4.3 Labor contracts

When hiring workers, companies enter into labor contracts with each worker. At that time, the employer must notify the employees in writing of the following employment conditions. If the worker wishes, the employment conditions can be presented via fax, email, social media, and other methods.

Any part of a labor contract that does not meet the standards laid down by law is invalid. For example, a contract containing provisions such as "the company may dismiss the worker at any time," "the company does not pay overtime fees," and "social insurance fees shall be borne entirely by the worker" (in the case of a business establishment covered by social insurance) is invalid insofar as these provisions are concerned.

It is also illegal to impose a penalty for non-fulfillment of a labor contract. For example, it is illegal to include a clause such as the following: "If a worker retires within two years of joining the company, he/she must pay to the company the sum of 500,000 yen." However, this does not preclude an employer from claiming damages from a worker for losses actually incurred.

Labor contracts generally do not stipulate a term. Where a term is specified, however, it must be no longer than three years except in a few special cases. A fixed-term Labor contract exceeding five years in total by updates can be converted to a Labor contract without a definite term upon the employee’s request.

However, exceptions are made for highly-skilled professionals or senior citizens who continue to work after mandatory retirement under the continued employment system.

Employers are allowed to set a limited period of probation prior to fully employing somebody, so as to see whether or not the probationary employee is able and suitable for the job. However, it should be noted that if the employer decides not to fully employ somebody during or after the probation period, this refusal to employ is treated in the same manner as dismissal of an employee; in order for such a refusal to be legally allowed, valid reasons for refusal (which were not evident at the time of probationary employment) must have come to light during the period of probation, and it must be objectively reasonable for the employer to refuse to fully employ that person for the aforementioned valid reasons.

Japanese companies frequently redeploy their workers through internal re-assignment and external assignment, and such redeployments may often require a worker to relocate. Generally, employers have considerable discretion when it comes to changing a worker's duties or temporarily assigning him or her to another company if this is reasonably necessary to business. However, it is necessary to follow the Employment Security Act when companies order their employees temporary external assignment (see also 4.3.9 (2)).

If a worker employed by one person engages in work for another person under the instruction of the latter, while maintaining the worker’s employment relationship with the former, the former will be deemed to be engaged in "worker dispatching" (see 4.3.9). To engage in worker dispatching, a company must receive a license. It is prohibited with criminal penalty to engage in worker dispatching without a license.

Working conditions such as wages, working hours, etc. may be changed by agreement between the company and the worker. Although the company may not change the working conditions in principle in a manner disadvantageous to the worker by changing the rules of employment, if the change to the rules of employment is reasonable in light of the extent of the disadvantage to be incurred by the worker, the need for changing the working conditions, the appropriateness of the contents of the changed rules of employment, the status of negotiations with a labor union or the like, or any other circumstances pertaining to the change to the rules of employment, the working conditions that constitute the contents of a labor content shall be in accordance with such changed rules of employment.

In the case of international contracts, which country's law to use as the governing law may be determined by agreement between the parties (see Article 7 of the Law on the General Rules on Application of Laws), and labor contracts are no exception. However, legislation that is clearly intended to protect workers as a matter of policy, such as the Labor Standards Act, will be compulsorily enforced in the forum state regardless of any such agreement. Even if a worker agrees to the law of a region other than that in which labor services are provided being used as the governing law for a labor contract, he/she may claim the benefit of specific forcible provisions (“relative mandatory law”) in the region in which labor services are provided by indicating to the employer that he/she wishes that such provisions should be applied. If a labor contract does not stipulate the governing law, it is assumed to be the law of the region in which labor services are provided.

When hiring a worker, a company may require that a guarantee of good conduct be provided by a relative of the worker or similar guarantor, and such a guarantee is held to be legally valid. The term of this guarantee is deemed to be three years if not specified, and up to a maximum of five years where a term is specified. Also, if the company seeks a financial guarantee from the guarantor, it needs to set a limit on the amount.

The contractual relationship between a company and directors, etc. is, as a rule, considered to take the form of an engagement agreement as opposed to a labor contract. Accordingly, the relationship is, as a rule, subject to the Companies Act rather than labor law. If a director, etc. does not have the right to represent a company and is employed in a manner very similar to that of a worker, he/she may be simultaneously subject to labor law as a dual worker/director, etc.

Use of workers of other companies can be made in three ways: worker dispatching, contracting, and temporary transfer.

Recently corporate reorganization is actively undertaken amid the advance in aggravation of enterprise competition and easing of regulations. How the labor contract is treated under such reorganization shall be, if it is divided into merger, business transfer, and company split, as follows:

Within the same company, setting unreasonable discrimination between regular and non-regular employees (part-time, fixed-term, or dispatched workers) in respect of any treatment, such as basic pay and bonuses, is prohibited. However, dispatched workers may be treated under a labor-management agreement that meets certain requirements in lieu of equal and balanced treatment with the client company’s workers.

Enterprises that outsource work to freelancers (business operators assigned outsourced work and not employing people) are required to clearly state the terms and conditions of the outsourced work, pay remuneration within 60 days from the date of receipt of benefits, and establish a system to prevent harassment. If the outsourcing contract is in fact a labor contract, various labor-related laws and ordinances are applied.