Future Course of Fixed-term Employment Reform: An assessment of the report of the Labour Policy Council's subcommittee

TSURU Kotaro
Senior Fellow, RIETI

A new direction for fixed-term employment contracts set by the Labour Policy Council

After more than a year of discussion, the Labour Policy Council's subcommittee on labor conditions, a government advisory panel, put forward its final report recommending a set of policy measures for reforming fixed-term employment contracts on December 26, 2012 (http://www.mhlw.go.jp/stf/houdou/2r9852000001z0zl.html(Japanese)). Based on this, the Ministry of Health, Labour and Welfare (MHLW) will amend the relevant laws and plans to submit bills to that effect to the current regular Diet session. Thus, the recommended measures can be defined as a key government policy in terms of setting a general framework for future regulatory reform regarding the treatment of fixed-term contract workers. In my earlier article for this column (Reforming Fixed-Term Worker Employment Practices, RIETI column No. 210, October 26, 2010), I discussed the direction of reforming discriminatory employment practices against fixed-term contract workers, which is the core issue of the problem of "hiseiki" or "contingent" workers, i.e., those other than permanent full-time workers. In what follows, I would like to point out some problems in the aforementioned government panel report in light of my arguments made in the article.

Maximum duration of successive fixed-term contracts may not protect workers

For a detailed background and explanation on the move toward reforming fixed-term worker employment practices, I would like to suggest that readers refer to my article mentioned above. In a nutshell, the focal point of the reform talks has been whether or not Japan, a country where restrictions on the employment of fixed-term workers are virtually non-existent, should introduce: 1) European-type entry regulations (restrictions on the conclusion of fixed-term employment contracts); 2) equal treatment regulations (prohibition of unfair treatment and discrimination by employment status); and 3) exit regulations (maximum total duration of successive fixed-term employment contracts, maximum number of renewals, etc. designed to ensure job stability and prevent abuse of fixed-term workers). As it turns out, the latest government panel report is very much in line with the overall conclusion drawn in a study group report on fixed-term work released in September 2010 (http://www.mhlw.go.jp/stf/houdou/2r9852000000q2tz.html(Japanese)), prior to the commencement of discussion at the Labour Policy Council's subsection on labor conditions, giving positive consideration to the introduction of exit regulations while taking a cautious stance on entry regulations. More specifically, the subcommittee called for introducing a system or exit regulations under which "fixed-term workers would be able to convert to permanent status upon their request once they have worked for the same employer on successive fixed-term contracts for five years (in which case the terms and conditions shall remain unchanged except for those concerning the contract period, unless otherwise provided)," while foregoing the introduction of a system or entry regulations that would prohibit the conclusion of a fixed-term labor contract without a rational reason.

In Europe, the relevant European Union (EU) directive obliges the member states to implement some sort of exit regulation on fixed-term employment, and most countries have set the maximum total duration at two to four years. In Japan, the Labour Policy Council's subcommittee has called for limiting the total duration to five years, which according to some media reports is nothing but a product of compromise between those subcommittee members representing the labor side, who insisted on three to five years, and those representing the management side, who demanded seven to 10 years. Meanwhile, although the mechanism appears to favor workers, employers may create a situation where fixed-term workers find it difficult to request conversion to a permanent position. Or even if employers allow temporary-to-permanent conversion, the "unless otherwise provided" clause in the subcommittee's report may provide them with a loophole to offer unfavorable terms by means of "other provisions." The greatest concern is the possibility of a rise in the number of cases where those who have been able to continue to work by renewing fixed-term contracts may be terminated uniformly before their service period reaches the five-year limitation. In the area of labor, it is often the case that the uniform imposition of mandatory regulations does not necessarily help protect or benefit workers. As it appears, the subcommittee's proposal is no exception.

Then, how can we improve the situation? The five-year limit on the total duration of fixed-term employment contracts is not necessarily far off the mark even though it may be a product of compromise between the labor and management. According to Genda (2010) (Note 1), who analyzed conversion from contingent to permanent employment, those quitting after working in a contingent job for some time are most likely to land in a permanent job when the duration of work in the previous job is two to five years. In other words, having five years of continuous work experience is taken as a sufficient sign of having the ability to work in a permanent position and the propensity to stay on the job. If so, defining the five-year period positively as a "try-out" period—rather than as a threshold triggering unconditional conversion to permanent status—will benefit both workers and employers.

Introducing the tenure track system to provide a foothold for permanent employment

More specifically, the five-year period should be defined as the maximum contract period for fixed-term workers (i.e., the maximum contract period under the Labor Standard Act should be extended from the current three years in principle to five years), not as the maximum total duration of successive fixed-term employment contracts. At the end of the contract period, employers would be given two choices; they can either continue to employ the worker by offering a permanent position or simply terminate employment at the end of the contract period. By closing the way for employers to continue to employ workers by renewing fixed-term contracts, this system would be able to prevent the abuse of fixed-term contracts effectively. We can see this as a tenure-track system under which five years of fixed-term employment is a probation period. We must not forget that it is widely recognized in Europe that fixed-term employment is a foothold for permanent employment, which is the reason why the EU directive on the maximum total duration of successive fixed-term contracts functions properly. In Japan, we should promote the adoption of a tenure track system, such as the one mentioned above, to change the perception and the fixed-term employment system gradually.

Meanwhile, regarding equal treatment regulations, the subcommittee's report calls for eliminating unreasonable treatment on the grounds of differences in employment status depending on whether the employment period is for a definite or indefinite period, stating that "terms and conditions for (fixed-term contract workers) should be determined in consideration of the nature and types of tasks, scope of potential changes in job assignments, etc., and must not be unreasonable, or perceived to be unreasonable, on the grounds of their being on fixed-term contracts." This approach is applicable in addressing other problems surrounding contingent workers, for instance, unequal treatment between part-time and full-time workers. Indeed, another Labour Policy Council subcommittee, which is currently discussing the treatment of part-time workers, seems to be exploring the possibility of adopting such an approach. I have been arguing that if we are to learn from Europe, we should introduce equal treatment regulations that prohibit unfair treatment without reasonable grounds as a deterrent against extreme inequality in treatment (see Mizumachi (2011) (Note 2) for detailed mechanisms and the points of discussion). I strongly hope that future discussion for the reform of fixed-term employment will move in the direction of putting greater weight on qualitative regulations designed to improve the treatment of fixed-term contract workers, rather than on quantitative regulations that forcibly restrict the practice of fixed-term employment.

February 14, 2012
  1. ^ Genda, Yuji (2010). "Hiseiki Koyo karano Dasshutsu [Breaking out of Contingent Work]," Chapter 4 in Ningen ni Kaku wa nai: Ishikawa Tsuneo to 2000-nendai no Rodo Shijo [There are No Ranks among People: Tsuneo Ishikawa and the Labor Market in the 2000s], Minerva Shobo.
  2. ^ Mizumachi, Yuichiro (2011). "Doitsu Rodo Doitsu Chingin wa Genso ka?: Seiki/Hiseiki Rodosha-kan no Kakusa Zesei no tameno Hogensoku no Arikata [Is Equivalent Wages for Equivalent Work an Illusion?: Legal principles for eliminating the disparity between regular and non-regular employees]," Chapter 11 in Tsuru, Higuchi, Mizumachi (Ed.) Hiseiki Koyo Kaikaku: Nippon no Hatarakikata o Ikani Kaeruka [Non-regular Employment System Reform in Japan: Changing the way people work], Nippon Hyoronsha. See also RIETI Discussion Paper Series No. 11-J-059 (abstract available in English) under the same title.

February 14, 2012