Termination of Fixed-Term Employment Contracts in Japanese Labor Law: An Explanation of the Doctrine of Dismissal

Fixed-term employment contracts are an essential form of employment that enables companies to utilize flexible manpower for specific projects, seasonal demands, or to establish a probationary period. While the nature of these contracts, which automatically terminate the employment relationship at the end of the contract period, may seem like a clear and manageable system for employers at first glance, under Japanese labor law, this “termination due to expiration of the term” is not always automatically and unconditionally recognized. In particular, if the contract has been repeatedly renewed or if the worker has a reasonable expectation of renewal, the employer’s unilateral refusal to renew, known as “employment cessation,” may be legally invalid. This legal doctrine, known as the “employment cessation doctrine,” has been formed through a buildup of case law over the years and is now codified in the Japanese Labor Contract Act.

The existence of this doctrine suggests a significant legal risk that companies must be aware of when operating fixed-term employment contracts. The mere formal fact that the contract specifies a period is not always sufficient to justify the termination of employment. Courts prioritize the substantive aspects over the form of the contract, such as the actual operation, the parties’ conduct, and the nature of the work, when determining the validity of employment cessation. Therefore, it is essential for business managers and legal professionals to accurately understand the specific content of this employment cessation doctrine, particularly under what circumstances a worker’s “expectation of renewal” is legally protected, and what reasons are required to effectively carry out employment cessation if it is restricted. This article comprehensively explains the overview of the employment cessation doctrine based on Article 19 of the Japanese Labor Contract Act, the important case law that has become the criteria for judgment, and the practical risk management measures that companies should take.

The Basic Principles of Fixed-Term Employment Contracts and Dismissal at Contract Expiration Under Japanese Law

In Japanese labor law, employment contracts are broadly categorized into “fixed-term employment contracts,” which have a specified period, and “open-ended employment contracts,” which do not. As the name suggests, the principle for fixed-term employment contracts is that the employment relationship ends upon the expiration of the contract term without any special declaration of intent between the parties. The act of an employer refusing to renew the contract upon its expiration is referred to as “dismissal at contract expiration” .

However, there are significant exceptions to this principle. The Japanese legal system places a high value on the stability of employment, and this protection extends to workers on fixed-term contracts. The freedom of employers to dismiss at the end of a contract term is not absolute and is significantly restricted under certain circumstances. At the heart of these restrictions is the “doctrine of dismissal at contract expiration,” which was established as case law and later codified in the Japanese Labor Contract Act. This doctrine aims to protect workers who are employed in a situation virtually indistinguishable from open-ended contracts or who have a reasonable expectation that their contract will be renewed, from arbitrary dismissal by the employer. The central legislation that sets out this discipline is the Japanese Labor Contract Act, particularly Article 19, which specifies the concrete rules regarding the validity of dismissal at contract expiration .

Codification of the Doctrine of Dismissal: Article 19 of the Japanese Labor Contract Act

In 2012, the doctrine of dismissal, which had been established by Supreme Court precedents, was codified as Article 19 of the Japanese Labor Contract Act. This codification did not create new rules but clarified the status of existing case law principles and their scope of application without changing them, by incorporating them into the text of the law .

Article 19 of the Japanese Labor Contract Act stipulates that a dismissal by an employer is invalid if it meets certain requirements. Specifically, an employer cannot dismiss an employee unless there is an objectively reasonable ground for the dismissal and it is considered appropriate according to social norms, in either of the following two cases where the worker has applied for renewal of the contract:

Firstly, if the fixed-term employment contract has been repeatedly renewed in the past and the dismissal is considered socially equivalent to the dismissal of a permanent employee (as per the first clause of the same article). This refers to situations where the employment relationship has effectively become indistinguishable from a contract without a fixed term due to repeated renewals. This provision directly codifies the legal principle demonstrated in the Toshiba Yanagicho Plant case judgment .

Secondly, if it is recognized that the worker has a reasonable basis to expect the renewal of their fixed-term employment contract upon its expiration (as per the second clause of the same article). This broadly targets situations where, even without long-term repeated renewals as in the first clause, it is reasonable for the worker to expect continued employment based on the nature of the work or the employer’s conduct . The existence of this second clause significantly expands the scope of the doctrine of dismissal, requiring employers to exercise greater caution.

It is a prerequisite for these provisions to apply that the worker must apply for the renewal or conclusion of the contract either before its expiration or immediately thereafter . However, this “application” does not necessarily have to be a formal written one. It is understood that it suffices for the worker to communicate their opposition to the dismissal to the employer in some form, such as by filing a lawsuit or making a verbal objection . Since the procedural requirement for this application is very low, it is generally difficult for an employer to argue the legitimacy of a dismissal on the grounds that there was no formal application for renewal from the worker.

Reasonable Expectation of Renewal: When is ‘Expectation’ Legally Protected Under Japanese Employment Law?

