【AW Letter English vol.1】What Businesses Should Know Before Firing Anyone in Japan
What Businesses Should Know Before Firing Anyone in Japan
Under the Japanese Labor Standards Act, Labor Contract Act, relevant regulations, numerous landmark precedents and court cases, employees in Japan enjoy significant protection from dismissal. Businesses with operations in Japan should proceed with great caution as well as well-planned execution to undertake a dismissal.
Due to Covid-19, many businesses in Japan have experienced significant reduction in business, whether indicated by observations of storefronts closing down on a daily basis or an unprecedented national GDP shrinkage of 22% in Q2 as expected by Nikkei. Thus, businesses may be incentivized to terminate their employees as a part of business restructuring under redundancy termination. In this case, four requirements established by case laws must be satisfied: (i) demonstrating economic necessity - a company must prove that its business circumstance is such that curtailing the redundancy is unavoidable and necessary; (ii) putting effort in avoiding termination - a company must have taken reasonable steps to avoid termination; (iii) adopting reasonable selection - employees to be terminated should be selected pursuant to reasonable and fair standards; and (iv) adopting due process - a company must prove that it has conducted due process including sufficient consultations with employees and labor unions, if any.
3. Dismissal Based on Poor Performance
Apart from redundancy and business restructuring, poor performance and misconduct are also common grounds for dismissal, which are stipulated in the rules of employment of most companies in Japan. However, poor performance or misconduct itself may not always justify dismissal in Japan. Under the Labor Contract Act, an employee is dismissible only if the company has objectively reasonable grounds to do so, and the dismissal is not deemed as unreasonable with respect to general social norms (Article 16 of the Labor Contract Act).
In general, regular employees with an indefinite term contract are dismissible only if their performances are exceedingly poor. Case law have found that mere “poor performance is not sufficient to justify a dismissal”, in addition to the requirement that “a company must prove that an employee’s performance is so poor that the employment can no longer be sustained”. Moreover, the landmark case Tokyo District Court, Judgement, 28 March, 2016 sets the premise for “exceedingly poor performance”. In the case, the company dismissed an employee due to his poor performance on the basis that his personal business commitments, an inhouse performance evaluation method, amounted to only 2 out of 5 over an extended period of time. The court verdict, however, granted that continuous low scores of personal business commitment should not be automatically recognized as a reasonable reason of dismissal since personal business commitment is merely a comparative evaluation adopted by the company internally. In sum, case laws have established a general rule of thumb for employers to undertake dismissals on the ground of poor performance or misconduct legally. A dismissal is only legally plausible and justified if an employee has been warned of its performance or misconduct and failed to improve despite the second chance given. The key takeaway here is that businesses should slowly and gradually build up the case to justify a dismissal prior to engaging the employee while continue to gather strong evidence of the process in anticipation of a challenge in court.
On the other hands, in case of the well-paid professionals and senior employees who are recruited as mid-carrier employees whose positions are specialized as defined by their employment contracts, Japanese courts tend to approve their dismissals in the absence of positional rotations/demotions (which are necessary when dismissing regular permanent employees) if they fail to exhibit the level of special capabilities expected, albeit businesses must provide them with, at the bare minimum, opportunities to improve at their assigned position (e.g. giving reasonable guidance for improvement) before commencing the dismissal procedure.
The Labor Contract Act also states that a company should not dismiss any employee under a fixed term labor contract during the term unless such dismissal must be undertaken due to unavoidable circumstances (Article 17 of the Labor Contract Act). The validity of such dismissal would be scrutinized even more strictly than permanent employees.
4. Disciplinary Dismissal
Business may also consider the ultimate way out - disciplinary dismissal. Article 15 of the Labor Contract Act stipulates that a disciplinary action is considered as invalid due to abuse of the right to terminate granted upon disciplinary actions if it lacks reasonable grounds from an objective point of view, of which the assessment of objectivity involves the action of the worker in question, the characteristics and attitude of the worker.
