#9 Employment Contracts

When hiring employees in Japan, it is essential to clearly define the terms and conditions in employment contracts in accordance with Japanese labor laws. Governed by the Labor Standards Acts and other regulations, employment contracts establish the rights and working conditions of employees, as well as the obligations of employers.

In this article, we will explore the key terms and conditions that must be included in an employment contract when hiring staff in Japan.

Terms of Employment

When drafting an employment contract, the following terms must be clearly stated in writing:

Contract Duration
- Whether the contract is for a fixed duration or an indefinite period.
- If it is a fixed-term contract, the employer must specify renewal conditions, including whether renewal is possible and under what circumstances.

Workplace Location and Job Description
- The location where the employee will work.
- The employee’s duties and responsibilities.

Working Hours, Breaks, Overtime and Leave
- Start and end times of work
- Workdays and holidays
- Break duration
- Overtime work (if required and applicable rates)
- Leave entitlements
- Shift details (if applicable)

Salaries and Bonuses
- Salary amount
- Payment method (e.g. daily, monthly)
- Details concerning pay raises
- Calculation method for overtime wages
- Bonuses (if applicable)
Retirement
- Retirement allowance (if any)

Termination
- Notice period for resignation or termination
- Valid grounds for termination

Fixed-Term Contracts & Conversion to Indefinite-Term Employment

For fixed-term labor contracts, it is necessary to clearly specify whether renewal is possible and, if so, under what conditions.

Additionally, when contract renewal grants the right to apply for conversion to an indefinite-term contract, the employment contract must specify:

The application process for conversion.
The terms of employment after the conversion (e.g., whether salary, work location, or benefits will change).

In Japan, the "Indefinite-Term Conversion Rule" under Article 18 of the Labor Contract Act applies when fixed-term contracts have been renewed continuously for over five years. Employees have the right to request a conversion to an indefinite-term contract, and employers must comply with this request. It is essential for employers to clearly outline the eligibility criteria, applicable timelines, and procedures for conversion within employment contracts or internal rules to prevent disputes and ensure compliance with the law.

For more details, please refer to the article #8 Understanding Fixed-Term Employment Contracts in Japan: Key Considerations for Foreign Businesses.

Prohibited Clauses

Contracts that do not comply with legal standards are invalid in these aspects. Examples of prohibited clauses include:

“The company can terminate an employee at any time without reason.”
　→ Employers must have valid grounds for dismissal.
“Overtime pay will not be provided.” → Overtime work must be compensated according to labor laws.
“The employee will bear all social insurance costs.”

→ Employers are responsible for a portion of social insurance contributions.

Additionally, imposing penalties for contract breaches are illegal. For example, an employment contract that includes a clause such as "If an employee resigns within two years of joining, they must pay the company 500,000 yen" would not be legally allowed. However, companies may seek compensation for actual damages caused by a breach of contract, provided they can prove the losses incurred.

Transfer, Secondment, and Dispatching Workers to Other Companies

In Japan, employee transfers and secondments are common and often involve relocation. Employers generally have the discretion to reassign job duties or temporarily assign employees to another company for legitimate business needs. However, when employees are assigned to work at another company, this must be properly conducted as a secondment.

If an employee formally employed by one company but works under the direct supervision of another company for the benefit of the latter, this constitutes labor dispatch. Companies engaging in labor dispatch must obtain the necessary government authorization, and failure to do so may result in legal penalties.

Changes to Employment Conditions

Changes to employment conditions, such as wages and working hours, can be made through mutual agreement between the employee and the company.

In principle, changes to the employment rules that are detriment to employees are not permitted. However, such changes may come into effect if they are properly communicated to employees and are deemed reasonable based on the following factors:

The extent of disadvantages to the employees
The necessity of the changes
The fairness of the revised rules
Negotiations with labor unions or employee representatives
Other relevant circumstances

Governing Law

In international contracts, the parties may agree on which country's law will apply to the contract, as stipulated in Article 7 of the Act on General Rules for Application of Laws (法の適用に関する通則法). This principle also applies to employment contracts.

However, laws with strong policy intentions, such as the Labor Standards Act (労働基準法), are compulsorily applied within their legal jurisdictions regardless of any contractual agreement. Even if an employee agrees to abide by laws of another country, they may still invoke mandatory labor law provisions of the country where the labor is performed, provided they express such intent to the employer.

If the governing law is not explicitly specified in the contract, the law of the country where the labor is provided is presumed to apply.

Equal Pay for Equal Work

Within the same company, unreasonable differences in treatment (e.g., basic salary and bonuses) between regular employees and non-regular employees (including part-time workers, fixed-term employees and dispatched workers) are prohibited.

However, for dispatched workers, different treatment may be permitted if a labor-management agreement is in place and meets specific legal criteria.

Obligation to Create and Submit Rules of Employment

Under Article 89 of the Labor Standards Act, employers with ten or more workers (including part-time and temporary workers but excluding corporate officers, contracted employees, and dispatched workers) are required to create rules of employment and submit them to the local Labor Standards Inspection Office.

The work rules should include the following:

Working Hours and Leave – Times at which work begins and ends, break periods, days off, leave, and shifts (if workers work two or more shifts).
Wages –Wage determination, calculation methods, payment methods, wage payment deadlines and periods, and pay raise details.
Retirement and Termination – Retirement terms, including reasons for termination.
Retirement allowance and severance pay (if any) – Eligible criteria, special wage determination, calculation methods, payment methods, and payment periods.
Other wages – Special wages (other than retirement allowance or severance pay) and minimum wages details.
Employee expenses – Any costs employees must bear for meals, work supplies, etc.
Safety and hygiene – Workplace safety and hygiene provisions.
Vocational training – Provisions regarding employee training.
Compensation and assistance – Compensation for work-related accidents and assistance for non-work-related injuries and illnesses.
Rewards and disciplinary actions – Types and degrees of rewards and disciplinary measures.
Other workplace regulations – Any additional rules that apply to all employees.

When submitting the work rules to the local Labor Standard Inspection Office, they must be accompanied by an opinion statement from either a labor union representing the majority of employees, or an employee representative if no such union exists.

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.