#8 Understanding Fixed-Term Employment Contracts in Japan: Key Considerations for Foreign Businesses

When expanding into Japan, foreign companies must navigate a unique and highly regulated employment landscape. One critical aspect is understanding fixed-term employment contracts, which are subject to specific legal requirements under the Labor Standards Act, the Labor Contracts Act, and other labor regulations.

Proper compliance with these rules not only ensures smooth business operations but also mitigates legal risks. This article explores the key terms, conditions, and best practices that companies should follow when hiring employees on fixed-term contracts in Japan.

What Is a Fixed-Term Employment Contract?

A fixed-term employment contract is a temporary work agreement with a predefined duration. For example, a software engineer hired for a two-year project from January 1, 2024, to December 31, 2025, would be considered a fixed-term employee.

While this type of contract offers flexibility, employers must be mindful of strict legal provisions governing its use, particularly regarding contract duration, renewal, and termination.

Key Considerations for Fixed-Term Contracts

1. Probationary Period: Evaluating Employee Suitability

Many companies implement a probationary period at the beginning of employment to assess an employee’s suitability for a permanent role. While not legally required, it is typically three to six months.

To avoid disputes, it’s essential to clearly define the terms of the probationary period in the contract, including:

✅The evaluation criteria for permanent employment ✅Conditions under which employment may not continue ✅Legal grounds for termination if the employee underperforms

2. Contract Duration: How Long Can It Last?

In general, the maximum length of a fixed-term employment contract in Japan is three years. However, there are two key exceptions where contracts can be extended to five years:

• Highly specialized professionals with advanced expertise • Workers aged 60 and above

For example, an architect working on a large-scale urban development project may qualify for a five-year contract due to their specialized skills.

3. Automatic Conversion to an Indefinite-Term Contract

Companies must be cautious about repeated renewals of fixed-term contracts. Under Japanese labor law:

If an employee has worked under consecutive fixed-term contracts for more than five years, they have the legal right to request conversion to an indefinite-term contract.
Once requested, the employer must comply and cannot refuse unless the employee falls under specific exemptions (e.g., highly skilled professionals or workers over 60).

Failure to comply with this rule can expose businesses to legal claims and penalties.

4. Mid-Term Termination: Can a Fixed-Term Contract Be Ended Early?

Unlike indefinite employment contracts, fixed-term contracts cannot be terminated mid-term without a valid reason. The only exceptions are unavoidable circumstances, such as:

🚨 Severe employee misconduct 🚨 The company ceases operations

Terminating a fixed-term contract without clear justification can result in legal disputes and financial liabilities for the employer.

5. Setting Clear Contract Renewal Terms

Uncertainty regarding contract renewal can create confusion and potential conflicts. To ensure transparency, employers should define renewal conditions in the original contract, such as:

📌 The company’s business outlook and financial stability 📌 The employee’s skills, performance, and work attitude 📌 The progress of the project the employee is working on

Clearly outlining renewal criteria prevents misunderstandings and supports fair employment practices.

6. Non-Renewal Notice: Giving Employees Proper Advance Notice

If a company decides not to renew a fixed-term contract, they must provide at least 30 days' notice before the contract expires if:

✅ The employee has had their contract renewed three times, or ✅ The employee has been continuously employed for over one year.

However, this requirement does not apply if the employer has explicitly stated in the original contract that no renewal will be offered.

Final Thoughts: Avoiding Legal Pitfalls in Fixed-Term Employment

Foreign businesses operating in Japan must carefully manage fixed-term contracts to avoid unintended legal risks. Key takeaways include: ✔ Repeated contract renewals may result in permanent employment status ✔ Early termination is highly restricted and requires a valid reason ✔ Clear renewal terms and proper non-renewal notice help prevent disputes

By understanding and complying with Japanese employment laws, companies can build a legally sound workforce and support long-term business success in Japan.

Need Expert Advice on Japan’s Labor Laws?

Navigating employment regulations in Japan can be complex. At Quantum Accounting, our experts are well-versed in Japanese labor laws and employment regulations. We provide tailored guidance on employment contracts, labor compliance, and workforce management, ensuring your business stays legally secure and operationally efficient. Contact us today to learn how we can support your HR and legal needs.

If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.