Employment Contracts and Work Rules in Japan: Labour Law for Employers

Companies employing staff in Japan must follow the Labor Standards Act, the Labor Contracts Act and related rules, regardless of the employees’ nationality or where the head office is located. Working conditions must be stated in writing or by similar means at hiring, and workplaces that regularly employ 10 or more workers must draw up work rules and file them with the Labour Standards Inspection Office. This article sets out the basics of employment contracts and work rules, and the points foreign companies most often overlook.

Labour laws that apply when hiring in Japan

Japanese labour law applies to employees working in Japan. The same is true even if a head office in mainland China or Hong Kong is the party to the employment contract, as long as the work is performed in Japan.

• Labor Standards Act: sets minimum working conditions, including working hours, days off, wages and notice of dismissal. Any contract term falling below these standards is void.
• Labor Contracts Act: sets rules on the formation and amendment of contracts, their relationship with work rules, dismissal and fixed-term contracts.
• Minimum Wage Act: wages below the minimum wage set for each prefecture are not permitted.
• Others: the Equal Employment Opportunity Act, the Child Care and Family Care Leave Act, the Industrial Safety and Health Act and others also apply.

It is possible to make home-country law the governing law of an employment contract. However, the Labor Standards Act applies automatically to people working in Japan. In addition, if the employee so declares, the mandatory provisions of Japanese labour law also apply (Article 12 of the Act on General Rules for Application of Laws). Using a home-country contract template as is risks any clauses that fall below Japanese standards being void.

Employment contracts and stating working conditions

Employers must state working conditions when concluding an employment contract (Article 15 of the Labor Standards Act). This is usually done by issuing a “notice of working conditions”. Using a combined “employment contract and notice of working conditions” signed by both parties also creates a record of the agreement.

Main items to be stated in writing

Written notice is the rule. If the employee wishes, conditions may also be stated by fax, email or similar means. Pay rises, bonuses, retirement allowances and the like must be stated where provided for.

Changes to the disclosure rules from April 2024

From 1 April 2024, amendments to the Enforcement Regulations of the Labor Standards Act added new items that must be stated.

• For all employees, the “scope of changes” to the place of work and duties must be stated.
• For fixed-term employees, whether there is a cap on the total contract period or number of renewals, and its details, must be stated. If a cap is introduced or shortened later, the reason must be explained in advance.
• At each renewal at which the employee becomes eligible to request conversion to an open-ended contract, the employer must state that the employee may make the request and the working conditions that will apply after conversion.

Give particular thought to how the scope of changes is worded for secondees from the head office and employees who may be transferred overseas in future.

Fixed-term contracts and the conversion rule

Where a contract has a fixed term, a single term is in principle capped at three years (five years for those with specialist knowledge and certain others). If fixed-term contracts with the same company are renewed and the total exceeds five years, the employee may request conversion to an open-ended contract (Article 18 of the Labor Contracts Act). The company cannot refuse this request.

Non-renewal after repeated renewals may be restricted in the same way as dismissal if the employee has a reasonable expectation of renewal. When using fixed-term contracts, it is important to state the renewal criteria and any cap from the outset.

Work rules: the obligation to draw up and file them, and required content

Workplaces that regularly employ 10 or more workers must draw up work rules and file them with the competent Labour Standards Inspection Office (Article 89 of the Labor Standards Act). The 10 include not only regular employees but also part-time and fixed-term staff. Headcount is assessed per workplace (branch, factory, etc.), not for the company as a whole.

Drawing up and filing work rules

1. Draft the rules (the Ministry of Health, Labour and Welfare’s model work rules are a useful reference).
2. Hear the opinion of the majority labour union or, if there is none, a representative of the majority of employees (Article 90).
3. File the rules with the Labour Standards Inspection Office, attaching the written opinion.
4. Make the rules known to employees by posting them, distributing copies or making them available on internal systems.

Work rules take effect only once employees have been informed of them. Rules that have been filed but not communicated may not be usable as a basis in the event of a dispute.

Items that must be included

• Start and finish times, breaks, days off and leave
• How wages are determined, calculated and paid, the closing and payment dates, and pay rises
• Matters relating to leaving employment (including grounds for dismissal)

Retirement allowances, bonuses, disciplinary action, health and safety and the like must be included where such systems exist. To take disciplinary action, the types of and grounds for discipline must be set out in the work rules. If work rules with reasonable content have been communicated to employees, their content becomes part of each individual employment contract (Article 7 of the Labor Contracts Act). Where an individual contract falls below the work rules, that part is raised to the standard of the work rules.

Basic rules on working hours, days off and wages

In addition, employers must keep an employee register, wage ledger, attendance records and similar documents for a set period. The retention period is in principle five years, but a transitional measure sets it at three years for the time being.

As a rule, wages must be paid in currency, directly to the employee, in full, at least once a month and on a fixed date. A contract paying an annual salary once a year, as may be customary in the home country, cannot be used as is in Japan. Tax deductions from pay are explained in Withholding tax and year-end adjustment, and insurance procedures in Employers’ social and labour insurance obligations.

Dismissal, resignation and probation

Dismissal is tightly restricted in Japan, and this is an area where foreign companies’ expectations often differ widely from local practice.

• Abuse of the right to dismiss: a dismissal that lacks objectively reasonable grounds and is not considered appropriate in light of social norms is void (Article 16 of the Labor Contracts Act).
• Notice of dismissal: give at least 30 days’ notice or pay at least 30 days’ average wages in lieu of notice (Article 20 of the Labor Standards Act).
• Probation: no notice is required within 14 days of hiring, but dismissal still requires reasonable grounds.
• Fixed-term contracts: dismissal during the contract term is permitted only where there are unavoidable reasons.

Headcount reductions on the grounds of poor business performance may also be held void if carried out without following the proper steps. We recommend consulting a 弁護士 (attorney) or 社会保険労務士 (labor and social security attorney) as soon as dismissal is under consideration.

Additional checks when hiring foreign employees

• Confirm that the work falls within the activities permitted by the employee’s status of residence.
• When hiring or losing a foreign employee, file a report on the employment status of foreign workers with Hello Work.
• Attaching a translation of the notice of working conditions in the employee’s native language or similar helps prevent misunderstandings.
• Discriminatory treatment in wages, working hours or other conditions on grounds of nationality is prohibited (Article 3 of the Labor Standards Act).

For work visa requirements, see Hiring foreign employees and work visas.

Summary

Employment in Japan rests on four basics: stating working conditions, putting work rules in place, following the rules on working hours and wages, and respecting the limits on dismissal. Home-country contracts and internal policies need to be reviewed against Japanese law. Working with partner labor and social security attorneys and attorneys, TIMOA supports the preparation of notices of working conditions and work rules, the conclusion and filing of Article 36 agreements and preparations for hiring foreign employees. For details, see our IP, Risk & Compliance services.