Reforming Fixed-Term Worker Employment Practices

TSURU Kotaro
Senior Fellow, RIETI

Reforming fixed-term worker employment practices at the core of the problem surrounding non-regular workers

The treatment of temporary workers from staffing agencies has been the focus of policy debate over the problem of non-regular (hiseiki) workers in Japan. A sharp rise in the number of such temporary agency workers from around 2003, brought about by the relaxation of relevant regulations and a recovery in the Japanese economy, was followed by a steep decrease in such workers after the bankruptcy of Lehman Brothers, as companies rushed to terminate their contracts. Because of this remarkably drastic turn of events, the term "temporary agency workers" is sometimes used synonymously with the so-called "hiseiki workers," which literally translates as "non-regular workers" and refers to all workers other than full-time permanent employees. But, we must remember that temporary agency workers account for only 2%-3% of "employees" as defined in Japan's Labour Force Survey. Meanwhile, when we look at the labor force composition in terms of contract time frame, almost all non-regular workers are workers on fixed-term contracts (hereinafter, "fixed-term workers"). That is, although some part-time employees are on open-ended contracts and thus have permanent status, they are extremely limited in number. Therefore, broadly defining "non-regular workers" as "fixed-term workers" is the right approach, in our view, and considering the treatment of fixed-term workers will allow us to start, though belatedly, getting to the core of the problem of non-regular workers.

The government's New Growth Strategy endorsed by the Cabinet in June calls for promoting "equal and equitable treatment" of workers as one of key government strategies in the area of employment and human resources development. Furthermore, the Growth Strategy Implementation Plan, which sets out a timetable for implementing the strategy, stipulates that: the Labor Policy Council, a government advisory body, begin deliberations on problems surrounding fixed-term employment contracts this fiscal year (discussions at the council's subcommittee on working conditions are set to kick off on October 26) to draw conclusions and recommend necessary reform measures by the end of fiscal year 2011 (ending March 31, 2012); and the government take appropriate policy steps by fiscal 2013 to ensure the equitable treatment of part-time workers, fixed-term workers, and temporary agency workers, as well as promote a shift of those non-permanent workers to a permanent status. As it appears, starting with addressing the problem of fixed-term workers, the government intends and aims to consider ways to reform discriminatory employment practices against non-regular workers in a comprehensive manner, departing from the conventional, segmented approach.

It is a customary practice that prior to starting deliberations at the Labor Policy Council of the Ministry of Health, Labor and Welfare (MHLW), a study group of academic experts from relevant fields compiles a report to provide a basis for deliberations. Regarding the issue of fixed-term employment contracts, a study group report (in Japanese [PDF:449KB]) was published in September after a year and half of deliberations.

The report, though designated to serve as a starting point for reforming the problem of non-regular workers, did not attract much media coverage partly because of its failure to provide a clear direction of reform. However, it includes some ideas that are important in determining the future course of reform. In what follows, I will critically review the report and attempt to show how we should proceed with the reform of discriminatory employment practices against fixed-term workers.

Regulatory system for fixed-term employment in Europe

Points discussed in the study group report are diverse but, in a nutshell, the bottom-line question raised by the report is whether or not Japan should import European regulations for fixed-term employment. The regulatory system governing fixed-term employment in Europe is two layered. That is, the European Council directive on fixed-term work, adopted in 1999, sets out minimum requirements that must be followed by member states of the European Union, while each member state has its own set of national regulations. In terms of substance, European laws and regulations on fixed-term work can be broken down into four parts: 1) underlying philosophies or conceptual foundation of regulations, 2) provisions regarding the conclusion of fixed-term contracts (entry regulations), 3) provisions on working conditions, and 4) provisions regulating the termination and non-renewal of fixed-term work contracts (exit regulations).

First, with respect to underlying philosophies, labor regulations in most European countries provide that open-ended contracts (indefinite contracts with no specified contractual end date) shall be the contractual norm, and the EC directive on fixed-term work calls for protecting fixed-term workers against discrimination and preventing the abuse of fixed-term contracts. The EC directive does not mandate signatory countries to impose entry regulations, but individual countries - particularly those in Southern Europe - traditionally have such regulations that call for employers to provide objectively justifiable reasons - a temporary increase in demand, the seasonal nature of work, etc. - for hiring fixed-term workers. Meanwhile, in order to prevent abuse arising from the use of successive fixed-term employment contracts, the EC directive stipulates that signatory countries implement at least one of the following exit regulations: setting the maximum total duration of successive fixed-term employment contracts, limiting the number of renewals of such contracts, and requiring employers to provide objective reasons justifying the renewal of such contracts. Regarding the employment conditions, the EU directive prohibits discrimination against fixed-term workers unless justified on objective grounds.

