In general, labor contracts in Japan have no contract period.
Employees who are hired based on the labor contract with no period are called "regular employees", and it is difficult to dismiss those regular employees.
Labor Contract Act Article 16 says, "A dismissal shall, as long as it lacks objectively reasonable grounds and is considered to be inappropriate in general societal terms, be treated as an abuse of the right and be invalid."
In Japan, it is said that even if an employee has shown a poor result, it is very difficult to dismiss him/her due to this article. We need more serious infringement of the labor contract by him/her.
As for a dismissal due to the reduction in the functions of a company, it shall be determined in light of (1) the necessity of the personnel reduction, (2) the necessity of choosing the dismissal for the purposes of reorganization, (3) the necessity of choosing the employee who has to be dismissed and (4) the validity of the dismissal procedure in a comprehensive manner. Moreover, a dismissal shall be approved only under a severely disadvantaged management status.
Therefore, in Japan, as it is difficult for a company to dismiss regular employees only by the company order, it is common for a company to make agreement on retirements with employees.
Labor Contract Act Article 20 says, "In the event where an employer wishes to dismiss a worker, the employer shall provide at least 30 days advance notice. An employer who does not give 30 days advance notice shall pay the average wage for the period of no less than 30 days."
However, as I explained above, even if a company provides at least 30 days advance notice or pays the average wage for the period of no less than 30 days, there is a possibility that the dismissal is invalid, so it is common for a company to pay three to six months worth salaries to recommend retirements to and make agreement on retirements with employees.
In contrast, non-regular employees such as "part-time workers", "arubaito (side-job) workers" or "dispatched workers through temporary staffing agencies" should obey the employment contract, and the contract termination may be described in the contract.
Therefore, a company can let those employees go upon the contract expiry without renewing it.
However, as for a dismissal in the middle of the contract period, there are regulations similar to those applied for regular employees as I explained above.
Furthermore, there is a new rule specifying that, if the fixed-term labor contract is repeatedly renewed more than five years, a company should change the contract from a fixed-term labor contract to a labor contract without a definite period by the requests from employees.
The rigid legal system pertaining to labor in Japan is criticized for interfering economic growth by reducing mobility in employment.
However, as the political power of the regular employees are strong, there is no prospect that the Japanese labor system will improve.
Recently, many of the Japanese companies do not employ regular employees but employ non-regular employees such as "part-time workers," "arubaito (side-job) workers," or "dispatched workers”.
Therefore, I recommend you to employ staffs with fixed-term labor contracts if you are not sure to continue to employ them and pay salaries.