Japan is one of the world’s most rapidly ageing societies. Along with the traditionally high life expectancy, the country’s fertility rate is at a continuously low level. According to the Japanese Ministry of Internal Affairs and Communications, as of September 2020, nearly 30% of Japanese are already 65 years or older. The effects of this demographic change are noticeable. Along with the increasing competition for qualified junior employees, the ageing workforce poses new challenges for employers.

The Japanese Government reacted to this development in 2013 by passing an amendment of the Act on Stabilization of Employment of Elderly Persons which aims to facilitate employment of elderly employees at least until the age of 65. Now, starting from 1 April 2021, an additional amendment will come into effect which seeks to promote further employment of elderly employees until the age of 70 (the “Amended Act”). This newsletter summarizes the current legal framework, the new amendments coming into effect on 1 April 2021 and its practical implications for employers in Japan.

1. Re-employment of elderly employees until the age of 65

Japanese law permits, but does not require, employers to set a mandatory retirement age, i.e. an age limit where employees are automatically deemed to be retired from the company and the employment agreement expires. The retirement age can be generally determined freely by the employer as long as it is not set lower than 60 years old. However, employers are required to continue employing their elderly employees, if desired by them, until the age of 65 even after they have reached the company retirement age.

For this purpose, employers can choose between three options: (i) abolishing the company retirement age, (ii) raising the company retirement age to 65 years, or (iii) maintaining the company retirement age whilst introducing a re-employment system for retiring employees until the age of 65. Given that neither the fact that an employee is entitled to pension payments nor that the employee’s “age” itself constitutes a valid ground for terminating the employment relationship with an elderly employee, option (i) is usually the least favorable option for the company as it leads to a high risk exposure due to the unlimited term of employment. Even if, at first glance, options (ii) and (iii) seem to lead to the same results, option (iii) – i.e. maintaining the company retirement age, which is e.g. set at 60 years old, whilst introducing a re-employment system until the age of 65 – has one key advantage: By choosing this option, the employer can offer to the employee new terms for the period of re-employment after the retirement age, e.g. part-time work with a reduced salary. The newly offered terms of employment must be however “reasonable”. Whether the new employment conditions are deemed reasonable depends on all circumstances of the individual case, such as the former terms and position of the employee concerned as well as the operational capacities of the employer. It is generally recommendable to provide the re-employment contract on a one year fixed-term basis in order to limit the risk exposure in case of dispute scenarios.