KOJIMA LAW OFFICES
Labor Practice Group

Vol. 1 August 2013

Labor & Employment Law Newsletter
Expanding Employment of the Elderly
Options for companies to deal withretiring employees under the amended
Act on Stabilization of Employment ofElderly Persons

following measures to secure stable
employment for its employees until theage of 65, and to amend their work
rules (“shugyo-kisoku”) and/or theemployment agreement accordingly:

Outline of the Amendment
Act on Stabilization of Employment ofElderly Persons (the “Act”) wasamended in 2004 and 2012. Theseamendments require companies totake measures to secure stable
employment of workers over the age of
60 to ensure that people can keep
working until the age of 65.
BackgroundIn response to the rapid increase inJapan’s elderly population, theJapanese government had no choice
but to reform the public pension
system. Prior to the 2000 reforms,
employees could receive both a fixedpension payment and an earningsrelated pension payment (“Earningsrelated Pension”) when they turned 60.
Following the reform, the eligibility age
for the fixed pension payment wasraised in stages from 60 to 65 between2001 and 2013. Similarly, the eligibility
age for the Earnings-related Pension
will be raised in stages from 60 to 65
between 2013 and 2025 (see “Overview of Transitional Measures” on nextpage). Because many Japanesecompanies had set their mandatory
retirement age at 60, certain employees between the ages of 60-65 that do
not yet meet the new pension eligibility
age would now be forced to live
without any income until they became
eligible. To deal with this issue, the Act
was amended in 2004 and 2012, allowing employees to work until age 65.
The 2004 amendment requirescompanies to adopt one of the(1)
(2)

(3)

Raising the mandatory
retirement age to 65;
Adopting the “ContinuedEmployment System”
under which employees
may choose to continue
working beyond the age of60; orAbolishing the mandatory
retirement age entirely.

Measures (1) and (3) are fairly straightforward, and only minimal revisions tothe work rules may suffice to comply
with the 2004 amendment. However,
because companies were allowed toexclude certain employees by establishing criteria in their labor-management agreements, many companies
adopted measure (2) in order to be able
to manage and minimize any increase inlabor costs. In fact, leading companies
such as Toyota and NTT have reportedlyadopted the Continued-Employment
System by selecting measure (2).
The Act was amended again in 2012
(effective April 1, 2013) to addresscertain issues left unresolved by theearlier amendment. For instance, evenunder the Continued-Employment
System, those who meet the criteria
established in their labor-managementagreements but are not yet old enoughto receive their pension might not earn
any income until reaching their eligibilityage. In addition, it can be prohibitively
expensive for companies to keep all ofContents
Expanding Employment of the Elderly ... 1Amendments to theEmployment Contracts Act .................... 3
Message from the Labor Practice GroupKojima Law Offices have provided legal
services in the area of labor law since its
founding in 1984. Our Labor PracticeGroup represents clients in labor disputes
and assists them in structuring and implementing HR policies. We work with bothforeign headquarters and local management to timely and appropriately resolve
employment issues that overseas
companies face operating in Japan.
As part of our continuing effort to reachout and share our expertise with others,
the Labor Practice Group is proud to belaunching the premier issue of our “Labor& Employment Law Newsletter”. Our hopeis to provide a better understanding of thiscomplex area of law, thereby enabling thereader to make more appropriate employment and labor decisions. We hope youfind our newsletters both interesting andinformative and welcome any feedback
you wish to share with us.
Labor Practice GroupKojima Law Offices

their employees over 60 on payroll
without the flexibility to transfer thoseemployees to subsidiaries and otheraffiliated companies. In response tosome of these problems, the main
provisions of the 2012 amendment

Labor & Employment Law Newsletter© Kojima Law Offices 2013

Kojima Law Offices
Labor & Employment Law Newsletter

provide as follows:

(1)

(2)

(3)

In principle, companies
adopting the ContinuedEmployment System arerequired to abolish the existing
criteria set forth in theirlabor-management agreements. However, as atransitional measure,companies can apply thecriteria to those who become
eligible for their Earningsrelated Pension between 2013and 2025 (see “Overview ofTransitional Measures” below);
The scope of companies
allowed to employ workers
covered by the ContinuedEmployment System isexpanded to include parent
companies, subsidiaries andother affiliated companies; andThe government can makepublic the names of companies
in breach of the Act.

Summary of Continued-Employment
SystemTo adopt the Continued-Employment
System, companies should choose fromVol. I August 2013

one of the following two schemes:(i) Continuing Employment
The term of employment will beextended and the current employment contract will continue to be inforce until the employee reaches 65(with or without changes inemployment conditions); and(ii)Re-Employment

The current employment contract
will be terminated and the company
will offer a new employment
contract (the conditions for the newcontract usually differ from those of
the previous contract).
A company should carefully
consider which scheme is mostappropriate for its unique set ofcircumstances. Because the Act
does not require companies tomaintain the same employment
conditions as before, companies
can alter those conditions (e.g., thetype of job, remuneration andbenefit plan) for the employees
covered by the ContinuedEmployment System.

