Recent changes to the Labor Contract Act allow fixed-term contractors, who have had more than 2 fixed-term contracts totaling 5 years in length with the same employer, to request the employer to convert their status to permanent contractors after 5 years. For less than one year fixed-term contract, companies may receive such request on April 1, 2018 at the earliest and they should be prepared for the potential applications by then. (Converting to a permanent status occurs on the next day the current fixed-term contract ends).
At the seminar held by PMP in 2013 regarding the upcoming Labor Contract Act revisions, most companies, in principle, did not expect their fixed-term contracts to exceed 5 years in total. However, more companies are now expressing their needs to convert certain fixed-term contractors in the organizations to permanent contractors, which may be due to their internal requests.
Let us now briefly review some highlights of a fixed-term to permanent contractor conversion process.
1. To avoid triggering a request from a fixed-term contractor to hold a permanent status, a company should start a process of “ending the fixed-term contract” before the total contract period reaches 5 years. This means, at the time of the last fixed-term contract renewal (prior to reaching the 5 years), the company should inform the contractor in writing that it is the final renewal and there will be no further extension. For one year fixed-term, a contract by the end of March 2017 would be the last contract to be extended.
Please be note the “right to expect” of the fixed-term contractor to presume that the contract would continue to be renewed in future. If contracts have been renewed multiple times and it is considered to be reasonable enough for the fixed-term contractor to “expect the situation to continue (so called the expectation rights)”, the company should have a conversation with the individual as early as possible. To avoid a situation where terminating a fixed-term contract becomes difficult or unachievable, the company should fully explain the management decision and the reasons behind the termination to the fixed-term contractor, so that they understand the situation and give their agreement.
2. If the company decides to convert a contractor from fixed-term to permanent, it is highly recommended that they make them a “permanent contractor” first, instead of an “employee”. To prepare for this, the company should establish and document separate Rules of Employment for permanent contractors. Also, it is ideal to have a separate registration process in case a permanent contractor becomes an employee in future. It is not uncommon for fixed-term contractors to believe that converting to permanent contractor status is the same as becoming a full-time employee. It is therefore important to give fixed-term contractors adequate explanation and information about the status change to ensure that there is no confusion. Please note that it is fine to keep the same labor conditions after the status change from fixed-term to permanent contractor).
3. It is also important to consider the impact on employment insurance for permanent contractors. Unlike full-time employees, permanent contractors could be restricted to certain work place, working days or hours, all influencing employment insurance. In Japan, terminating a contract because an individual does not agree with a change in terms and labor conditions is not allowed. This means, terminating employment for this reason could be regarded as an abuse of the company’s right to dismissal under Article 16 of the Labor Contract Act. (We believe this topic needs to be reviewed in Japan in future). On the other hand, in case of a restructuring due to the company’s poor financial performance, there may be less restrictions on terminating permanent contractors compared to the permanent employees. We suggest that companies should keep these points in mind when implementing their rules of employment and contracts for permanent contractors.
4. Equal pay for equal work focuses on salary gaps between fixed-term contractors and full-time employees (under Article 20 of the Labor Contract Act). This does not cover permanent contractors. Issues around equal pay for equal work involving permanent contractors will be handled in future on a case by case basis based on judicial decisions. Guidelines on equal pay for equal work for fixed-term contractors were released by the Cabinet Office last year end, and the implementation to the law will take place in future. As such, the guidelines have no legal force or implications on current employment conditions. In practice, there are close relationship between the working conditions of fixed-term and permanent contracts. The future Labor Contract Act on equal pay for equal work may require companies to revise the working conditions of existing fixed-term contractors. It is important to note that the changes may also have impacts on the working condition of permanent contractors.
5. Lastly, for a company that re-hires fixed-term contractors after their retirement age (as well as high skilled specialists with annual salary over Y10,750k), we recommend the company obtain an authorization certificate to be acknowledged as “Dai-2 shu Nintei Jigyounushi (Dai-1shu for highly skilled specialists)”. Some companies have only one re-hire date in a year (company’s financial year end date) for everyone in the organization to switch their status. This means, status conversion could only happen after the individuals reach the age of 65. For some contractors, this could make the total fixed-term contract period longer than 5 years. If a company wants no status change for those re-hired fixed-term contractors after their retirement age when the total period hits 5 years, the company is required to obtain a certificate of acknowledgement from the Minister of Health, Labour and Welfare. If a company has not yet obtained a certificate of acknowledgement, we advise you to commence the application process soon.
If you have any questions about this article, please feel free to contact us at info@pmp.co.jp .
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