This is the third and final article in a series exploring contract employment in Japan.
In the first two articles of this series, we looked at the benefits of contracting and made predictions about the future direction of contract employment in Japan. This article will consider some of the technical aspects of contracting and offer some suggestions on how modifications to the present regulatory framework could help make the system more effective and socially acceptable in Japan.
Under current regulations, prospective employers are technically not allowed to conduct interviews for "haken" positions since "haken" staff are defined as “dispatch workers.” Agencies are expected to dispatch an appropriately skilled worker to the role, sight-unseen and untested in response to a job description. Of course, very few companies are willing to take on an employee without some sort of interview. In practice, nearly every company holds interviews for "haken" roles, just not in name – instead they conduct “introductory meetings” with candidates. The necessity for this kind of subterfuge casts a shadow over the "haken" process and contributes to the stigma attached to contract employment. Easing the restrictions on interviews for "haken" employees would add more legitimacy to "haken" itself and go some way to eliminating the isolated image of "haken" in the labor market.
Another more substantial aspect of Japanese contracting law that many would like to see changed is the division between "haken" and "ukeoi" styles of contract employment. Simply put, "ukeoi" is a much freer style of contract employment where the individual operates as an independent contractor. Under "ukeoi," the independent contractor is not required to pay into the Japanese National Health Care and Pension systems, which is mandatory under "haken" contracts. There are also tax advantages to being an independent contractor. If the individual were to take the further step of establishing their own company (as is frequently done in more mature contract markets, such as the UK) and making a contract between their company and an agency, any business-related expenses, which may include transportation, meals, and even housing, can usually be written off for tax purposes.
In contrast, "haken" is considerably more restrictive and regulated. In addition to the higher cost burden to all parties because of the requirement to pay into the National Health and Pension systems, there are only a limited number of types of positions that can legally be employed on "haken" – 26 to be exact. By contrast, with "ukeoi," nearly any type of position can be employed, including construction, dock work and other security-risk jobs, which are clearly excluded under "haken."
Companies that hire contractors also tend to prefer "ukeoi" because it typically does not affect official head count, whereas "haken" does. Without head count considerations, the approval processes are easier and funds can be paid out of project budgets rather than through central payroll. This all adds up to "ukeoi" being advantageous to individual contractors and the contracting companies, as it offers more flexibility and potentially higher pay to the contractor.
Despite all of these advantages, "ukeoi" contracts are not as prevalent as they could be. The reason for this is a provision buried deep in contracting law which leads to a somewhat counter-intuitive and counterproductive chain of command between employers, agencies, and contractors. Under "ukeoi" contracts, the dispatching agency must manage the contractor, while maintaining proof that they are giving the contractor work instructions. The company where the contractor is actually working is not allowed to give any direction whatsoever. This is a problematic management issue, as companies do not want to lose their ability to give directions to onsite contractors.
Furthermore, agencies are not typically capable or qualified to manage IT, accounting, legal or other contract specialists. Penalties for violating this regulation include fines, court orders for the agency to halt all business activities, or a revocation of the agency’s contract license. The government has been taking violations of these provisions very seriously. In 2007, the government ordered Goodwill Inc, a Japanese temporary staffing agency, to suspend all business activities for 6 months for several related violations. Employers want a system that allows them to directly manage their workers. Realigning how employers are allowed to manage contractors could facilitate this. It might also help enhance the appeal of hiring contract employees and eventually lead to a corresponding increase in compensation for contractors.
At times, contract employment law in Japan can be complicated. There is no single government agency that is responsible for overseeing the implementation of "haken" laws in Japan. Regulatory responsibility is spread across several different government agencies and departments. This lack of centralization coupled with complicated and occasionally contradictory regulations make contracting problematic to implement in all its forms and to the detriment of all parties. If responsibility for all aspects of contract employment law and regulation were to be centralized in a single government body it could help make the system easier to understand, implement, and regulate.
We have discussed three aspects of contracting in Japan and offered suggestions on modifications to the present regulatory framework in Japan: Interviews for "haken" employees; division between "haken" and "ukeoi" styles of contract employment, and; chain of command between employers, agencies, and contractors. Taking these first few steps could help make the system more effective and would be a real step toward addressing the negative stigma that "haken," and contracting in general, hold in Japan.
The system will only evolve once enough stakeholders in contract employment - companies that employ contractors, contracting agencies, and contracting individuals - understand the issues facing contract employment in Japan, although it won’t happen overnight. That said, there are signs that things are moving in the right direction for contracting overall. The Diet is currently reviewing a bill that, if passed, would provide companies with one million yen in government compensation for every "haken" employee converted to permanent status. This should provide contractors with more stability and recognition and is a sign the government is taking the right steps toward improving the viability of contract employment in Japan.
Casey Wahl is director of the Contract Division at Robert Walters, Japan’s largest foreign-owned specialist recruiter.© Japan Today