Japanese Labor and Employment Law 1 (Dismissal Regulations) | Articles

Overview

Labor and Employment laws in Japan apply to all employees working in Japan, regardless of nationality. Even if a foreign law is designated in the employment contract, the mandatory provisions of Japanese labor laws are applied to employees working in Japan.
Companies in Japan typically create “Rules of Employment” outlining employment conditions, which are mandatory if a workplace has ten or more employees. Keep in mind that any individual agreements on employment conditions that fall below the standards specified in the Rules of Employment are considered invalid.

General Dismissal Regulations

In contrast to the highly fluid labor market in the United States, which is characterized by employment-at-will, Japan’s labor market is more rigid, famously defined by its lifetime employment system.
Japanese labor laws provide significant protection for employees, and compared to other countries, the requirements for dismissal are very strict.
A dismissed employee can claim reinstatement, wages (sometimes up to two years’ salary in court practice), and compensation for wrongful dismissal unless the employer can prove with evidence that the dismissal had objectively reasonable grounds and the dismissal procedures were socially appropriate.

Ordinary Dismissal

The criteria for ordinary dismissal include having objectively reasonable grounds and appropriate dismissal procedures as per social norms.
In cases of poor work attitude or performance, both ordinary and disciplinary dismissals require that the employer has given the employee opportunities for improvement, such as issuing warnings or presenting a Performance Improvement Plan (PIP). It must be carefully assessed whether the employee showed remorse, defiance, or lack of prospects for improvement.
Due to a lack of awareness of the strictness of Japanese dismissal regulations, particularly among foreign companies, there are instances where employees are hastily dismissed for poor work attitude or performance. However, Japanese courts have invalidated dismissals based merely on below-average performance evaluations, requiring significant evidence of inefficiency with no prospect for improvement. Additionally, there have been cases in the Japanese subsidiaries of foreign companies where dismissals for lack of ability, even after undergoing a PIP, were deemed invalid because the analysis of what roles were initially expected upon hiring or how significantly the employee lacked the necessary skills for their position was insufficient.
Differences between Ordinary Dismissal and Disciplinary Dismissal. Ordinary dismissal is a termination based on breach of contract, whereas disciplinary dismissal is a sanction for violating company order, each having fundamentally different premises. However, the practical differences between them are not substantial, with ordinary dismissal often seen as a less severe sanction. Accordingly, the degree of objectively reasonable grounds required for dismissal varies; for instance, there are relatively many cases where ordinary dismissal has been deemed valid for disobeying work orders, whereas disciplinary dismissal requires a more significant level of misconduct to be recognized. In practical terms, the differences for disciplinary dismissal include the disadvantages of not receiving severance pay, and the dishonorable record of having been disciplined, which may negatively impact future job searches.

Disciplinary Dismissal

Disciplinary dismissal is permitted in cases of serious disciplinary reasons, such as assault, threats, workplace bullying (power harassment), sexual harassment, embezzlement, theft or damage to company property, leaking significant corporate secrets, significant misrepresentation of qualifications, or severe disobedience of work orders.
To proceed with a disciplinary dismissal, it is necessary that the Rules of Employment specify the reasons for discipline and the types of disciplinary actions. Typically, the types of disciplinary actions are defined in ascending order of severity, including reprimand, salary reduction, suspension, demotion with salary reduction, and finally, disciplinary dismissal. Disciplinary dismissal is a last resort and is not often chosen immediately unless the misconduct is extremely severe, such as embezzlement of company funds.
In practical terms, when disciplinary dismissal is considered for reasons such as poor work attitude, similar to ordinary dismissal, employers often issue warnings and encourage improvement. If no improvement is seen, less severe sanctions such as reprimand, salary reduction, or suspension are typically applied progressively. It is important to keep evidence of repeated warnings and their non-compliance with them in anticipation of legal disputes. If problematic behavior does not improve despite several disciplinary actions, then disciplinary dismissal may be considered. During disciplinary dismissal, it is also important to provide the employee with an opportunity to defend themselves and to ensure the fairness of the dismissal procedures. It is necessary to be aware that If the employment rules stipulate a disciplinary committee and it is omitted, this can lead to procedural violations.

Redundancy Dismissal

Redundancy dismissals occur when the employer needs to reduce staff to continue operations. Unlike ordinary or disciplinary dismissals, redundancy is based on business necessities, subject to stricter and more specific legal standards. To legally conduct redundancies, employers must demonstrate the following four factors:
1. Necessity of redundancy: Strong financial or business needs justifying redundancy, typically showing the business unit is operating at a loss. Strategic redundancy in profitable business units is scrutinized strictly by Japanese courts, favoring resolutions like voluntary retirement with enhanced severance packages. Courts may require the submission of financial statements for a detailed assessment of a company’s state. If a company conducts redundancy while simultaneously hiring, this contradictory behavior may lead courts to deny the necessity of redundancy.
2. Efforts to avoid dismissal: Measures such as reducing overtime, halting new and mid-career hiring, reassigning or seconding surplus staff, temporary layoffs, soliciting voluntary resignations, reducing executive pay, and other cost-cutting efforts.
3. Rational selection of employees: Fair selection is based on rational and objective criteria set by the employer, like performance evaluations, disciplinary history, attendance, length of employment, and family dependencies. Criteria cannot include discriminatory factors like nationality, race, creed, gender, union membership, etc. Consideration of age has been supported in some court cases and not supported in others.
4. Appropriateness of dismissal procedures: Honest discussions and negotiations about the necessity for redundancy, efforts to avoid dismissals, and details about the timing, scale, and rational selection with employees or their representatives (including unions where applicable).

Alternatives to Dismissal

If there is no compelling reason for dismissal, a safer, customary option is for the employer to propose voluntary resignation to the employee, typically with a financial incentive. This arrangement is often documented in a severance agreement detailing severance pay, waivers, and restrictions. While there is no legal requirement in Japan for a consideration period before signing such agreements, it is generally advisable to provide a grace period to allow employees to make informed decisions.
As a strategy to avoid strict dismissal regulations, employing workers on fixed-term contracts, renewable typically annually, can be considered. However, keep in mind that if fixed-term employees are employed repeatedly over a long period or have a reasonable expectation of continued employment, they may be subject to the same strict dismissal regulations as permanent employees.