Non-Renewal of Fixed-Term Contract Employees: Renewal Counts and Conversion to Indefinite-Term Employment in Practice

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When ending the renewal of a contract employee's contract, care is needed with an approach that mechanically issues a notice based only on the expiry date stated in the contract. Although the principle is that a fixed-term employment contract ends upon expiry of its term, even a contract facing its first renewal may be legally restricted from non-renewal if a reasonable expectation of renewal has arisen from, for example, explanations at the time of hiring or the circumstances of the recruitment.

The first thing to consider is whether renewal of the contract will be recognized under the non-renewal doctrine in Article 19 of the Labor Contracts Act. In addition, where the aggregate contract period with the same employer exceeds five years, you must also understand when the right to apply for conversion to indefinite-term employment arises under Article 18 of the same Act. Note that the validity of non-renewal is not necessarily recognized merely because the contract sets a renewal cap or because advance notice was given 30 days before expiry.

The Non-Renewal Doctrine Under Article 19 of the Labor Contracts Act and Its Two Categories of Protection

Article 19 of the Labor Contracts Act (Japanese) provides that, for certain fixed-term employment contracts, where the employer's refusal to renew "lacks objectively reasonable grounds and is not considered appropriate in general social terms," the employer is deemed to have accepted the application for a fixed-term employment contract on the same working conditions as before. This protection covers not only applications for renewal made by the expiry date of the contract term but also applications to conclude a contract made without delay after expiry. The precondition for its application is that the case falls under either item 1 or item 2 of the article.

Item 1 is the category in which the contract has been repeatedly renewed in the past and non-renewal can be considered, in general social terms, equivalent to dismissal under an indefinite-term employment contract. It is based on the idea that, in a relationship that has continued to be operated in a way that is substantively no different from a contract without a fixed term, the freedom to end the contract solely on the ground that its term has expired should not be recognized. In contrast, item 2 is the category in which there are recognized to be reasonable grounds for the employee to expect the contract to be renewed. Even a contract that has been renewed only a few times may be protected if a reasonable expectation has been formed through explanations at hiring or the actual renewal procedures.

If either item applies, the employer's refusal to renew is substantively examined as to whether it has objective reasonableness and appropriateness in general social terms. The text of the article uses wording equivalent to the doctrine of abuse of the right to dismiss, but because the nature of the fixed-term contract and the degree of the expectation of renewal are taken into account in the specific judgment, it is not understood that requirements as strict as those for dismissing a regular employee uniformly apply to every fixed-term contract.

Whether there is a reasonable expectation is judged comprehensively from the wording of the contract as well as the reality of daily labor management and renewal procedures. In practice, the following operating practices are the main factors that tend to create an expectation of renewal.

• A practice of continuing to reissue the contract document as a mere formality, without interviews or confirmation of terms in the renewal procedure
• A practice in which the duties are not distinguished from those of regular employees and the employee is settled into long-term, permanent work
• A practice of making remarks at hiring or at contract renewal that raise expectations, such as "we'd like you to work here for a long time" or "as a rule, we will renew if there are no problems"
• A practice of repeatedly renewing the contract without much thought, without stating a cap on the number of renewals or the aggregate number of years in the contract

These are only some of the factors used to find a reasonable expectation, and no single circumstance determines the conclusion. The assessment is made by comprehensively considering the contract provisions, the continuity of the work, the explanations given at hiring, and the actual renewal procedures. Even if interviews were conducted at renewal, that fact alone does not lead directly to the conclusion that a reasonable expectation is negated.

The Right to Apply for Conversion to Indefinite-Term Employment Under Article 18 of the Labor Contracts Act and Calculating the Aggregate Period

For companies that repeatedly renew fixed-term employment contracts, the rule on conversion to indefinite-term employment under Article 18 of the Labor Contracts Act is a norm to be understood alongside the non-renewal doctrine. That article provides that, for two or more fixed-term employment contracts concluded with the same employer, where an employee whose aggregate contract period exceeds five years applies to conclude an indefinite-term employment contract, the employer is deemed to have accepted the application. The right to apply must be exercised by the expiry date of the fixed-term contract currently in effect, and work under the indefinite-term employment after conversion begins on the day following that expiry date. The working conditions, other than the contract term, remain the same as before, except for matters on which separate provisions have been made.

The period counted toward the aggregate includes not only the period actually worked but also the entire term of the contract currently in effect. On the other hand, a future contract whose first day has not yet arrived is excluded from the aggregate period. For example, under the common practice of renewing one-year contracts without interruption, the right to apply for conversion within that contract term arises only when the first day of the sixth year's contract term arrives. Even if the renewal contract is signed in advance, the right to apply does not arise before the term begins. Where there is a cooling-off period during which the contract is interrupted, examine the exclusion requirements in paragraph 2 of the article, and for highly skilled professionals and employees rehired after retirement age, consider the categories covered by the special measures act.