Japan provides weak protection to fixed-term workers

In stark contrast to Europe, the United States does not embrace the idea of open-ended contracts as being the contractual norm, and neither does it have entry/exit regulations for the employment of fixed-term workers or regulations governing their working conditions. In the U.S., where restrictions on layoffs of permanent workers are not strict in the first place, companies have little incentive to hire fixed-term workers and hence the proportion of fixed-term workers in the total workforce is relatively low. Meanwhile, in Japan, though it is generally understood that indefinite employment is the norm, this perception has never been explicitly provided for in the relevant laws or regulations. Thus, there exist no entry regulations for the employment of fixed-term workers or regulations governing their employment conditions. On the exit end, no regulations are in place to protect fixed-term workers against abuse arising from the use of successive fixed-term employment contracts, while a doctrine on employment termination (application by analogy of the doctrine of abuse of the right of dismissal) has been established as a case law by court decisions. The Labor Standards Act stipulates that fixed-term labor contracts, in principle, are not to exceed a period of three years. However, this provision is not meant to regulate the exit from a contract but to bind both parties to the contract (the Civil Code provides that a fixed-term employment contract may be cancelled by either party but only with a "compelling reason"). That is to say that Japanese labor regulations - including the relevant provisions under the Civil Code - provide only for the binding force of contracts in terms of protecting both fixed-term workers and employers, and that overall regulations on fixed-term employment in Japan are far more weaker than those implemented in continental Europe and are rather closer to those in Anglo-Saxon countries. Accordingly, there is a relatively large divergence between permanent (infinite) and fixed-term workers in the strictness of employment protection (Figures 1 and 2). (*1)

Figure 1: International Comparison of Employment Protection Legislation (EPL) Indexes

Figure 1: International Comparison of Employment Protection Legislation (EPL) Indexes[ Click to enlarge (PDF:13KB) ]

Figure 2: Differences in Employment Protection Legislation between Permanent and Fixed-term Employment, and Degree of Deregulation of Fixed-term Employment

Figure 2: Differences in Employment Protection Legislation between Permanent and Fixed-term Employment, and Degree of Deregulation of Fixed-term Employment[ Click to enlarge (PDF:80KB) ]

As discussed above, the MHLW study group's report does not set any clear direction for government policies and I can only infer by reading between the lines. But, I have the impression that the study group, though having reservations about entry regulations, is positive about introducing exit regulations that involve setting limits for the number of renewals and the total duration of successive fixed-term contracts, as well as about clarifying the doctrine of employment termination and turning it into one with explicit rules. It also seems that the study group is pushing toward institutionalizing a mechanism that would ensure the equal treatment of fixed-term workers and/or pave the way for their shift from a fixed-term to permanent employment status. Now, how should we assess this direction set out by the study group?

European-style regulations are hard to import into Japan

First, we must understand that the EU regulations on fixed-term employment are extremely comprehensive and holistic, whereby component mechanisms or elements are complementary to one another and those components together constitute an integrated regulatory system that is consistent and coherent. Therefore, importing only certain elements of the EU regulations without consideration to the entire system would not do any good for Japan, or rather, could have unfavorable side effects. For instance, entry and exit regulations in Europe are ensured to be effective by complementing one another. In countries where demand for fixed-term workers is on the rise, entry regulations have been somewhat eased and exit regulations continue to function properly. This is because rules requiring employers to allow fixed-term workers to change to permanent status after a certain period of time are in place and function properly under the principle of indefinite employment as a norm. It is highly questionable whether introducing exit regulations alone will provide greater protection to fixed-term workers in Japan, as it may as well be the case that such an attempt would only lead to another - and much-anticipated - problematic situation where employers are motivated to terminate contracts with fixed-term workers in a preemptive manner.

