In Japan, the common standard for employment contracts has been indefinite employment agreements. This essentially means that the employee is hired by the company on an open-ended contract and is protected by Japan’s labour law.
In recent years, as more multinational companies enter the Japan market and as Japanese companies evolve to become more competitive to hire top talent, we are seeing a rise in fixed-term contracts for various reasons.
Let’s take a look at the reasons behind the rise in fixed-term contracts, what advantages and disadvantages there are both for employer and employee, and cover what the market still expects.
The gold standard = forever contracts
Japan’s employers typically see a responsibility to take care of employees and give them a place for life. This is reflected in the structure of employment contracts, which tend to be open-ended and have an indefinite term.This type of contract is how almost all new Japanese employees entering the workforce will be structured. For the majority of Japanese employees who have also changed jobs a couple of times, all of their employment contracts will also have been structured this way.
Thus, when a Japanese candidate receives a new offer of employment, the base-level expectation is that your offer will be a permanent, open-ended, indefinite employment contract. For most people, to receive otherwise, for example, a one-year fixed-term contract, is seen as a risk.
In Japan, stability tends to be valued higher than upside opportunity. The image of stability that an indefinite contract gives, as well as the structural protections in place for permanent employees, are attractive for most conservatively minded Japanese professionals.
Rise of the fixed-term contracts
Over the last five years, the number of companies offering fixed-term contracts has significantly increased. We can broadly divide these companies into two groups.
Firstly, let’s look at multinational companies that wish to manage risk. Japan has a reputation, rightly so, for being a very difficult market to fire people, make them redundant, or otherwise let them go. Many new employers, especially investors or developers, are reluctant to make hiring decisions and take on 100% of the risk of making a mis-hire and being stuck with that person.
Secondarily, some companies entering Japan’s market recognize how competitive it is. If the business fails to meet targets, they want the option to scale back or exit the market quickly. The primary reason for offering fixed-term contracts is therefore risk mitigation, with much of that risk effectively shifted onto employees.
Japanese companies are the second type of company utilizing fixed-term contracts looking to become more competitive to secure top-level talent. With the Japanese permanent employee system, professionals are put into a highly structured, graded employee promotion cycle, which gives limited wiggle room for fast-track promotions, salary increases, or creativity in role and benefits. Hiring on a fixed-term contract, however, allows these companies to circumvent those rules and hire people under a different system.
As the employees are not typical permanent employees, the company’s HR department and business leaders have more freedom to offer more competitive salary packages, offer more senior positions to younger talents, or otherwise be more flexible in the working conditions offered.
Why has this come about in Japanese companies that already have a large number of employees? The reason is largely because the bulk of hiring for large Japanese companies is done via new graduate programs. The speed of change and evolution in the energy industry has meant that the talent that companies hired 10 to 15 years ago may not be the talent required to drive the company forward today.
In order to attract experienced talent, Japanese firms must go into the mid-career executive-level markets in direct competition with well-financed, aggressive multinational competitors. This means the type of talent they are looking to attract are typically professionals who have already made one or two career moves and are the type of person who has increased their monetary value and has a higher risk tolerance.
Realities and limitations
1) Market expectation to shift to permanent: In many cases, the employing company may wish to initially hire on a fixed-term contract. This may be three, six, or twelve months in most cases, and the rationale behind this is risk mitigation for the employer.
Typically, this can be framed as a probation period. At the end of this period, the expectation is that the contract will be transferred to a permanent, indefinite version, typically under the same employment conditions, salary, and benefits.
2) The Five-Year Rule: Under Japanese labor law, the maximum length of any single fixed-term employment contract is three years, and the maximum amount of time for consecutive role in contracts is five years.
This means that for both multi-national companies looking at hedging their risk or Japanese companies looking at offering an alternative salary and employment structure to their employees, they have a five-year window. After this time, they will need to make that employee permanent under a standard indefinite employment contract.
Is it easier to let someone go? Japan is infamous for being difficult to fire. You need to either have material proof of a severe breach of contract or, in the case of a performance firing, clear reviews and documentation of poor performance. Efforts to improve performance and continued documentation showing this has failed are required in order to legally justify the decision. In the case of fixed-term contracts, it is also difficult to fire somebody based on performance mid-term.
Therefore, if you offer a 12-month contract to mitigate the risk of a mis-hire and, six months in, you wish to let that person go, you still face the same challenges as you would with an indefinite contract. For the purposes of mitigating this higher risk, it was advisable to initially start with either a three- or a six-month contract and essentially treat this as a probation period.
3) Paying the risk premium: Finally, as mentioned, a typical expectation is an open-ended, indefinite contract because most Japanese professionals value stability. In a competitive market such as today, if your firm hires on a fixed-term contract, this will be seen as a risk by the employee.
4) Make your offer attractive is highly advisable: To pay a salary and/or offer benefits that are over and above what would be expected under an open-ended contract. Think of this as a risk premium in insurance. At the end of the day, you’re shifting the risk from yourself onto the employee, and that has a real-life cost.
Andrew Statter is a Partner at Titan GreenTech, an executive recruitment agency focused on the clean energy space.