Secondment Within a Corporate Group under Japanese Labour Law

In Japan, secondment (出向, shukko) is commonly used within corporate groups—for example, where a parent company temporarily assigns an employee to a subsidiary, affiliate, or another group company while maintaining the employee's employment relationship with the original employer.

The central legal distinction is between zaiseki-gata shukko (在籍型出向), where the employee remains employed by the original company while also working under the direction of the host company, and transfer/secondment involving termination of the original employment relationship (転籍, ten-seki). The latter normally requires the employee's consent. The Ministry of Health, Labour and Welfare describes zaiseki-type secondment as involving employment relationships with both the sending and receiving companies.

1. Legal framework

The principal statutory provision is Article 14 of the Labour Contract Act. It provides that where an employer has authority to order secondment, the order is invalid if, considering the necessity of the secondment, the circumstances surrounding selection of the employee, and other circumstances, it constitutes an abuse of rights.

Accordingly, a group-company secondment should normally be examined through four questions:

1. Does the employer have contractual authority to order the secondment?
2. Is there a genuine business reason for the secondment?
3. Was the particular employee selected reasonably?
4. Does the arrangement impose disproportionate disadvantage on the employee?

A group relationship by itself does not automatically give the parent company or group employer unrestricted authority to move employees between companies.

2. How group-company secondment operates

A typical structure is:

Parent/Sending Company → Secondment Agreement → Subsidiary/Host Company

while:

Employee ↔ Employment relationship with sending company

and, depending on the structure:

Employee ↔ employment relationship/working arrangement with host company

The host company normally controls the employee's day-to-day work, while the original employer may continue to administer matters such as:

• seniority;
• retirement benefits;
• pension arrangements;
• promotion;
• salary administration;
• performance assessment;
• return to the original company;
• disciplinary authority, depending on the agreement.

The MHLW specifically notes that secondment arrangements should address matters such as the secondment period, employee status, treatment and other practical conditions.

3. Corporate-group relationship is important but not decisive

A parent and subsidiary are ordinarily separate legal entities.

Therefore, an employee of Company A cannot simply be treated as an employee of Company B merely because:

• Company A owns Company B;
• both companies belong to the same corporate group;
• the same directors manage both companies;
• the companies share HR policies.

The legal basis for the secondment must still be established.

This becomes particularly important where the employee's contract, work rules or collective agreement contains a group-company secondment clause.

A properly drafted clause may substantially strengthen the employer's authority to order a zaiseki-type secondment, but it does not eliminate the requirement that the order be exercised reasonably.

4. Employee consent

Japanese law does not treat every zaiseki-type secondment as requiring fresh individual consent.

Where the employment contract, work rules and collective agreement already establish a sufficiently clear secondment framework, an employer may in appropriate circumstances order secondment without obtaining separate consent each time.

The leading authority is Shin Nippon Steel (Nippon Steel) Case.

The Supreme Court recognized that detailed work-rule and collective-agreement provisions concerning external employment, secondment periods, employee status, wages, retirement benefits and other treatment could provide the legal basis for an employer to order zaiseki-type secondment without individual consent.

However, this should not be confused with ten-seki. If the employee's original employment relationship is terminated and a new employment relationship is created with the receiving company, individual consent becomes fundamentally important.

5. Case Law

Case 1 — Shin Nippon Steel / Nittetsu Unyu No. 2 Case

Supreme Court, Second Petty Bench, 18 April 2003

This is the leading Japanese Supreme Court authority on secondment.

Employees were working in railway transportation operations at a steel plant. As part of business restructuring, the relevant work was outsourced and employees were ordered to work for the outsourcing company while remaining employed by the original company. The employees objected.

The Supreme Court upheld the secondment.

The important factors included:

• work rules contained a provision allowing external employment for business necessity;
• the collective agreement contained corresponding provisions;
• a detailed external-work agreement regulated secondment;
• the agreement addressed the secondment period;
• employee status was protected;
• wages and retirement benefits were addressed;
• allowances and personnel treatment were regulated;
• there was a genuine business necessity;
• employee selection was reasonable;
• there was no substantial disadvantage to the employees.

The Court also held that the fact that the secondment became lengthy did not automatically transform it into a transfer requiring individual consent.

Principle:
A properly structured zaiseki secondment within a corporate restructuring can be valid without fresh individual consent where the contractual framework and circumstances support the employer's authority.

Case 2 — Shin Nippon Steel / Nittetsu Unyu Case

Fukuoka High Court, 12 March 1999

This was part of the same litigation leading to the Supreme Court decision.

The court considered the employer's authority under the work rules and the circumstances surrounding the prolonged secondment.

The court accepted that:

• there was business necessity;
• employee selection was reasonable;
• the employees' work and workplace did not materially change;
• the secondment did not produce an unacceptable degree of disadvantage.

The case is particularly useful because the secondment was repeatedly extended. The court did not automatically regard prolonged secondment as equivalent to permanent transfer.