Second, it is practically impossible to import an entire set of regulations from another country or region, no matter how excellent the regulations might be, if situations in the importing country significantly differ from those in the exporting country or region of origin. In Japan, where regulations on fixed-term employment have been relatively weak, the proportion of fixed-term workers is believed to have risen to a level that is among the highest in the OECD countries (*2). In addition, it has been traditionally considered in Japan that the renewal and continuation of fixed-term work contracts is good so long as it is based on an agreement between employers and workers, and employers have been encouraged to renew and continue fixed-term contracts over a long period of time. Given this historical background, the introduction of entry regulations or the principle of indefinite employment would not be an effective option for Japan.

South Korea, which faces the problem of non-permanent workers similar to that in Japan, introduced European-style fixed-term employment regulations in July 2007, including the prohibition of discriminatory employment practices and exit rules under which fixed-term work contracts can continue for the maximum period of two years and those workers employed beyond the two-year threshold are considered to be permanent workers. And today, it is not necessarily clear whether the new policy has resulted in an increase in the number of cases of temp-to-perm transitions. It seems necessary for Japan to learn from the experience of South Korea.

Best possible reform of fixed-term worker employment practices in Japan

What principle should govern the reform in Japan? First, Japan should not pursue indefinite employment as an explicit principle. Fixed-term employment per se and its continuation over a long period of time should not be considered as evil, and we should forgo the idea of introducing entry and exit regulations. On the other hand, it is necessary to put on some brakes to prevent an excessive increase in the number of fixed-term workers and create a mechanism to address the problems of job insecurity and discriminatory treatment. To achieve this end, provisions governing the treatment of workers should be defined as the main pillar of new regulations.

That is to say that Japan should consider qualitative regulations that would lead to improved treatment and greater diversity of fixed-term workers, rather than quantitative regulations exemplified by entry and exit regulations. Attempting to achieve strict equality would be unrealistic. Even so, Japan can and should consider a legal mechanism to deter discriminatory practices by creating a credible threat, that is, by ensuring that those employing fixed-term workers on objectively unjustifiable, extremely discriminatory terms and conditions will be severely penalized (Put into the language of game theory, this is a call to create a mechanism in which a sub-perfect equilibrium is established).

The problem of fixed-term employment, such as job insecurity and the termination and non-renewal of contracts, should not be left to the poorly-predictable doctrine of employment termination to judge as is the case today. Predictability should be improved by implementing and institutionalizing requirements for employers to present, at the time of contracting fixed-term workers, diverse types of fixed-term employment contracts, each containing explicit provisions on contract renewability and, if any, the maximum number of renewals. At the same time, policymakers should change their mindset, shifting to the idea of addressing the problem of job insecurity by means of enhancing compensatory programs, for instance, in terms of severance pay upon the termination of contract, other forms of monetary compensation, and outplacement support. Moreover, if a mechanism for reflecting the length of contract term on to the treatment of individual workers such as severance pay and wage rates is established (in a move to give consideration to the principle of pro rata temporis) takes root, it would provide momentum to the initiatives discussed above toward ensuring equitable treatment and facilitating temp-to-perm transitions.

Reforming fixed-term worker employment practices involves designing a new institutional system that is comprehensive, coherent, and appropriate to the realities of Japan. With no model to follow, this is going to be a very difficult task, and the task also carries immense responsibility. It is strongly hoped that the report released by the MHLW study group will serve as a starter for constructive discussions toward designing the best possible institutional mechanism.

Translated from the original Japanese text written on October 26, 2010.
  1. In 1985, Japan was already among the least strict in fixed-term employment regulations (Figure 1). The regulations were further eased over the past 20 years but the degree of deregulation (mainly in the area of employment of temporary agency workers) was not particularly large, ranked around the middle of the OECD countries (Figure 2).
  2. According to OECD statistics, the ratio of temporary workers in Japan stood at 13.7% in 2009. However, "temporary workers" defined by the OECD include only day workers and fixed-term workers employed for a duration of less than one year. Given the fact that the ratio of those employed for a period of one year or more to total fixed-term workers in Japan increased by 15 percentage points over the past 25 years, the ratio of fixed-term workers - including those on long-term contracts - has risen to about 25%, a level comparable to those observed in Spain, Portugal, and South Korea, the top three countries in the temporary worker ratio.

October 26, 2010