JILPT Research Eye
Findings from Surveys on the Amended Labor Contract Act^{[Note 1]}

September 7, 2017
(Originally published on September 28, 2016 in Japanese)

（Revised adding supplementary explanations of the Amended Labor Contract Act and so on.）

Yuko WATANABE

Researcher, Research and Statistical Information Analysis Department

To assist in the preparation, implementation and evaluation of labor policy, the Japan Institute for Labour Policy and Training conducts comprehensive research on labor issues. As part of this, I have been involved in research on part-time workers and fixed-term contract workers, among others.^{[Note 2]} And now, I am responsible for research on the August 2012 Amendment to the Labor Contract Act.

How are companies planning to cope with the conversion rule to open-ended contract?

Fixed-term contract workers have been pointed out the fact that employment is unstable, safety nets are inadequate, wages are low, and opportunities for vocational development are scarce. To deal with these problems, the following amendments were added to the Labor Contract Act (Act No. 128 of December 5, 2007). What newly enacted are (1) Conversion rule to open-ended contract (employment without periods) (Article 18), (2) The doctrine of contract termination allowed under case law (Article 19), and (3) Prohibition against the unreasonable labor condition by providing fixed-term contract (Article 20) . Among them, the rule (1) enables fixed-term contract workers apply for open-ended contracts (the employer will be deemed to have accepted such requests), when the fixed-term contract has been repeatedly renewed for a total exceeding five years. Such amended Act came into full force on April 1st, 2013, and ongoing efforts are being made to penetrate its purpose and content.

I conducted two company questionnaire surveys on these rules ^{[Note 3]}. As a result, I got some unexpected results concerning the conversion rule to open-ended contract. Because the first survey in 2013 was conducted just three months after the full enforcement of the Act, the most common response was “Policy undecided or unknown.” However, the second most common was (ii) “Will convert to open-ended contracts when fixed-term contract workers serving for more than five years request,” and the ratio of (ii) far surpassed that of (i) “Will arrange for fixed-term contracts not to exceed five years, including renewals. ”

When the response (ii) is added to (iii) “Will convert to open-ended contracts before the five years are up, depending on the fixed-term contract workers' aptitude,” and (iv) “Will only use open-ended contracts (i.e. will no longer hire fixed-term contract workers),” the ratio of companies planning to convert to open-ended contracts in one form or another was as high as 42.2% for full-time fixed-term workers and 35.5% for part-time fixed-term workers (Figure 1).

The trend toward conversion to open-ended contracts progressed further in the second survey held two years later in 2015. Not only had the ratio of “policy undecided” and “no reply” decreased compared to the previous survey, but the ratio of (i) had also fallen by half. Instead, the number of companies that would convert to open-ended contracts in one form or another, had significantly increased by 23.9 points to a total of 66.1% among companies employing full-time fixed-term workers, and by 27.6 points to a total of 63.1% among those employing part-time fixed-term workers.

Figure 1. Company policies on the conversion rule to open-ended contract

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Why so many companies were positive about the conversion rule to open-ended contract in the 2013 survey?

So why so many companies were positive about the conversion rule to open-ended contract in the 2013 survey conducted soon after the amendment? One reason, as pointed out in the accompanying interview survey, was that “There was no maximum limit on renewals since long before.” Another reason was that “Workers who have served for more than five years are, in effect, already in permanent employment situation, and their contract renewals cannot be simply terminated nor would there be any intention of that.”^{[Note 4]}

The situation before the amendment can be confirmed in “2011 Survey on Actual Situation of Fixed-Term Labor Contracts 2011” conducted by the Ministry of Health, Labour and Welfare (MHLW). This shows, only 12.8% of employers set a maximum limit on fixed-term contract renewals (or 12.3%, in length of total employment), while 40.1% of employers responded that they want fixed-term contract workers to keep working “as long-term as possible”. In fact, 33.6% of employers have renewed contracts repeatedly for a total exceeding five years.

In the interview survey, meanwhile, a reason given for the response (iii)“Will convert to open-ended contract before the five years are up, depending on the fixed-term contract workers' aptitude” was that “We have merely used the fixed-term contract as a trial employment period.” Similarly, 13.1% of employers cite “To see if they have aptitude as regular employees,” as one of the reasons for employing fixed-term contract workers (multiple response up to the first 3). Again, 52.0% of employers using fixed-term workers have “A system of conversion to regular employees,” and 23.1% of those have experiences such conversions “To a certain degree.”

Based on the situation above, I conducted the following multinomial logistic regression analysis using the 2013 survey. The dependent (explained) variable is which policy was adopted, to cope with the conversion rule. And the independent (explanatory) variables include combination dummy that was created by　the setting circumstances of a maximum limit on contract renewals and the situation of introducing inner programs or having experiences of conversion to regular employees.

The results are shown in Figure 2. Looking at the companies that have set no limits on contract renewals but had inner programs or experiences of conversion to regular employees, a significant correlation can be seen only for the policy (ii) / (iii) or (iv), in comparison to the companies having neither of these features (Model 2). On the other hand, the more conspicuous tendency can be seen to adopt the policy (i) among companies that have only set limits on contract renewals. In other word, these results suggest that companies are likely to adopt the policies acclimated to the method of employment management that continues since before the amendment.

