right to convert their contract into a permanent one (Article 18 of Labor Contract Act).

Chapter 3: Rules of Employment

1. What are “Rules of Employment”?

“Rules of Employment” (shugyo kisoku in Japanese) (“RoE”) are set of internal rules set by employers detailing the working conditions and disciplinary measures in each workplace (jigyo ba in Japanese, which is in principle equals to each office of employer such as main office or any branch offices). In Japan, RoE are crucial due to the typically simple terms of employment contracts. If number of employees is equals to or more than ten in any of workplaces, employers should prepare RoE applicable to such workplace and comply with specific procedural requirements. This is to ensure that employees are aware of their working conditions and to prevent unfair management practices by employers.

The RoE must cover various aspects prescribed in labor laws such as working hours, holidays, wages, and retirement rules including grounds for dismissal. They may also include the rules of retirement benefits, bonuses, disciplinary actions, and any rules that apply to all employees at the workplace. While a Japanese company typically have a document called “Rules of Employment,” it often doesn’t cover all these details comprehensively. Certain specifics, like payroll, might be contained in separate documents like “Payroll Rules”, which are considered part of the RoE for regulatory purposes.

2. Binding Effect of Rules of Employment

Once established by an employer and made known to employees, the RoE are binding, provided they are reasonable. However, if there’s a conflict with laws or collective labor agreements, the latter take precedence. The RoE set minimum working conditions, and any agreement with an employee that offers less favorable conditions will be overridden by the RoE.

3. Establishing Rules of Employment

When creating the RoE, an employer must seek feedback from a labor union representing a majority of the workplace’s employees, or if it does not exist, a representative elected by such employees. The employer then submits RoE, along with the employee feedback, to the local Labor Standards Office. All relevant employees should be able to access the RoE.

4. Amending Rules of Employment

An employer can amend the RoE if the changes are considered reasonable. This involves evaluating the amendment’s necessity, its impact on employees, reasonableness of the provisions after amendment, and discussion history with labor union or other employee’s representative. Like the initial establishment process, amended RoE and employee feedback are submitted to the Labor Standards Office. Employers must ensure that the amendments are easily accessible and understandable to all employees.

Chapter 4: Working Hours

1. The Fundamentals of Working Hour Regulations

Japan’s labor laws set clear boundaries on the length of the workday and workweek to safeguard employees’ health and well-being. Standard working hours are capped at 8 hours per day and 40 hours per week.

Break times are mandated to give employees a chance to rest during their workday. If an employee works more than 6 hours in a day, they are entitled to at least a 45-minute break. For workdays extending beyond 8 working hours, the required break time increases to a minimum of 1 hour. Additionally, employees must receive at least one day off per week. An alternative provision allows employers to give four or more days off in a four-week period.

2. Overtime and Holiday Works under “Agreement under Article 36”

Agreements under Article 36, commonly known as “saburoku kyotei,” enable employers to order overtime work or work in a day-off, subject to specific caps and conditions. These agreements must be in writing, agreed upon with a labor union or an employee representative of each relevant workplace, and notified to the Labor Standards Office. The standard limits of overtime and day-off work are up to 45 hours per month and 360 hours per year. However, Agreement under Article 36 may contain provision allowing employer to order further overtime or day-off work in extraordinary circumstances necessitating additional work, up to 100 hours per month at the maximum, with a yearly cap of 720 hours.

Premium over the standard wage rate shall be payable to employees as consideration for overtime and day-off work. The rates are as follows:
– Overtime Work: A 25% premium is applied to hours worked beyond the statutory limits, increasing to 50% for any time beyond 60 hours in a month.
– Holiday Work: Work on statutory days off attracts a 35% premium.
– Night Work: Work between 10 p.m. and 5 a.m. is compensated with a 25% premium.
If an employee works overtime at the nighttime shift or work at nighttime on a statutory day off, they are entitled to both applicable premiums.

Some Japanese corporations uses fixed-amount overtime payment schemes, where a predetermined amount of overtime is included in an employee’s monthly fixed salary. This method can make job offers appear more attractive by showing a higher monthly wage. However, transparency in showing the breakdown between the basic salary and the overtime component is mandatory. Employers must ensure that if actual overtime exceeds the fixed amount, additional compensation is provided.

3. Accurate Tracking of Working Hours

For compliance and fair compensation, accurately tracking working hours is important. Working hour includes all time the employee is under the employer’s direction or when performing tasks requested by the employer. Common methods involve using time cards or digital records of computer usage times. In situations where these methods are impractical, self-reporting by employees may be relied upon, with employers taking steps to verify accuracy.

4. Special Considerations for Managerial Positions

Employees in managerial or supervisory roles are exempt from certain working hour regulations, reflecting their autonomy and decision-making responsibilities within the organization. This exemption includes freedom from standard work hour limits, break times, and day-off requirements, though night work premiums still apply. Eligibility for this exemption considers the individual’s role in significant corporate decisions, flexibility in work hours, and compensation arrangements that reflect their managerial status.