The determination of whether there is a “reasonable ground to expect renewal” as stipulated in Article 19, Paragraph 2 of the Japanese Labor Contract Act is one of the most crucial issues in disputes related to employment termination. This determination is not made based on a single factor but rather involves a comprehensive consideration of various circumstances related to employment, with each case being judged individually. The following are the key factors that courts particularly focus on.

1. The objective nature of the work Whether the work is permanent or temporary is taken into account. If an employee is engaged in core, permanent tasks of the company, and the nature of the work is no different from that of a full-time employee, the expectation of renewal tends to be stronger.
2. The number of contract renewals and the total duration of employment The more frequent the contract renewals and the longer the total duration of employment, the stronger the presumption of employment continuity, and the worker’s expectation of renewal becomes more solidified.
3. The management of contract periods The degree to which the contract renewal procedures have been strictly followed is questioned. For example, if each renewal involves a new interview and a careful decision based on evaluation, the worker’s expectation weakens. Conversely, if the contract has been renewed automatically without any formal procedures, the expectation strengthens.
4. The employer’s conduct and statements If, during the hiring interview or the contract period, supervisors or HR personnel have made statements suggesting long-term employment (e.g., “We’ll need you next year too,” “If you work diligently, you can stay indefinitely”), this becomes a significant basis for protecting the worker’s expectation.
5. The renewal status of other workers If there is a track record of other fixed-term employees in similar positions having their contracts renewed almost invariably without termination, it is easier to conclude that the same expectation exists for the worker in question.

When evaluating these factors comprehensively, what is important is the substance, not the form. For example, even if the employer has formally conducted the renewal procedures strictly, if there is a reality that the worker has been engaged in core tasks for many years, the formality of the procedures alone cannot negate the reasonable expectation of renewal. Procedures become an effective risk management measure only when they accurately reflect the temporary nature of employment. Therefore, the most effective risk management involves not just maintaining contracts and procedures but ensuring that the role and nature of the work of fixed-term employees are genuinely ‘temporary’ as per their legal status.

The table below summarizes these decision factors.

Learning from Precedents: The Toshiba Yanagicho Plant Case and the Hitachi Medico Case Under Japanese Employment Law

Two types of employment termination principles in Japan have been established by two landmark Supreme Court decisions. Understanding these cases is essential for grasping the scope of the legal principles involved.

The Toshiba Yanagicho Plant case (Supreme Court of Japan, July 22, 1974) involved temporary workers who were employed on two-month contracts and had their contracts renewed between 5 to 23 times before being terminated. They were engaged in core operations at the factory, and their work was indistinguishable from that of full-time employees. The Supreme Court determined that, given the reality of repeated renewals, the employment contracts in question were “in a state not different from contracts without a fixed term.” Consequently, such terminations were to be evaluated as if they were dismissals of indefinite-term employees, and the abuse of the right to dismiss doctrine was analogously applied. In other words, terminations required objectively reasonable grounds and social adequacy. This decision established the “de facto indefinite-term contract” type, which forms the basis of Article 19, Paragraph 1 of the current Japanese Labor Contract Act.

The Hitachi Medico case (Supreme Court of Japan, December 4, 1986) concerned temporary workers on two-month contracts who were terminated after five renewals due to the company’s economic downturn and resulting staff reductions. The Supreme Court found that the employment relationship in this case was not equivalent to an indefinite-term contract, as in the Toshiba Yanagicho Plant case. However, the court did not end its judgment there. It indicated that even if the employment could not be viewed as an indefinite-term contract, if the workers had a reasonable expectation of renewal based on the reality of repeated renewals, such expectation should be legally protected, and termination that betrays this expectation could be invalid as an abuse of rights unless there are special circumstances. This established the “expectation of renewal protection” type, which forms the basis of Article 19, Paragraph 2 of the Labor Contract Act. Although the termination itself was deemed valid in this case due to the clear necessity for staff reductions due to economic hardship, the legal significance of this decision is profound. Furthermore, this decision suggests that there is a rational difference between indefinite-term regular employees and fixed-term contract workers in the context of workforce restructuring, providing a basis for the rationality of prioritizing fixed-term contract workers for layoffs.

The comparison of these two cases is shown in the table below.

Validity of Dismissal: Objective Rationality and Social Appropriateness Under Japanese Employment Law

When a court determines that a case falls under Article 19, Item 1 or 2 of the Japanese Labor Contract Act, meaning that the employment relationship is essentially regarded as an indefinite contract, or that the worker has a reasonable expectation of renewal, it does not immediately render the dismissal invalid. At this point, the focus of judgment shifts to whether there is a legitimate reason for the dismissal. The burden of proof lies with the employer, who must demonstrate that the dismissal is based on “objectively rational reasons” and is “socially appropriate” . This standard is identical to the wording in Article 16 of the Japanese Labor Contract Act, which governs the dismissal of indefinite contract workers (the doctrine of abuse of the right to dismiss), and is extremely strict.