In addition, with regard to the main industries and workers scale (Model 1), the level of significance often either disappears or weakens when the combination dummy variables are added. This means that the relation between the policies on the conversion rule and the main industries or workers scale are only a superficial matter but practically a mediated relation by the methods of employment management.

The methods of employment management should have been certainly introduced and revised in line with employment practices, business strategies of each company, and their aims in developing human resources, among others. Therefore, it would be reasonable to think,　at least for the time being that their company policies to deal with the conversion rule also lie on an extension of those circumstances that continued since before the amendment. This would appear to suggest that companies’ response to legal amendments and other changes tends to depend on their existing methods of employment management.

In this survey, moreover, companies were asked to choose only one response that best fits their policies (applies to more workers) to the open-ended conversion rule for each of full-time and part-time workers. Therefore, the immediate response rationally selected under the current situation where there are quite a few fixed-term contract workers who have already served for a total exceeding five years, could differ from the response in future when newly hired workers would be increasing more. This kind of research needs to be continuously conducted to grasp changes of the situation.

Figure 2. The Estimation Results by the Multinomial Logistic Regression Analysis

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Why were even more companies positive in the 2015 survey?

So why did the ratio of companies that were positive about conversion to open-ended contracts increase, in the 2015 survey? The reasons for this change can be found in replies on their benefits and problems of open-ended conversion (Figure 3). Firstly, as one advantage of open-ended conversion (multiple answer), more companies expressed that they “Can expect employees to serve longer” (10.8 point increase from the previous survey) and that it “Will become easy to secure personnel periodically” (11.1 point increase). Amid a rising sense of crisis over manpower shortages, companies are trying to keep hold of human resources by converting to open-ended contracts.

Meanwhile, as a problem that could affect employment management when converting to open-ended contracts (multiple answer), “The impact on new hiring of regular employees” decreased by 7.1 points. Given the difficulty of hiring new graduates and other new recruits in a seller’s market, and the fact that many baby boomers are reaching final retirement, fears of negative impact on manpower problems may well have been relieved.

Moreover, although more companies are planning to convert fixed-term contract workers to open-ended contracts in a form or another, there has also been an increase in the ratio of “No replies” regarding the employment type of open-ended conversion. Based on the situation of "labor shortages", while the momentum toward conversion to open-ended contracts in one form or another is gathering even, there seem to be many companies that have yet to completely determine the details.

In that sense, companies’ response to law amendments and other changes is easily influenced by the economic and employment situation. This would appear to suggest that the timing of enforcement is also important when discussing the impact of law amendments and other changes. Further, as for the survey results concerning the policy to the open-ended conversion rule, it should be borne in mind that circumstances would easily change, if faced with a sudden economic crisis.

Figure 3. Benefits and Problems of Converting to Open-Ended Contracts

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What will open-ended conversion have meaning to fixed-term contract workers?

If the positive attitude toward the conversion to open-ended contracts would probably truly be actualized, what significance would it have for fixed-term contract workers? In this regard, some hints can be found in the interview survey.

For example, one labor union, which had achieved open-ended conversion of all fixed-term contract workers, expressed: “It enabled us to break the barrier to open-ended contracts which would never have been easily changed, in spite of the fact that fixed-term contracts were repeatedly renewed and the company considered as being the almost same as open-ended employment. Now, workers are grateful that they can serve without any feelings of employment uncertainty. Furthermore, the bosses’ authority on contract renewals has been completely wiped away, and the workplace atmosphere also seems to have been improved.”

Another union had managed to reach an agreement on allowing fixed-term contract workers serving a total of more than five years to request conversion at any time. The union commented that “Since before, we had been striving to expand conversion to regular employees, by creating a new category for non-career workers. Nevertheless, that category still requires workers to reach a certain standard of skill and obtain recommendation from a superior, as well as passing a promotion test. On the other hand, under the new system of conversion to open-ended contracts, anyone serving more than five years can apply for, and they can also get the subsidiary safety nets (e.g. sick leave, ease of use of paid holiday). Because fixed-term contract workers are very various, we need to have schemes for gradually promoting or steadily converting them to employment formats that match their wishes.”

Although the survey is still in process, the rigid linkage between fixed-term contracts and the limited labor conditions such as contents of work, working hours, and the range of working locations are being dissolved, and the atmosphere of tolerating diverse employment formats within open-ended contracts is being fostered.

Related to this point, I also conducted the following multinomial logistic regression analysis. The dependent (explained) variable is which policy was adopted to the conversion rule. And the independent (explanatory) variables include “utilization reason (multiple answers) dummy of fixed-term contract workers.”

As a result, the policy (i) “Will arrange for fixed-term contracts not to exceed five years, including renewals” tended to be adopted in connection with the reason “To periodically replace workers,” among others. Conversely, in cases where fixed-term contracts have been used “Because working hours, personnel systems and others differ from those of regular employees,” another policy (ii) “Will convert to open-ended contracts when fixed-term contract workers serving for more than five years request” tended to be adopted more (Figure 4).

If those were the reasons, there would have been little necessity to set a fixed (specified) -term contract, I think. That's because the companies could have established employment categories under working conditions that differ from those of regular employees, even with open-ended contracts. In that sense, taking the open-ended conversion rule as a stimulus, a possibility is suggested that utilization for this kind of reason could be corrected in a more appropriate direction.

Figure 4. The Estimation Results by the Multinomial Logistic Regression Analysis

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