Principle:
Duration alone is not necessarily determinative. The overall substance of the employment relationship and the employee's continuing status must be examined.

Case 3 — Kowa Case

Nagoya District Court, 26 March 1980

The employer belonged to a group consisting of numerous affiliated companies. Employees had been recruited through a common recruitment system for group companies, and the employer's rules contemplated transfers to affiliated companies.

An employee challenged an order to work for an affiliated company.

The case is important for group-company secondment because the court examined:

• the employer's recruitment practices;
• the employee's knowledge of group-company mobility;
• work-rule provisions;
• established group-company personnel practices;
• the parties' understanding when the employment relationship was formed.

The case is therefore an important illustration of how the employment relationship's historical context can affect whether a secondment obligation forms part of the employment contract.

Principle:
A genuine and established group-company mobility system, particularly when communicated to employees and reflected in work rules, can support the legal basis for secondment.

Case 4 — Japan Stainless / Nissho Packaging Case

Niigata District Court, Takada Branch, 31 October 1986

The case concerned secondment and transfer involving affiliated companies. The court considered whether individual consent was necessary where the employer's work rules authorized external assignments.

Importantly, the court examined the relationship between the companies and found circumstances indicating that the relevant group entities were effectively closely integrated.

However, the court also considered the employee's personal circumstances. In the particular case, family-care circumstances and the hardship associated with relocation were significant.

The court therefore demonstrated that even where an employer possesses a contractual secondment power, the power cannot be exercised without regard to serious personal hardship.

Principle:
Contractual authority to second does not provide unlimited discretion; employee-specific hardship can affect the validity of the order.

Case 5 — Kowa-related Secondment Litigation

Nagoya District Court, 26 March 1980

The Kowa litigation is also significant for distinguishing a group-company personnel transfer from an ordinary transfer within the same corporate entity.

The court considered whether the employee had effectively been informed, from the beginning of employment, that work could be performed at affiliated companies.

The employer's established group-wide employment practices and work rules were relevant to determining the scope of the employee's contractual obligations.

Principle:
When drafting group-company employment arrangements, the employer's historical practice, recruitment explanations and work rules can collectively help establish the contractual basis for secondment.

Case 6 — Nippon Stainless / Affiliated Company Secondment Case

The Nippon Stainless case is particularly relevant to group-company arrangements because the secondment involved an affiliated subsidiary.

The court accepted that an applicable work-rule provision could provide authority for secondment without individual consent. At the same time, it scrutinized the employer's motives and the employee's personal circumstances.

Where the employee's family circumstances made relocation exceptionally difficult, the exercise of the employer's authority was treated as problematic.

The case therefore illustrates an important distinction:

Having a secondment clause is not the same as having unlimited authority to use it.

The employer must still exercise the authority consistently with the purpose of the provision and without abusing its personnel-management power.

6. Abuse of rights under Article 14

Even if the company possesses contractual authority, Article 14 of the Labour Contract Act can invalidate a secondment order that amounts to an abuse of rights.

The main factors are:

A. Business necessity

The company should be able to explain why the secondment is necessary.

Examples include:

• group restructuring;
• integration of business operations;
• temporary shortage of personnel;
• launch of a new subsidiary;
• transfer of technical expertise;
• management development;
• business expansion;
• temporary operational support;
• outsourcing or reorganisation.

A purely arbitrary decision is much more vulnerable to challenge.

B. Reasonableness of employee selection

The employer should have objective criteria for deciding who is seconded.

Potentially relevant criteria include:

• skills;
• experience;
• job function;
• business requirements;
• seniority;
• location;
• existing group mobility arrangements.

Selection that appears retaliatory, discriminatory or personally targeted creates greater legal risk.

The MHLW's explanation of Article 14 specifically identifies both necessity and the circumstances surrounding selection of the employee as factors in determining abuse of rights.

C. Employee disadvantage

The company should compare conditions before and after secondment.

Relevant matters include:

The Supreme Court's Nippon Steel decision demonstrates the importance of protecting the employee's employment status and treatment during secondment.

7. Secondment agreement between group companies

A good corporate-group secondment agreement should identify at least:

Parties

• sending company;
• receiving company;
• employee.

Duration

• commencement date;
• expiry date;
• extension mechanism;
• maximum duration, where appropriate.

Employment status

• continuing employment with sending company;
• employment relationship with receiving company, if applicable;
• responsibility for personnel administration.

Duties and supervision

• job description;
• reporting line;
• authority of host company;
• performance management;
• workplace rules.

Compensation

• salary;
• bonus;
• allowances;
• overtime;
• reimbursement;
• payroll responsibility.

Benefits

• health insurance;
• pension;
• retirement benefits;
• paid leave;
• welfare benefits.

Confidentiality and IP

• confidential information;
• inventions;
• copyright;
• trade secrets;
• data handling.