So, what reasons are considered “objectively rational” and “socially appropriate”? The main ones are as follows:

Firstly, the worker’s lack of ability or poor work attitude. However, the employer’s subjective dissatisfaction alone is insufficient as a reason. There must be concrete arguments and evidence based on objective evidence (such as personnel evaluation records, guidance records, disciplinary action records, etc.) for poor work performance, serious disciplinary violations, or violations of work orders . Furthermore, the court will rigorously examine whether the employer provided the worker with appropriate guidance and opportunities for improvement .

Secondly, the necessity for management, commonly known as restructuring dismissal. When dismissals are carried out to reduce personnel due to poor business performance, it is a fundamental prerequisite that there is a true necessity for such action . In judicial practice, the validity of restructuring dismissals is strictly judged by comprehensively considering four elements: the necessity for personnel reduction, the execution of efforts to avoid dismissal, the rationality of personnel selection, and the appropriateness of the procedure. A similar strict examination tends to be applied to the dismissal of fixed-term contract workers. As demonstrated in the Hitachi Medico case, there is a certain rationality in proceeding with the dismissal of fixed-term contract workers to avoid the dismissal of permanent employees, but this is also based on the premise that there is an objective necessity for management itself .

This legal structure contains important implications for employers. Once a worker’s reasonable expectation of renewal is established, the hurdle for subsequent dismissal jumps to almost the same level as that for permanent employees. Therefore, from the perspective of legal risk management, preventive measures to avoid forming a “reasonable expectation” at the early stages of a dispute become extremely important.

Practical Responses and Risk Management for Companies Under Japanese Employment Law

To properly manage the risks associated with fixed-term employment contracts and prevent disputes before they arise, it is recommended that companies in Japan rigorously implement the following practical measures:

1. Clarification in Contracts It is essential not only to specify the contract period in the employment contract but also to clearly state whether there is a possibility of renewal. If there is a possibility of renewal, specific criteria such as “The renewal of the contract will be determined considering the volume of work at the time of contract expiration, the employee’s performance, abilities, and the company’s business situation” should be included. In cases where it is certain that the contract will not be renewed, it is worth considering the inclusion of a ‘non-renewal clause.’ However, even with a non-renewal clause, if subsequent practices contradict the clause (for example, if there are actions or words that lead to an expectation of renewal), there is a risk that the effectiveness of the clause may be negated.
2. Strict Management of Employment Periods It is crucial to establish a system that accurately understands and manages the expiration dates of all fixed-term contract employees’ agreements. According to the standards of the Ministry of Health, Labour and Welfare, if an employee has had their contract renewed three times or more, or has been working continuously for more than one year, the employer must provide at least 30 days’ notice before the expiration of the contract period. This notice is a legal obligation, but it is important to note that the act of giving notice does not in itself establish the validity of the termination.
3. Avoiding Actions and Words That Lead to Expectations of Renewal It is important to thoroughly educate managers and HR personnel on the principles of termination of employment and to instruct them to refrain from casually promising long-term employment or leading employees to expect renewal. It is necessary to recognize that daily communication can inadvertently become evidence in later disputes.
4. Implementing Substantive Renewal Procedures If the contract states that there is a possibility of renewal, the renewal process should not be merely formal. As the contract expiration approaches, it is necessary to actually assess the need for the work and the employee’s performance and to make a substantive decision on renewal based on those results. This process should be documented.
5. Thorough Documentation Keeping a written record of all processes is the most robust defense in the event of a dispute. It is extremely important to prepare objective evidence, such as records of personnel evaluations, instructions for work improvement, minutes of interviews, and notices clearly stating the reasons for the final termination.

Summary

Managing fixed-term employment contracts under Japanese labor law is a sophisticated area of risk management that requires more than just getting the “form” of the contract right; it also demands careful management of the “substance” of the employment relationship. Article 19 of the Japanese Labor Contract Act imposes significant restrictions on an employer’s right to unilaterally terminate employment at the end of a contract period. In particular, if the nature of the work, the number of renewals, and the conduct of management create a “reasonable expectation of renewal” for the worker, then the termination cannot be considered valid without objective and rational reasons and social appropriateness, akin to the dismissal of a permanent contract employee. This legal threshold is quite high and can pose a significant management risk for companies.

Monolith Law Office deeply understands the nuances of Japanese labor law and has a proven track record of supporting many international clients. Our firm employs several attorneys who are qualified in foreign jurisdictions and are native English speakers, enabling us to provide clear and practical advice that bridges different legal systems and business cultures. We offer comprehensive legal services to ensure that our clients’ employment practices are robust under the Japanese legal framework, from drafting employment contracts that comply with the governing law, to providing training for managers, and representing clients in labor disputes. For expert support in solidifying your human resource and labor strategies in Japan, please consult with Monolith Law Office.