Pros And Cons Of Main Contract Types In Japan

There are three main employment contract types in Japan:

  • Permanent Employee, known as Sei-sha-in;
  • Contract Employee, known as Keiyaku sha-in;
  • Outsourced or Temporary Employee, known as Haken sha-in.

There are other types of contracts too, but these are the three that you need to be most aware of as you explore your options in Japan.

A. Permanent Employees:

Most employees prefer, and will push for a contract with a permanent employee status, being inherently more stable and less risky in the eyes of the employee.

The main benefit to the employer is that it is easier to attract talent and to secure employee loyalty with the lure of a permanent position. Also, for manager ranks it is not necessary to pay overtime allowances as managers in Japan are expected to “take one for the team” as and when required.

The downside is that it is harder to terminate employees if they don’t work out.

B. Contract Employees:

Contracts are generally for a short and specified term, such as three, six or twelve months. Many companies find it less risky to use this as a way of hiring people because it is easier to terminate contract employees on completion of their contract term, simply by not renewing it.

Traditionally the employer’s obligations towards contract employees were very low, vis-a-vis such things as providing social security benefits, paid leave, and pension plans etc., but this has tightened up in recent times.

Contract employees are now entitled to paid leave after 6 months of employment, even if they are on three month contracts that you keep renewing.

They must also be given the option of being enrolled in the national social security system.

Many employers use fixed term contracts as a form of probation, without having to make any long-term commitment. If you terminate a permanent employee at the end of their three or six months’ probation, you will need to pay them one month’s severance.

If you terminate a contract employee after the same period, you don’t need to pay severance, but should be prepared to show reasonable justification for not renewing their contract.

The only real benefit to an employee being on a fixed term contract is that companies are obliged to pay overtime allowance to all contract employees.

In the past many employers hired contract employees and simply kept renewing their contracts, sometimes for several years, so that they could terminate them whenever it suited them to do so.

However, the Courts now take the view that long-term contract employees are entitled to the same protection as permanent employees, and so must be provided with social security benefits, paid leave and have the right not to be terminated without cause or compensation.

In short, contracts are a useful  for testing the waters but should not be abused or continued ad-infinitum.

C. Outsourced or Temporary Employees:

Generally referred to as “Haken” contracts and are very similar to temporary staff contracts in the UK.

Mainly used for admin or secretarial personnel, but also for interim management positions, when a fill-in manager is needed for a short term.

The “Haken” employee will not be your employee, or on your payroll; they will be the employee of the temporary agency, which will invoice you for the hours worked by them.

The benefit to you as an employer is that you have no obligation to the employee if they are not suitable.

You can simply ask the agent to send a replacement. You also don’t need to pay directly for their commuting to work, paid leave, social security benefits, payroll administration etc.

They are an ‘off-the-shelf’ solution. The only two downsides are that the selection of people willing to do temporary work in specialist areas is smaller, and that the cost is higher, at first glance.

Generally, the hourly cost of a temporary employee will be about 150% to 160% the cost of a contract or permanent employee.

The reason for this is that the additional amount accounts for the cost to the agent of providing the employee with social security benefits, travel expenses, training, paid leave, payroll and HR services, employee support and of course the agency fee.

These are all costs which you as an employer would otherwise have to bear, so the true cost works out similar to that of hiring a permanent employee.

The upside is that you don’t have to maintain a large back-office to perform all of the above HR functions yourself.

As a way of hiring quickly, just to establish an initial presence in the market, Haken can be a very good way to go. You can also “try before you buy’ as most temporary agencies offer “temporary-to-permanent” solutions whereby you can take on a temporary employee, and then hire them permanently on payment of a buy-out fee to the agency.

Additionally, it gives you the flexibility to downsize in a bad economy without having to make huge redundancy payments. This is a very popular solution particularly for hiring back-office staff.