The key practical issues in workforce restructuring include:
- Legal justification
- Works council and employee representatives’ process
- Labor administration process
- Costs and timing
- Litigation risk
Dismissal of employees for redundancy is mainly governed by the Labor Contracts Act (LCA) and the Labor Standards Act (LSA).
The Employment Measure Act (EMA) provides for specific notification and approval requirements in case of “large decrease in employment,” i.e., 30 or more redundancies in a month.
Additional notification requirements provided by the Act on Stabilization of Employment of Elderly Persons (ASEEP) apply in case of redundancies of five or more elderly persons in a month.
Required legal justification
The Labor Contracts Act (LCA) provides that a dismissal by an employer is deemed by law to be an abuse of the employer’s rights and, therefore, stays null and void, if the dismissal lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms (“Dismissal Requirement”) as provided by the LCA.
In terms of redundancy, courts generally determine whether they have met the Dismissal Requirement by looking into the following four factors (“four-factor test”):
- Necessity to reduce the workforce
- Whether the employer made decent efforts to avoid the dismissal for redundancy by taking measures other than the dismissal
- Appropriateness of selection of dismissed employees
- Appropriateness of dismissal procedure
Works council/unions or other employee consultation requirements
Consultation requirements with works council/unions
Under the Japanese law, there is no general obligation to consult with unions upon dismissing employees for redundancy unless there is an existing collective labor agreement between the employer and a union that obliges the employer to consult with the union. However, in light of the four-factor test to be used by courts to determine whether a redundancy is valid or not, the employer is encouraged to have a proper communication with unions (if any) or employees.
There is no works council system in Japan.
Consultation requirements with other employee representatives
There is no specific obligation to consult with other employee representatives in Japan.
Consultation requirements with employees
Under the Japanese law, there is no general obligation to consult with employees upon dismissing employees for redundancy.
However, to meet the four-factor test to be used by courts to determine whether a dismissal for redundancy is valid or not, the employer often explains reason of redundancy and offers voluntary severance packages to avoid redundancy. As such, consultation with employees to be dismissed is often undertaken.
Approval/notification of the labor authorities or other government authorities
Notification requirement: Under the Employment Measures Act (EMA), the employer must notify the Ministry of Health, Labor and Welfare (MHLW) in the prescribed form no later than one month prior to implementing any contemplated “large decrease in employment.” The required information includes measures to be taken to assist the employees in finding new jobs and the status of securing a new employer for the employees.
In addition, under the Act on Stabilization of Employment of Elderly Persons, in the event that five or more elderly persons (in principle, persons aged 45 or more) employed are made redundant in a month, the employer must notify the Public Employment Security Office no later than one month prior to the redundancy. The required information is similar to those required for the notification to the MHLW described above.
Approval requirement: Further, under the EMA, if there is a “large decrease in employment” due to downscaling of operations based on the employer’s economic reason, the employer must formulate a plan for measures to support such employees in finding new employment in the prescribed form, which must be submitted to the MHLW for approval no later than one month before the first relevant redundancy occurs. The required information includes current status of business, measures to be taken to assist the employees in finding new jobs, and opinion from employees’ representative (meaning a union organized by a majority of employees at the workplace, where such a union exists, or a person representing a majority of the employees, where no such union exists).
Employee selection criteria
The employer is not free to choose which employees will be dismissed for redundancy and should establish objectively reasonable criteria and fairly apply them. The four-factor test is used by courts in Japan to determine whether a dismissal for redundancy is valid or not. The criteria may differ from case to case (as the four-factor test is not established by law but by court precedents) but generally the employee’s attitude toward work (e.g., the number of days absent from work and history of disciplinary action), degree of contribution (e.g., years of service and performance), type of employment (e.g., regular employee or part-time worker), and circumstances (e.g., age and family structure) are used.
Under the Labor Standards Act (LSA), an employer may not dismiss an employee (whether for redundancy or not) during a period of absence from work for medical treatment with respect to injuries or illnesses suffered in the course of employment, nor within 30 days thereafter, and may not dismiss a female employee (whether for redundancy or not) during the period of absence from work before and after childbirth pursuant to the LSA (i.e., six weeks before expected birth date and eight weeks after childbirth, in principle) nor within 30 days thereafter.