Generally, it is considered plausible for businesses to undertake disciplinary actions (including disciplinary dismissal) against employees who violate the company’s rules, directions, or orders, provided that the company’s rules illustrating such consequences are clearly established pertaining to disciplinary actions. This also means that disciplinary actions taken based on grounds that are not set out in the rules of employment are likely to be regarded by courts as wrongful termination. Even the consequences are clearly established in employment rules, businesses still need to administer fair disciplinary actions proportionate to the level of violation of rules, taking into consideration the details of past disciplinary action in comparable cases. Businesses should also avoid administering disciplinary actions retroactively against activities occurred prior to when the rules pertaining to such disciplinary actions came into effect as well as disproportionately undertaking multiple disciplinary measures in against a single activity in violation.
Bottom line here is that businesses should examine with additional vigilance when the need to commence disciplinary dismissal arises, maintain a fair and reasonable decision process on a case-by-case basis if engaged, and comply fully with due process (e.g. grant of opportunity for excuse).
5. Procedural Regulations
In addition, when undertaking dismissal regardless of the ground, businesses must comply with the following procedural regulations:
A company must provide a prior dismissal notice of 30 days or payment in lieu of the dismissal notice when executing a dismissal. Statutory exemptions to this procedure regulation are extremely limited, with one of the few applied being the case that the term of the employment contract of the dismissed employee is less than two months. (Articles 20 and 21 of the Labor Standards Act) Businesses should recognize that even in case of a punitive dismissal, unless the approval of the director of the relevant Labor Standards Inspection Office is obtained, a company must not dismiss the employee without conducting above mentioned procedures.
In addition, a company must issue a letter, to the employee, that states the grounds for dismissal without delay, if requested by the dismissed employee either at the time of dismissal or during the period between the delivery date of dismissal notice and the date of dismissal (Article 22 of the Labor Standards Act).
Keep in mind, however, that in certain situations, such requirement may make extremely difficult for a company to undertake dismissal. For example, while an employee is on leave from work as a result of illness or injury incurred in the course of work, and within 30 days of the completion of such leave, or while an employee is on maternity leave of six week (fourteen weeks in case of multiple pregnancy) prior to and eight weeks after the child birth or for 30 days following the completion of such leave (Articles 19 and 65 of the Labor Standards Act) .
Dismissal is not a happy situation for both employees and employers. Adding onto the sentiment, the Japanese legal system governing labor related matters, from what most international businesses have expressed to us, may not be as transparent as those of other jurisdictions due to the fact that most of the substantial laws that the courts enforce are embedded in precedents and case laws. To successfully and comprehensively mitigate the risks involved in executing dismissals, businesses should clarify the exact reason why he or she should be dismissed, and give him or her opportunities for correction in good faith. Nevertheless, businesses must also be fully prepared for litigation by collecting evidences during the processes and consult with professionals if possible.
Mugiko Ashiwa (Associate Lawyer)
Mugiko Ashiwa has two years of experience as a judge at a district court in Japan. She changed her career path and became a cross border lawyer since 2018. She now works on general corporate matters such as M&A, JV and crisis management issues at our Tokyo office.
Admitted: Japan (2018)
Education: Keio University, LL.B. (2012), Keio University Law School, J.D. (2014).
Professional Experience: 2016-2018 an Assistant Judge at Gifu District Court, 2018 Joined AsiaWise Group
Guangjia J. Jiang (Paralegal)
At AsiaWise, Guangjia is assisting a wide array of clients on cross-border legal matters alongside our Tokyo & Indian attorneys. Prior to joining AsiaWise, he has gained commercial law experiences in GBA (Guangzhou, PRC), Japan, and the State of N.Y.
Education: Nagoya University, LL.B. (2019).
 You may also want to consider the subsidy for employment adjustment made available for businesses facing labor related difficulties by the Japanese government. If granted, businesses will be entitled to receive JPY 15,000 (maximum) per employee per day.