Even if the title changes from contract employee to part-time contract staff, or the employee transfers between departments within the same legal entity, the aggregate is not reset as long as the employer is the same. In addition, Articles 18 and 19 are separate systems with different protective purposes. Note that even where the aggregate has not reached five years, that is no reason to escape the restrictions on non-renewal under Article 19.

Standards for Stating Renewal Caps, and Practice Regarding Non-Renewal Notices and No-Renewal Clauses

Clearly stating a cap on the number of renewals or years at the start of the contract is an effective way to align the expectations of labor and management in advance regarding the prospects for continued employment. However, the application of Article 19 cannot be excluded merely because a cap clause has been formally included. Where the contract was renewed beyond the cap, or where explanations suggested that employment would continue even after the cap was reached, it is that actual practice that becomes the subject of legal assessment.

Under the rules on stating working conditions (Japanese) that took effect in April 2024, companies must state, when concluding and renewing a fixed-term employment contract, whether there is a renewal cap and its specific content. Setting a renewal cap after the contract has been concluded is not understood to be uniformly prohibited as such, but Article 1 of the "Standards Concerning the Conclusion, Renewal, and Non-Renewal of Fixed-Term Employment Contracts" provides that where a cap is newly established or lowered upon renewal of the contract, the reasons must be explained to the employee in advance. Whether this duty to explain was fulfilled, which is a matter for administrative guidance, is judged separately from the validity of the change in working conditions and the lawfulness of the non-renewal.

At a contract renewal at which the right to apply for conversion to indefinite-term employment arises, the employer is required to state that the employee may apply for conversion and the working conditions after conversion. Even where the employee does not exercise the right and the fixed-term contract is renewed again, the same statement must continue to be made each time a renewal at which the right arises comes around.

In addition, Article 2 of the Standards Concerning the Conclusion, Renewal, and Non-Renewal of Fixed-Term Employment Contracts (Japanese) provides that, when not renewing a contract that has been renewed three or more times, or the contract of an employee who has worked continuously for more than one year from the date of hire, notice must be given at least 30 days in advance. Contracts in which it was stated in advance that the contract would not be renewed are excluded, but a general statement of a renewal cap in a contract and a statement that the employment ends with that particular contract are not always the same concept, so whether notice is required should be determined from the contract wording and the history of individual explanations. Even in cases excluded from the notice requirement, the review under Article 19 of the Labor Contracts Act itself is not waived.

Article 3 of the same Standards provides that, where an employee who has received notice of non-renewal, or an employee whose contract has not been renewed, requests a certificate stating the reasons, the employer must issue it without delay. Simply writing "expiry of the contract term" does not count as stating the reasons, and it is essential to be in a position to present the specific grounds for non-renewal.

Some companies add a no-renewal clause stating that "there will be no further renewals" to the contract partway through. Inserting such a clause is not automatically void as such, but if it is set unilaterally, without obtaining the substantive consent of the employee based on their free will, for a contract under which an expectation of renewal has already matured through repeated renewals, the validity of the clause and the voluntariness of the consent may be disputed. In particular, introducing a no-renewal clause just before the right to apply for conversion to indefinite-term employment arises, or refusing renewal on the ground that the employee did not agree, makes it more likely that the measure will be assessed as an attempt to evade conversion to indefinite-term employment. When adding such a clause, it is essential to keep records of the need for the cap, the content of the explanation, and the process by which the employee's agreement was formed, and to examine it in light of the principle of agreement in Articles 8 to 10 of the Labor Contracts Act and the reasonableness standard for changes to work rules.

When actually handling non-renewal or conversion to indefinite-term employment, the steps HR and labor staff should check are as follows.

• Confirm the number of renewals and the aggregate contract period of the contract concerned
• Confirm interview records, documents issued, and explanations given in past renewal procedures
• Confirm when the aggregate will reach five years and when the right to apply for conversion to indefinite-term employment will arise
• Confirm whether a non-renewal notice is required and the deadline for notice
• Organize the objective grounds for the non-renewal and prepare for requests for a certificate of reasons

In deciding on non-renewal, it is essential to verify not only the expiry date on the contract but also when the right to apply for conversion to indefinite-term employment arises and the past facts that support an expectation of renewal, and to consider both systems consistently. I believe that recording in advance, in a contract management table, the notice deadline calculated back from the expiry date and the renewal at which the right to apply for conversion arises is an effective means of preventing delays in judgment in practice.

Legal Support for Managing Contract Employees

We support the management of fixed-term contracts and the preparation of work rules and employment contracts through our Labor Management and HR service. Where collective bargaining or dealings with government authorities are required, please see Labor Union and Labor Standards Inspection Office Matters. For ongoing review of daily contract renewals and internal labor consultations, we provide support through Legal Outsourcing.