Some companies have alreadyestablished criteria in their labormanagement agreements to limit
persons covered by the ContinuedEmployment System under the 2004
amendment. With the 2012 amendment, these companies can take up to
12 years to transition to the new system
by applying the existing criteria tocertain employees while concurrently
applying the new standards to the rest of
their employees (see “Overview ofTransitional Measures”). Furthermore,
the companies themselves are notrequired to employ the employees
covered by the Continued-Employment
System. Instead, they can transfer theemployees to a group company, as
shown in the chart below.
<Companies Employing the Elderly>
Parent Company

Affiliates
CompanyAffiliates
Subsidiary
Owing majority of shares
Owing 20% or more shares<Overview of Transitional Measures>*Available on the website of Ministry of Health, Labour and Wealth:2

http://www.mhlw.go.jp/english/policy/affairs/dl/01.pdf

Labor & Employment Law Newsletter© Kojima Law Offices 2013

Kojima Law Offices
Labor & Employment Law NewsletterVol. I August 2013

Amendments to the Employment Contract Act
When is a fixed-term contract not a
fixed-term contract?

5 years(1)
Outline of Amendments
The Employment Contract Act wasamended to provide a measure ofjob security to non-regular
employees. The amendments tookeffect on April 1, 2013 and requirecompanies to grant open-ended
employment status to employees
who have worked for five years
under fixed-term contracts.
Background
Japanese companies used toboast about offering theiremployees “lifetime employment”.
With the prolonged downturn inthe economy, however, fewer andfewer employees have been able
to attain this coveted status.
According to data published by
Japan’s Ministry of Internal Affairs
and Communications, thepercentage of non-regular
employees, including fixed-term,
part-time, and dispatchedemployees, increased to 35.2
percent of the total workforce in2012 (up from only about 20
percent in 1992). Some of thereasons behind this shift are likely
the lack of at-will employment inJapan and the difficulty companies
face in laying off workers. Manycompanies therefore came to view
non-regular employment as aneffective way to maintain flexibility
in adjusting the size of theirworkforce. However, with morethan a third of workers now
classified as non-regular
employees, the almost complete
lack of job security that comeswith non-regular employment has
become a significant concern. The
Act was amended to address thisissue.
The amendment resulted in threemajor changes to the Act.

3(2)

(3)

Companies must now grant
open-ended employment
status to employees who haveworked for five years under
fixed-term contracts.
The criteria for how a company
can validly decline to renew a
fixed-term employment
contract are now codified in
the Act.
The Act prohibits companies
from providing non-regularemployees with less favorable
employment conditions thantheir regular employees.

Even prior to the amendment,
companies were effectively required
to comply with items (2) and (3), theunderlying principles of which werealready established by case law.
Item (1), however, is new andrepresents a potentially significant
burden on companies.
Granting open-ended employment
to workers who have worked forfive years under fixed-term
contracts
A company must grant open-ended
employment status to fixed-term
employees who request regular
employment and who meet therequirements listed below. If theemployee exercises the option, thefixed-term employment will automatically be “converted” into openended employment status upon
expiration of the fixed-term employment contract that was in effect at
the time the employee exercised theoption (see chart below).
(a)

The employer and employee
have entered into two or
more fixed-term employmentcontracts; and(b)Under those fixed-term
employment contracts, theemployee has worked for a
total of at least five years.

Exercise Option↓5 years contract

5 years contract

Open-ended employment

RenewalConversion

5 years

Exercise Option↓2 years contract 2 years contract 2 years contract Open-ended employment

RenewalRenewal Conversion

After automatic conversion toopen-ended employment status, itwill be very difficult for the company
to terminate converted employees.
To do so, the company would needto comply with the stringent
requirements for dismissal in Japan.
Conversion does not automaticallyresult in any changes to theemployment conditions ofemployees who exercise theirconversion options (apart from theterm of employment, of course). The
result is that employment conditionsof the fixed-term employment
contract such as wages, paid
holidays, and benefits will remainunchanged under the new
open-ended employment status.
Recommended Action
Companies should review their work
rules and amend them, if necessary,to clarify whether the rules apply to“converted” regular employees.
As noted above, except for the term ofemployment, the employment
conditions remain unchanged when afixed-term contract is converted to anopen-ended contract. This effectively
means that the employment
conditions of the fixed-term contract
will continue to apply. Employers may
face problems, however, because thework rules often state simply that therules will apply to all regular
employees without clarifying whether
the rules also encompass “converted”
regular employees.
If there are any differences inemployment conditions between thefixed-term contract and the work
rules, the conditions set forth in theLabor & Employment Law Newsletter© Kojima Law Offices 2013

Kojima Law Offices
Labor & Employment Law Newsletter

fixed-term contract that are lessfavorable to the employee thanthose of the work rules can benegated and replaced by the work
rules. The employer can establish
different sets of work rules
depending on the status of theemployee. Therefore, companies
should carefully review and, if
necessary, amend their work rules
and/or establish another set ofwork rules tailored for “converted”
regular employees to avoid
potential problems.

Vol. I August 2013

Labor Practice GroupPartnerCounsel/Associates

Hiromasa Ogawa

Izumi Okada
Darcy H. Kishida*
Hitomi Sakai
Hirokazu Amemiya
Norio Mitsuuchi
Minoru Saito
Tatsuro Terada
Seizaburo Taira

Please visit our website for
additional information about
Kojima Law Offices:
http://www.kojimalaw.jp/en/index.html
To report changes to yourcontact information or tounsubscribe to thisnewsletter, please contact:
newsletter@kojimalaw.jp

Ayako Shinmura
Tel: +81 3 3222 1401
* Mr. Kishida is licensed to practice law in Hawaii,
New York and Washington, D.C. and provided
editorial assistance for this newsletter.

The contents of this publication, current at the date of publication, are for reference purposes only. They do not constitute legal advice
and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately
before taking any action based on this publication.

4

Labor & Employment Law Newsletter© Kojima Law Offices 2013