Health and safety

• occupational health;
• workplace safety;
• harassment prevention;
• accident reporting.

Discipline

The agreement should identify which company can:

• investigate misconduct;
• issue instructions;
• impose disciplinary measures;
• terminate or recommend termination.

Return

A particularly important clause should specify:

• when the employee returns;
• who decides return;
• whether early return is possible;
• what happens if the host company no longer requires the employee.

8. Salary and cost allocation

The sending company may continue paying the employee and recover some or all of the cost from the receiving company.

Alternatively, the receiving company may administer payroll while the original employment relationship continues.

The agreement should therefore clearly establish:

Employee compensation → responsible entity → reimbursement mechanism → tax/social-insurance treatment.

For multinational groups, this also becomes relevant to:

• transfer pricing;
• permanent-establishment issues;
• payroll withholding;
• social-security coverage;
• immigration status;
• cross-border tax;
• foreign exchange;
• expatriate allowances.

These issues become especially important where the secondment crosses national borders.

9. Secondment versus worker dispatch

This distinction is extremely important.

Secondment — 出向

The employee is transferred temporarily to another company while retaining an employment relationship with the original employer.

Worker dispatch — 労働者派遣

The Worker Dispatching Act framework applies where a dispatching business supplies workers to another entity under the statutory dispatch model.

The fact that companies are members of the same corporate group does not automatically make an arrangement a secondment rather than dispatch.

Japan also has special restrictions concerning group-company dispatch. MHLW materials, for example, explain an 80% limitation on group-company dispatch for dispatch businesses where group companies account for the majority of dispatch destinations.

Therefore, companies should not label an arrangement "secondment" merely to avoid the Worker Dispatching Act.

The actual substance of:

• who employs the worker;
• who directs the work;
• why the arrangement exists;
• how the worker is supplied;
• whether the arrangement is temporary;

must be examined.

10. Parent company → subsidiary secondment

A common structure is:

Parent Company A

↓ employee remains employed by A

Subsidiary B

↓ daily work and supervision

Employee

This can be legitimate where:

• A has authority under its employment framework;
• B genuinely needs the employee;
• the employee's role is clearly defined;
• compensation is protected;
• the secondment period is defined;
• the employee's legal status is clear;
• the arrangement does not constitute disguised worker dispatch.

11. Important HR risks

For corporate groups, the greatest risks usually arise from inadequate documentation.

Risk 1 — No secondment clause

If the employment contract and work rules say nothing about group-company secondment, the employer's position can become considerably more difficult.

Risk 2 — Permanent secondment disguised as temporary

Repeated extensions can create disputes concerning the actual nature of the arrangement.

The Nippon Steel litigation demonstrates that lengthy duration does not automatically invalidate secondment, but the entire relationship and circumstances must be examined.

Risk 3 — Reduction in compensation

A secondment should not casually be used as a mechanism for reducing contractual compensation.

Risk 4 — Arbitrary selection

Selection motivated by retaliation, discrimination or personal hostility creates substantial risk.

Risk 5 — No return mechanism

Employees should understand whether and when they will return to the original company.

Risk 6 — Confusion over disciplinary authority

The agreement should clearly establish who investigates and who imposes disciplinary action.

Risk 7 — Disguised dispatch

If the arrangement actually functions as worker dispatch, the Worker Dispatching Act must be considered.

12. Practical compliance checklist

Before implementing a group-company secondment, HR should document:

1. Business reason for secondment
2. Applicable employment-contract clause
3. Work-rule/collective-agreement authority
4. Employee's existing job
5. Proposed job at host company
6. Secondment period
7. Work location
8. Reporting structure
9. Salary and bonus
10. Overtime arrangements
11. Leave
12. Social insurance
13. Retirement benefits
14. Performance evaluation
15. Promotion/seniority
16. Disciplinary authority
17. Health and safety responsibility
18. Harassment complaint mechanism
19. Confidentiality/IP
20. Return-to-sender mechanism
21. Extension procedure
22. Early termination procedure
23. Tax implications
24. Immigration requirements for international secondment
25. Worker Dispatching Act analysis

13. Key legal principles from the six cases

The MHLW's compilation of secondment precedents expressly identifies Nippon Steel, Kowa, Nippon Stainless, Tokai Railway and other cases as relevant authorities on the legal basis and limits of secondment.

Conclusion

For a Japanese corporate group, intra-group secondment is legally workable but should be treated as a structured employment-law transaction rather than merely an internal HR transfer.

The strongest arrangement normally has:

clear employment authority + detailed work rules + written inter-company secondment agreement + reasonable business necessity + objective employee selection + protection of employment conditions + defined duration/return rights + careful distinction from worker dispatch.

The central Supreme Court authority, Shin Nippon Steel (18 April 2003), shows that individual consent is not necessarily required for every zaiseki-type secondment. But Article 14 of the Labour Contract Act continues to restrict secondment orders that amount to an abuse of rights.