5. Alternative Working Hour Arrangements

Japan’s labor laws provide for flexible working arrangements, allowing employers and employees to adapt to various operational and personal needs. Certain requirements including procedural requirements shall be fulfilled to use each of following exemptions.
– Irregular Working Hours System: This arrangement permits variations in daily and weekly working hours, exempting employers from paying overtime under certain conditions, provided the average weekly hours do not exceed statutory limits over a designated period.
– Flextime System: Offering employees discretion over their start and end times, this system accommodates personal preferences and commitments, provided the average weekly hours remain within regulatory bounds.
– Deemed Working Hours System: For roles where tracking actual hours worked is challenging or roles requiring employee’s extensive discretion in carrying out work, this system assumes a preset number of working hours. Typical examples of roles eligible for this exemption is certain field-based roles or certain jobs requiring high levels of autonomy.
– High-Level Professionals Exemption: For certain professional works with high compensation (JPY10.75 million or more) is eligible for this exemption, where all working hour regulations, including, working hour, rest time, statutory day-off and night work are exempted.

6. The Annual Salary System

If an employer intends to adopt “annal salary system” under which amount of annual salary is inclusive of part or all of overtime charge, there are three options that may be available.

Firstly, if the relevant employee is in a managerial position, employer may rely on exception for manger. In this case, employer does not need to pay overtime and day-off charge, except for premium for night work.

Secondly, if the employer may rely on deemed working hour system or exception for high-level professionals, a part or all of overtime charge is exempted.

If these two options are not available, last option is to adopt a fixed-amount overtime charge. As explained above, employer should pay the difference if the actual overtime work in a month exceeds the overtime contained in the monthly fixed salary.

Chapter 5: Wages

Employers must pay full amount of wages in Japanese yen, directly to the employee, not less than once per month, and on a specified date. Even though employers adopt annual salary system, employers should pay the salary each month (for example, pay 1/12 of annual salary amount in each month).

As exceptions, employers may remit wages into an employee’s bank account, or under certain conditions and limitation, certain e-payment service provider other than bank. Social insurance premiums, taxes and similar expenses may be deducted from wages.

Chapter 6: Termination of Permanent Employment

1. Basic Principles

Understanding the framework for terminating a permanent employment contract is crucial within Japanese labor regulations. Unlike fixed-term contracts, which are covered separately, permanent employment offers different rights and obligations for termination by both the employer and employee.

Under Japanese Civil Code, employee may resign with two weeks’ notice period. However, some companies specify longer notice periods in their Rules of Employment, such as one month. It’s worth noting that it is not clear whether such extended notice periods is valid.

Employer-initiated termination (dismissal) faces strict scrutiny under Japanese law. A notice period under Japanese labor law is one month, but dismissals must meet further justification. They require a “reasonable ground from an objective perspective” and must be considered “reasonable in light of conventional wisdom.” Furthermore, the cause for termination must be explicitly listed in the Rules of Employment, prohibiting dismissals for reasons not previously outlined.

2. Causes for Dismissal

The legitimacy of dismissal often hinges on two main grounds: poor performance and redundancy. We will explain how Japanese court review the legitimacy of dismissal in each of these two grounds.

Dismissal for poor performance focuses on whether:
– Transfer to another position could mitigate the need for dismissal, considering the employee’s skill set and the feasibility of reassignment.
– The significance of the lack or decrease of skill is substantial enough to justify termination. A court have ruled dismissals based on being in the lowest 10 percentile performers as invalid, and another court judgement emphasizes the need for a significant impediment to business operations.
– Measures to improve performance were taken, requiring employers to attempt to remedy the situation before considering dismissal, including suggestions for demotion or transfer as alternatives.

Dismissal for redundancy must prove:
– Necessity of redundancy: the court does not require serious financial distress, but court usually does not allow a company in black to dismiss employees for redundancy. In addition, simultaneous hiring during layoffs, for example, could invalidate the redundancy claim.
– Efforts to avoid redundancy, where employers must explore all other cost-saving measures before resorting to dismiss for redundancy.
– Fairness in the selection process for layoffs, using reasonable, objective and non-discriminatory criteria.
– Due process, involving transparent communication with employees about the reasons for and the process of redundancy, including negotiation in good faith.

3. Restrictions on Dismissal

Certain protections exist for employees under specific conditions, such as:
– Medical or maternity leave, where employees cannot be dismissed during and for a period after such leaves.
– Protection for whistleblowers and women during pregnancy or within one year of childbirth, ensuring that these conditions cannot be grounds for dismissal.

4. Consequences of Unlawful Dismissal

If a dismissal is ruled invalid, the employer must reinstate the employee and compensate for any lost wages. However, many cases are finished with settlement rather than court judgement, often resulting in the employee’s voluntary resignation in exchange for a severance package.

5. Voluntary Resignation Solicitation

Employers may encourage voluntary resignation as a means to end employment relationships, often enhancing severance packages as an incentive. Nonetheless, any coercion or undue pressure that compromises the employee’s free will can render such resignations invalid, allowing employees to retract their decision.

6. Non-Compete Agreements

Post-employment non-compete agreements are only allowed to a limited extent in Japan to balance the constitutional right to freely choose occupation against protecting business interests. These agreements must be reasonable in duration, geographic scope, and the type of work restricted, and must offer fair compensation for the limitations imposed. Additionally, the Unfair Competition Prevention Act guards against the disclosure and wrongful acquisition of trade secrets.

(Note) Please note that this column is for informational purposes only and does not constitute legal advice. If you have any query, please feel free to contact us via inquiry form in this website.