Formation of Employment Contracts in Japan: Definitions, Offer and Acceptance, Implied Formation, and Legal Commentary on Grounds for Invalidity and Cancellation

In operating a business in Japan, a precise legal understanding of the establishment of employment contracts serves as the foundation for avoiding unforeseen legal risks and building stable labor-management relations. Japanese employment law emphasizes not just written agreements but also the substantive relationships between employers and employees. Understanding how employment contracts are established and under what circumstances their validity may be contested is essential for managerial decision-making. The formation of employment contracts is primarily governed by the Japanese Labor Contract Act and the Civil Code of Japan. However, when interpreting these statutes and applying them to specific cases, the case law developed by courts over the years plays an extremely important role. In particular, the legal nature of job offers, the risk of inadvertently establishing an “implied employment contract” with individuals under service agreements, and how to respond when employment application fraud is discovered are challenges many companies face. This article first explains the legal definition of an employment contract, especially the concept of “subordination,” which forms its core. Next, it concretely explains how the principles of the Civil Code of Japan apply to the formation of employment contracts during the hiring process, namely the “offer” and “acceptance.” Furthermore, it analyzes the risks and criteria for judgment regarding the important issue of “implied formation” of employment contracts, even in the absence of explicit agreement, including case law. Finally, it details the legal requirements and effects of defects in consent, such as fraud, duress, and mistake, on the validity of employment contracts.

The Definition of Employment Contracts Under Japanese Law

Article 6 of the Japanese Labor Contract Act stipulates that “an employment contract is established by the agreement between a worker and an employer, where the worker agrees to work under the employment of the employer, and the employer agrees to pay wages in return” . In this context, “worker” refers to someone who works under the employment of an employer and is paid wages, while “employer” refers to the party paying wages to the worker (as defined in Article 2 of the same law) . Although this definition may seem straightforward, it is important to note that even if a contract is named as a “service contract” or “contract for work,” it may legally be considered an employment contract if its actual substance matches this definition.

When determining whether a contract qualifies as an employment contract, the courts place significant emphasis on the criterion of “subordination” . Subordination is composed mainly of two elements.

The first element is whether the work is performed under “direction and supervision” . This refers to whether the worker carries out their duties according to the instructions and orders of the employer. Specifically, the lack of freedom to refuse specific instructions or orders regarding the performance of work, the management and restriction of the workplace and working hours, and the prohibition of having someone else perform the work are all considered factors affirming a relationship of direction and supervision .

The second element is the “remuneration for labor provided” . This refers to whether the payment made is for the provision of labor itself, rather than for the completion of a job or a result. If the remuneration is calculated on an hourly or monthly basis, if pay is deducted for absences, or if there are allowances for overtime work, these are strong indications that the remuneration has the personality of being in exchange for labor .

Even if a company enters into a “service contract” with an individual, if the actual operation of the business involves the company giving specific work instructions to the individual, imposing time constraints, and paying remuneration on a time basis, the courts may recognize the contract as an employment contract. It is the actual substance of the work, not the title or form of the contract, that determines its legal nature under Japanese labor law. Therefore, when choosing a contract form, it is necessary to carefully consider not only the name but also how the planned method of performing the work will be legally evaluated.

Formation of Employment Contracts in Japan: Offer and Acceptance

As employment contracts are a type of contract, they are subject to the general principles of Japanese Civil Law. According to Article 522, Paragraph 1 of the Japanese Civil Code, a contract is established “when an offer indicating the intent to enter into a contract (hereinafter referred to as ‘offer’) is accepted by the other party” . Furthermore, Paragraph 2 of the same article states that, except in cases where there are special provisions by law, the creation of a written document is not necessary for the establishment of a contract, and a contract can be validly formed through verbal agreement .

When applying this principle to employment relationships, certain actions in the hiring process can legally constitute an ‘offer’ and ‘acceptance’, potentially leading to the formation of an employment contract at an unintended stage. Generally, a job seeker’s application to a company’s job posting, submission of a resume, and participation in an interview are interpreted as an ‘offer’ to enter into an employment contract . In response, the company’s decision to hire the job seeker and the act of notifying them of this decision, namely issuing a ‘job offer (informal offer)’, is considered an ‘acceptance’ of the offer .