Actions required to limit the negative impact and social plan
Internal alternative employment/redeployment
Based on the four-factor test to be used by courts to determine whether a dismissal for redundancy is valid or not, an employer is required to make a decent effort (both internal and external measures) to avoid dismissal for redundancy. Generally, cost reduction (e.g., reduction in directors’ compensation, bonus and other business cost), redeployment, secondment, suspension of new hiring, and company-wide voluntary retirement offer (including a provision of support in finding a new job inside or outside of the employer) would be considered.
For information on other external measures, see “Internal alternative employment/redeployment” above.
In cases where submission of a plan for large decrease in employment to the Ministry of Health, Labor and Welfare is not required but no voluntary resignation before dismissal is sought, one to two months would be sufficient. However, practically, due to the four-factor test to be used by courts to determine whether a dismissal for redundancy is valid or not, employers often seek voluntary resignations of employees (with voluntary payment of severance packages) before undertaking dismissals for redundancy. In such cases, an additional one to three months could be required. Additionally, if there is a collective bargaining session with unions, more time could be necessary.
The key components of mandatory HR legal costs are as follows:
- Payment of 30-day average wage (defined in the Labor Standards Act) if the employer does not give a 30-day advance notice for dismissal
- Payment of retirement allowance set forth in applicable employment contracts
Customary additional costs
Practically, due to the four-factor test to be used by courts to determine whether a dismissal for redundancy is valid or not, employers often seek voluntary resignations of employees (with voluntary payment of severance packages) before undertaking dismissals for redundancy. In such cases, payments under the packages consist customary additional costs. There is no official standards for the type and the amount of the packages and employers determine them on a case-by-case basis.
Hiring restrictions post-redundancy
There is no specific regulation on hiring after the implementation of dismissal(s) for redundancy. For the purposes of the four-factor test to be used by courts to determine whether a dismissal for redundancy is valid or not, however, new hiring implemented immediately after dismissals for redundancy would make courts consider that there had been weak necessity to undertake dismissals for redundancy in the first place, which is a part of the four-factor test. As such, new hiring after the implementation of dismissal(s) for redundancy should be carefully considered.
After a dismissal for redundancy, the dismissed employee can bring a lawsuit or other legal proceedings available to challenge the legal validity of the dismissal. Statute of limitation depends of the claim of the employee dismissed as given below:
- For reinstatement claim, there is no expressed statute of limitations.
- For back-pay of the employee’s salary (assuming that the dismissal was null and void), applicable statute of limitation is two years from each payday of relevant salaries.
- Claim of compensation for damages is usually subject to a three-year limitation from the date of the dismissal.
Litigation cannot stop or slow down the redundancy process.
Damages and other remedies
Remedies could be compensation for the harm suffered by the employee and/or reinstatement of the employee.
There is no punitive damage system in Japan.
Damages for unfair dismissal
Usually, illegal dismissal (where the dismissal lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, and therefore, is deemed null and void by the court) itself does not become a ground for compensation for damages. However, in an exceptional case, courts may consider a dismissal itself to constitute a tortious act and order the employer to compensate the damages (consolation money).
If the dismissal lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, and therefore, is deemed null and void by the court (failure to pass the four-factor test), employees affected could seek reinstatement with relevant back-pay with statutory interest (6% per annum).
Under the Employment Measures Act (EMA), failure to comply with the notification requirements to the Ministry of Health, Labor and Welfare (MHLW) in case of a “large decrease in employment,” may result in a criminal fine of up to JPY300,000 for the person in charge and the employing entity itself.
In addition, under the Act on Stabilization of Employment of Elderly Persons, failure to comply with the notification requirements to the MHLW in case of redundancy of five or more elderly persons (in principle, persons aged 45 or more) in a month may result in non-criminal fine of up to JPY100,000 for the representative of the employing entity.
There are no other specific issues to Japan.
Primary Contact for Japan Labor and Employment Law
EY Law Co.
+81 3 3509 1672