4.3 Labor Contracts

Section 4: Human Resource Management


This section covers Japan’s labor laws and regulations. Topics include recruitment, employment contracts, wages, working hours, work rules, workplace safety, hygiene requirements, resignation and dismissal procedures, and Japan’s social security, health, and pension systems.


4.1  Application of Laws

4.2  Recruitment

4.3  Labor Contracts

4.4  Wages

4.5  Legislation on Working Hours, Breaks, and Days Off

4.6  Work Rules

4.7  Safety and Hygiene

4.8  Resignation and Dismissal

4.9  Japan’s Social Security System


4.3.1 Working Conditions
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.

  • The term of the agreement (or where there are no provisions pertaining to term, the fact that there are no provisions pertaining to term).
  • The workplace, and the duties that the employee will have to perform.
  • Matters pertaining to start and finish times, work in excess of regular working hours, breaks, days off and leaves.
  • Methods of determining, calculating and paying wages; the wage calculation period and payment times.
  • Matters pertaining to resignation and dismissal (including all grounds for dismissal).

(Note) In the case of part-time workers, the employer must in addition specify in writing whether they will be eligible for pay increases, retirement allowances, and/or bonuses.
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 for any reason," "the basic wage shall include all overtime pay," 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.


4.3.2 Term of Labor Contracts
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. However, a worker may resign by notifying his/her employer at any time as long as at least one year has elapsed since the date of the start of the contract term.


4.3.3 Probation Period
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. Probation periods generally last for about three months. 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.


4.3.4 Re-Assignment, External Assignment, and Dispatch of Workers to Other Companies
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, if a company dispatches workers in its own employment in a regular basis to another company with which they have no contracts of employment to supply labor subject to the directions and orders of that other company, the dispatching company is then classified as engaging in "worker dispatching undertakings" (see 4.3.9). To engage in worker dispatching undertakings, a company must have obtained a government permit. 


4.3.5 Disadvantageous Change of a Labor Contract to the Worker
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.


4.3.6 Governing Law
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.


4.3.7 Written Guarantee of Good Conduct
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.


4.3.8 Corporate Directors and Executive Officers, Etc. ("Directors, Etc.")
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.


4.3.9 Use of Workers Employed by Other Companies
Use of workers of other companies can be made in three ways: worker dispatching, contracting, and temporary transfer.

  1. Worker dispatching
    As a rule, temporary workers can be placed at companies to perform any duties other than port transport, construction and security, as well as some medical work. The period where the same temporary worker is allowed to work in the same organizational unit in the client is limited to a maximum of three years. If a placement lasts continuously for more than three years, the temporary worker must be, as a rule, employed directly by the client. However, a temporary worker employed by the dispatching business operator without employment period is not applicable for the period limitation. Companies where temporary workers are placed are prohibited from then placing those workers with other companies.
  2. Contracting
    If workers employed by one company (company A) are subject to the independent personnel administration, directions, and orders of company A, though actually performing work at another company (company B), the arrangement is treated as a contracting relationship. In such case, company B cannot give directions or orders to the workers concerned.
  3. Temporary transfer
    It is also permitted for workers employed by one company (company A) to enter new employment contracts with another company (company B) to provide labor subject to the directions and orders of company B for a specified period under an agreement between company A and company B.

(Note) It is legally banned that a company (Company-A) which has directly recruited a worker and has him work under its supervision gets another company (Company-B) and the worker apparently make labor contract and treats him a dispatched or seconded worker to the Company-A from the Company-B (Article 44 of Employment Security Act).


4.3.10 Corporate Reorganization and Labor Contracts
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:

  1. Merger
    In the event of an enterprise' s merger, all rights and obligations are universally succeeded. Thus, in both the case of consolidation-type merger (where a new company is formed as a result of a merger) and the case of absorption-type merger (where an existing company initiates a merger), the company surviving after the merger succeeds all labor contracts.
  2. Business Transfer
    If an enterprise transfer all or some of its businesses to another enterprise, succession of the rights and obligations is determined by parties concerned (individual succession). Thus, succession of labor contract is determined by the agreement among the assignor company, the assignee company, and the worker. Labor contract is not succeeded to the assignee company if either the assignee company or the worker refuses the succession of the labor contract.
  3. Company Split
    Company split has two types. One is incorporation-type company split where the company-A splits a part or all of the rights and obligations concerning the company-A’s undertaking, and the other is absorption-type split where the company-C absorbs a part or all of the company-A’s undertaking. Then, the labor contract of the worker who is mainly engaged in succeeded undertaking is succeeded to the newly found company or the absorbed company by operation of law.