As a result, at the moment a company sends out a job offer notification, a legal evaluation is made that an employment contract has been established between the company and the job candidate. This contract is often understood as a ‘conditional employment contract with a reserved right of termination’. This means that the contract is ‘conditional’, starting from a specific future date (for example, April 1 of the following year), and includes a ‘reserved right of termination’, allowing the company to terminate the contract if certain conditions arise.

It is crucial to understand that a job offer notification is not merely an informal promise but signifies the formation of a legally binding employment contract. Therefore, a company’s withdrawal of a job offer is not a refusal to enter into a new contract but is treated as synonymous with ‘dismissal’ from an already established employment contract. Article 16 of the Japanese Labor Contract Law stipulates that “a dismissal is invalid if it lacks objectively reasonable grounds and is not considered appropriate according to social norms” . Consequently, the cancellation of a job offer is only considered valid in very limited circumstances, such as the discovery of significant misrepresentation of qualifications that could not have been known at the time of the offer or if the job candidate fails to graduate from their academic program. Any casual withdrawal of a job offer carries a very high risk of being legally invalidated.

Establishment of Implied Employment Contracts Under Japanese Law

An employment contract in Japan can be established “implicitly” through the actions of the parties involved, even in the absence of an explicit agreement in writing or verbally. This is an area that requires particular attention in managing legal risks for businesses, as it is possible for a legal employment contract relationship to be recognized with individuals whom the company does not perceive to be in an employment relationship.

The issue is most evident in cases known as “disguised contracting.” Despite formal contracts for work or subcontracting between companies, the ordering company (user company) may directly command and engage the workers of the contracted company as if they were its own employees. In such situations, courts in Japan may recognize the existence of an “implied employment contract” between the user company and the workers, despite there being no direct contractual relationship, based on the actual work situation.

An important case law on this point is the Shin-Konan Steel Material case. The court emphasized the fact that the workers were integrated into the user company’s production process, were subject to attendance management, and were ordered to work overtime based on direct instructions from the user company. The court ruled that “as long as the company accepts the labor provided daily, at least an implicit employment contract is established between the two parties.” This judgment clearly demonstrates the judiciary’s stance of prioritizing the actual work situation over the form of the contract.

Furthermore, the Osaka High Court’s decision on April 25, 2008 (Heisei 20), delved into the legal structure of disguised contracting. In this case, the court first declared both the service contract between the user company and the staffing agency and the employment contract between the staffing agency and the workers invalid, as they violated laws prohibiting the supply of labor and were against public policy. Then, after examining the actual work situation of the workers, the court found that the user company effectively decided on hiring, working conditions, and wage payments, and directly supervised the workers, thereby recognizing the existence of a direct “implied employment contract” between the user company and the workers.

What these cases illustrate is that the establishment of an implied employment contract is not determined solely by the content of the contract documents prepared by the legal department, but also by the “operations” of how managers on the ground interact with workers on a daily basis. If site managers give detailed instructions on how to proceed with work to external subcontracted staff, manage their working hours, or conduct direct performance evaluations, these actions can serve as evidence of an employment relationship and potentially lead to the unintended establishment of an employment contract. Therefore, to avoid such risks, it is essential not only to maintain appropriate contracts but also to implement internal controls that clearly educate and enforce the legal boundaries of interaction between employees and external subcontracted staff for on-site managers.

Invalidation or Cancellation of Labor Contracts Due to Defects in Expression of Intent Under Japanese Law

Similar to other contracts, a labor contract in Japan may be negated if there is a legal defect (flaw) in the expression of intent by the parties at the time of its conclusion. Japanese Civil Code identifies “fraud,” “duress,” and “mistake” as the main defects, and these provisions are also applicable to labor contracts.

Fraud

Article 96, Paragraph 1 of the Japanese Civil Code stipulates that a declaration of intent made through fraud can be revoked. In the context of employment contracts, the most typical example of fraud is a job seeker’s “resume padding.” This occurs when an applicant makes false statements about their educational background, work history, or criminal record, thereby misleading a company into hiring them.

However, not every false statement can serve as grounds for contract cancellation or dismissal. Courts require that the misrepresentation be “significant.” In other words, the lie must be about a matter so important that the company would not have hired the worker had it known the truth.

