What is the Conversion Rule?

The rule concerning conversion to permanent employment contracts (the ‘Conversion Rule’) applies to fixed-term employees who have been continuously employed under fixed-term contracts with the same employer. Under the Conversion Rule, if a fixed-term employee’s contract term is more than five years in total as a result of renewal, then that employee may, by the date of expiration of the current term of his or her contract, request that his or her employer execute a contract without a definite term (i.e. convert to a permanent employment contract) starting on the day following the expiration date. If the fixed-term employee makes this request, the employer shall be deemed to have accepted and a permanent employment contract shall come into effect (Article 18 of the Labour Contract Act).

By way of example, a fixed-term employee who has been continuously employed under a succession of one-year fixed-term employment contracts may, pursuant to the Conversion Rule, request conversion to a permanent contract during a period from the first day after his or her fixed-term contract is renewed for the fifth time until the expiration of the sixth year of employment. In that case, the fixed-term employment contract will be converted following the expiration of the sixth year of employment.

By contrast, a fixed-term employee who has been continuously employed under three-year fixed-term employment contracts may, pursuant to the Conversion Rule, request conversion to a permanent contract during a period from the first day after his or her fixed-term employment contract is renewed for the first time until the expiration of the sixth year of employment. As in the former example, in this case, the fixed-term employment contract will be converted when the sixth year of employment ends.

The Conversion Rule will apply to employees on fixed-term employment contracts regardless of how their employment status is described (e.g. contract employee, contingent employee, non-regular employee, part-time employee, or dispatched employee) or their working hours, job type or purpose of employment. The Conversion Rule, therefore, will affect many companies employing fixed-term employees.

Article 2 of the Supplementary Provisions of the Amended Labour Contracts Act provides that Article 18 of the Labour Contract Act shall apply to fixed-term employment contracts executed or renewed on and after 1 April 2013. Accordingly, it is expected that from April 2018 cases of fixed-term employees who have been on fixed-term contracts for more than five years exercising their right to request conversion to a permanent employment contract will increase.

How should employers prepare?

In advance of fixed-term employees requesting permanent contracts, companies are advised to take appropriate preparatory measures. The main action points are set out below.

1. Employee review

Confirm the number of fixed-term employees who are currently employed, the number of times the contract of each such employee has been renewed, the total period for which each such employee has been employed, their work duties, responsibilities and other relevant circumstances. Organisations should also review and consider the types of work that will be assigned to each category of fixed-term employee.

2. Review terms and conditions

Consider the terms and conditions of employment that will apply to employees entitled to request conversion after their contract becomes permanent. Establish new or amend the existing rules of employment if the terms and conditions that will apply after conversion are different from those applicable before conversion. Differences may include a new retirement age, or a different retirement age for fixed-term employees whose contracts are converted to permanent contracts after they have reached retirement age (the so-called ‘second retirement age’). The terms and conditions of employment that apply after conversion may also be different from those applied to other permanent employees who are hired under permanent contracts (e.g. if the rules on retirement allowance applicable to other permanent employees will not be applied to converted employees).

3. Amend employment rules

Amend the rules of employment which are applicable to fixed-term employees to include a provision regarding the procedure to request conversion to a permanent employment contract.

4. Keep employees informed

Inform fixed-term employees of their rights under the Conversion Rule by, for example, holding an explanatory meeting or distributing documents.

5. Take action required for establishing or amending employment rules

In addition to the above, when establishing new rules of employment or amending existing rules of employment, take any action required by applicable laws and regulations such as notifying the director of the relevant labour standards inspection office of the new or amended rules of employment (Articles 89 and 90 of the Labour Standards Act) and informing employees of any new or amended rules (Article 106 of the Labour Standards Act).

6. Exercise caution in choosing not to renew fixed-term contracts

In order to prevent a fixed-term employee from being entitled to request conversion, organisations may wish to stop renewing the employment of fixed-term employees before the five-year limit is reached. However, refusing to renew a fixed-term employment contract upon its expiration solely to impede the right to request conversion to a permanent contract may be found illegal (in breach of Article 19 of the Labour Contract Act).

Exceptions to the Conversion Rule

The Act on Special Measures concerning Fixed-term Employees with Expert Knowledge and Skills (the ‘Act’) provides an exception to the Conversion Rule. Specifically, the Act states that:

• Any fixed-term employee with particular expert knowledge and skills who engages in a project that is contemplated to be completed within a certain period which is more than five years and receives a salary above a certain level (no less than JPY 10.75 million per year) is not entitled to request conversion of their employment contract to an indefinite term during a period of up to ten years, for which the fixed-term employee engages in such project.
• Any employee who is continuously employed under a fixed-term employment contract after having reached retirement age shall not be entitled to request conversion of their employment contract once retirement age is reached.

Employers seeking to apply these exceptions are required to prepare a plan ensuring that they will make effective use of the abilities of the employees subject to this exception. Furthermore, these employers must obtain certification from the director of the prefectural labour bureau with jurisdiction over the company’s headquarters or principal office. Since the number of applications for certification has been increasing nationwide, the prefectural labour bureaus have requested that organisations wishing to obtain certification by the end of March 2018 file their applications by January 2018. Therefore, employers wishing to obtain certification need to accelerate their application processes.