CWS 3.0: June 20, 2012

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Costs: Legislation to Add Costs and Risks in Japan

Temporary staffing in Japan is more familiarly known as “dispatching” and, since 1985, the provision of temporary personnel has been regulated under the “Law Concerning Securing the Proper Operation of Worker Dispatching Undertakings and Improved Working Conditions for Dispatched Workers” (Law 88), to give it a more succinct label.

Originally, this law only allowed agencies to supply temporary workers within 16 distinct job categories such as software development, clerical and filing, telemarketing, etc. Reforms in 2000 and 2004 substantially expanded the types of temporary workers that could be supplied and also made it possible for agency workers to convert to permanent employment. During this period, the Japanese staffing industry boomed, overtaking the U.S. in terms of penetration (temporary agency workers as a proportion of the total workforce).

However, recent amendments to the act passed by the Japanese Diet in March 2012 seek to tighten the regulation of both staffing agencies and the companies that use temporary agency workers. These new amendments will come into effect in October and signal a renewed emphasis on restricting the use of temporary agency workers to situations where their labor is required on a temporary basis, and not as a substitute for traditional employees. One subtle yet telling amendment is the changing the title of the legislation to “Act for Securing the Proper Operation of Worker Dispatching Undertakings and the Protection of Dispatched Workers,” thus emphasizing its main purpose of protecting temporary agency workers.

Impact on staffing firms
 Under the amended act, staffing agencies will no longer be permitted to provide temporary workers on short-term contracts of less than 31 days with a limited exception for certain “specialized” work (to be stipulated by Ministerial ordinance). Staffing agencies must also implement a range of measures to improve opportunities, salaries and transparency for temporary workers, namely:

  • supporting permanent employment opportunities by providing opportunities or training
  • considering the salary level of other employees at the client company when determining the salary to be paid to the temporary worker
  • informing temporary workers of the fees being paid by the client company for the assignment
  • reporting a breakdown of temporary worker salaries and the fees paid by client companies (i.e. the agency’s margin) to the Ministry of Health, Labor and Welfare
  • Taking measures to ensure employment opportunities are found for temporary workers when their assignments are terminated.

Impact on contingent workforce buyers
 For hirers of temporary agency workers, the knock-on effect of these new procedures imposed on staffing agencies will be increased costs given the added administrative burden and the obligation that agencies adhere to the concept of pay parity with traditional employees. But the amendments have other implications as well.

The change that will likely have the most significant impact is the addition of a sanction against employers for breaches of the act. However, unlike other provisions, these sanctions will not come into effect until October 2015. From that date, when a host employer accepts a temporary agency worker knowing that the arrangement is in breach of the act, the employer may be deemed to have offered the temporary worker a traditional employment contract. Any suspected breaches will be settled by the Labor Bureau, which will inform the employer and the temporary agency worker if it deems a permanent offer has been made by default. If the temporary agency worker accepts the offer, an employment contract will be formed with the employer.

If the employer was unaware that the temporary agency arrangement was not lawful, and this lack of knowledge was not due to any negligence on its part, no employment contract will be deemed to exist. However, it appears that this will be interpreted rather narrowly given that, to use this exemption, the employer will need to have first enquired with the relevant authority to ascertain the legality of the arrangement. Japanese employers are therefore advised to review their staffing agency contracts to ensure they include appropriate representations and warranties regarding their agencies’ compliance with the act.

The amendments to the act will also prevent employers from engaging any ex-employee as a temporary agency worker for a period of one year after termination of employment.

The other significant change brought about by the new amendments limits the ability of employers to establish their own internal staffing agency. Many large companies in Japan have been able to use temporary work arrangements to minimize employment risks by setting up their own internal staffing agencies supplying workers solely to their own group companies.

Some of the largest staffing companies in Japan are actually owned by large business conglomerates such as Panasonic and Mitsubishi. Owners of staffing firms include auto and electrical manufacturers, insurance companies, logistics firms, technology/ telecom providers, retailers, engineering companies and banks. This common practice will limited under the amended act, which will now require that a maximum of 80 percent of temporary working hours can be “sold” by a staffing agency to companies belonging to the same group as the staffing agency.

Unlike other aspects of the amended act, this restriction on internal agencies may well prove a positive benefit to independent staffing companies operating in the Japanese market and lead to further consolidation in a very fragmented market. Even before the new amendments to the act were announced, there was already a trend for these internal agencies to be sold to independent staffing firms, such as the sale of Mitsubishi-owned Mates to Recruit in 2009; the disposal of Intelligence by cable broadcaster, Usen Corp., to private equity firm, Kohlberg Kravis Roberts in 2010; the sale of Kobelco Personnel by Kobe Steel as well as the sale of Nikkei Personnel by the Nikkei newspaper group to Tempstaff, both in 2011; and the 2012 sale of Caplan Corp. by the multinational conglomerate, ITOCHU Corp., to Pasona.

The Japanese staffing market is the second-largest in the world, estimated at €43.6 billion (US$56.4 billion) in 2011 by Staffing Industry Analysts. However, these legislative changes will inevitably dampen demand for temporary agency workers at a time when the economy is challenged by huge government debt and the country is still trying to recover from the considerable damage caused by the 2011 earthquake and subsequent tsunami.

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