A representative case on this point is the Sumiken Seiko incident (Supreme Court judgment on September 19, 1991). In this case, the Supreme Court ruled that the disciplinary dismissal was valid for a worker who concealed his university degree to match the company’s hiring policy (which targeted only high school graduates) and also hid the fact that he was in the middle of a criminal trial. The court emphasized that the employment relationship is based on mutual trust and indicated that workers have a duty to truthfully disclose important aspects of their background based on the principle of good faith.

In the Grabas case (Tokyo District Court judgment on December 17, 2004), the dismissal of a programmer who falsely claimed to have specific programming skills (JAVA) and was hired on that basis was deemed valid. In this instance, the lack of the core skills required was judged to be a significant misrepresentation. When canceling a contract or dismissing an employee on the grounds of resume padding, it is crucial to carefully assess whether the misrepresentation is significant enough to affect the foundation of the contract’s formation and performance.

Coercion Under Japanese Civil Law

Article 96, Paragraph 1 of the Japanese Civil Code stipulates that a declaration of intent made under coercion can be revoked. Coercion refers to the act of unlawfully threatening to cause harm, thereby inducing fear in the other party and leading to a declaration of intent as a result.

In the context of labor relations in Japan, for instance, an employer might exert undue pressure on an employee by suggesting dismissal, thereby coercing the employee into agreeing to a wage reduction or resignation. However, suggesting disciplinary action based on legitimate reasons does not immediately constitute illegal coercion. To be considered coercion, the means and purpose must be deemed socially unacceptable and illegal. Furthermore, if the degree of coercion is so extreme that the declarant’s freedom of will is completely taken away, the declaration of intent is considered ‘invalid’ from the outset, rather than a matter of revocation.

Mistake in Contractual Intent Under Japanese Civil Law

Article 95 of the Japanese Civil Code governs the handling of expressions of intent based on a mistake, or what is commonly referred to as a “misunderstanding.” With the revised Civil Code enacted in 2020, the effect of a mistake has been changed from “invalidity” to “cancellation.”

There are mainly two types of mistakes. One is a “mistake in expression,” where there is a discrepancy between the internal intention and the external representation (for example, intending to display a salary of “1 million yen per month” but mistakenly writing “10 million yen per month”). The other is a “mistake in motive,” where there is a misunderstanding in the motive that led to the expression of intent. To cancel a contract based on a mistake in motive, it is necessary that the motive was indicated to the other party as a basis of the contract.

For a cancellation due to a mistake to be recognized, the mistake must be “significant” in light of the purpose of the contract and social conventions. Generally, if the party expressing the intent has made a serious error, they cannot cancel the contract. However, if the other party knew of the mistake or was also under the same misunderstanding, cancellation may be exceptionally possible. In employment contracts, for instance, cancellation due to a mistake may arise if both employer and employee fundamentally misunderstand the content of a specific qualification that forms the basis of the hiring agreement.

Comparison Chart: Fraud, Coercion, and Mistake Under Japanese Civil Law

Fraud, coercion, and mistake are all provisions related to defects in the expression of intent, but they have significant differences in their requirements and effects, especially in relation to third parties. The table below summarizes these differences.

Conclusion

The regulations governing the establishment of employment contracts in Japan delve not only into the formalities of a written contract but also deeply question the substantive relationship between employers and employees. As explained in this article, whether an arrangement constitutes an employment contract is determined based on the reality of the “employment subordination” relationship, and a notification of a job offer is legally considered a binding contract formation. Additionally, the everyday actions of on-site managers may inadvertently establish an “implied employment contract” with external staff, posing a risk. Furthermore, issues such as fraudulent misrepresentation discovered during the hiring process can shake the very foundation of a contract’s validity based on provisions of Japanese civil law, such as fraud or mistake. Understanding these legal principles accurately and building a consistent compliance system from the hiring process to daily labor management is a key to achieving business success in Japan.

Monolith Law Office has extensive experience in providing advice and practical support on issues related to the establishment of employment contracts, as discussed in this article, to numerous clients within Japan. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to offer specialized support to companies expanding internationally to comply with Japan’s complex labor laws and manage legal risks appropriately. We provide legal support for your business in all aspects, including the conclusion of employment contracts, hiring practices, and the construction of labor compliance systems.