含羞草社区

Japan’s employment system is uniquely distinguished from other countries by exceptional job security for employees, with a prominent feature of labour law including stringent restrictions on terminating employment.

This article explains restrictions on ending employment contracts categorised under ordinary dismissal, redundancy dismissal, disciplinary dismissal, and non-renewal of fixed-term contracts.

Ordinary dismissal

Ordinary dismissal is when an employer unilaterally terminates employment due to an employee’s breach of obligations under the employment contract. When an employer dismisses an employee without a fixed-term contract, such dismissal must meet two conditions:

1. Proper dismissal procedures must be followed, including providing a 30-day advance notice, or paying the equivalent of at least 30 days’ wages in lieu of notice, and ensuring the dismissal does not occur during a prohibited period; and
2. Dismissal must be based on objectively reasonable grounds, considered appropriate in general societal terms (article 16 of the Labor Contract Law).

The second condition is known as the doctrine of abuse of the right to dismiss. In the Japanese employment system, continuous employment until retirement is often expected, and because dismissal can have severe consequences for employees with limited economic resources, the law imposes restrictions on dismissal.

In practice, determination of whether a dismissal is based on objectively reasonable grounds and is appropriate in general societal terms involves considering factors such as:

1. Whether the employee’s lack of ability or poor work attitude constitutes a breach of contract;
2. Whether the reason for dismissal falls under ordinary dismissal grounds outlined in the company’s rules of employment (Syugyo-Kisoku); and
3. Whether the employee was given an opportunity to improve or not.

In some cases, a Performance Improvement Plan (PIP) may be implemented, and if performance does not improve despite the PIP, dismissal may be considered by the employer. However, it is important to note that implementation of a PIP alone does not automatically validate a dismissal.

The reasonableness of the PIP, employee’s response and results of the PIP must all be considered when determining the dismissal’s validity.

Redundancy dismissal

Dismissals carried out due to the need for workforce reduction are specifically referred to as redundancy dismissals.

While redundancy dismissal is a type of ordinary dismissal, it is unique in that the dismissal is not due to any fault of the employee, and validity of such dismissals therefore requires special consideration.

Court precedents have established that the validity of redundancy dismissals is determined by four factors:

1. The necessity of workforce reduction;
2. Efforts made to avoid dismissal;
3. Reasonable criteria used to select employees for redundancy dismissal; and
4. Appropriate procedures, including explanations provided to employees.

When closing a company’s only site in Japan, redundancy dismissals are generally more likely to be deemed valid. However, simply eliminating the position or duties of the affected employees does not automatically justify redundancy dismissal.

It is generally necessary to consider whether a transfer to another position or duties is possible or not. Even in a job-based employment system, the absence of a role or position does not exempt an employer from the obligation to make efforts to avoid dismissal, and this should be particularly noted.

Disciplinary dismissal

Disciplinary dismissal is a form of disciplinary action serving as a punitive measure for serious violations of corporate rules. Nearly all companies include disciplinary dismissal as a type of sanction in their rules of employment or individual labour contracts if no rules of employment are established.

In addition, it is common for employers to stipulate in rules of employment or individual contracts that part or all of the retirement allowance will not be paid in the case of disciplinary dismissal.

For a disciplinary dismissal to be valid there must be objectively reasonable grounds and the dismissal must be deemed appropriate in general societal terms, given the nature and circumstances of the employee’s conduct (article 15 of the Labour Contract Law). This means that the employee’s conduct must be serious enough to justify the loss of the employment relationship.

Additionally, to justify disciplinary dismissal, several factors must be rigorously assessed, including proportionality of the punishment, the principle of equal treatment among employees, compliance with procedural rules in rules of employment, and ensuring the employee’s right to defend themselves.

Fixed-term contracts

The above-mentioned regulations primarily pertain to employees without fixed-term contracts. However, there are specific provisions regarding the dismissal of employees with fixed-term contracts.

In principle, the contract terminates upon end of the fixed term, and during the contract period dismissal is only permissible for unavoidable circumstances (article 17(1) of the Labour Contract Law).

Since obligation to continue employment is even more stringent until expiration of a fixed-term contract, “unavoidable circumstances” are understood to be more serious than the “objectively reasonable grounds, considered to be appropriate in general societal terms” required to dismiss an employee without a fixed-term contract.

While the contract typically ends when the fixed term expires, before execution of the contract an employer must also clearly state criteria for contract renewal, enhancing predictability and transparency as part of the mandatory disclosure of working conditions.

Since April 2024, if there are any limits set on the total contract duration, or the number of renewals, these must also be explicitly disclosed before execution of the contract. Fixed-term contracts are also subject to regulations such as maximum duration limits, the right to convert to a “without fixed-term contract” for employees who have had their contracts repeatedly renewed for more than five years, and the Doctrine of Non-Renewal of Fixed-Term Contracts.

In summary, under Japanese labour law, in certain situations, even if a fixed-term employment contract expires, an employer cannot refuse to renew the contract without objectively reasonable grounds, and without refusal deemed appropriate in general societal terms.

This is known as the Doctrine of Non-Renewal of Fixed-Term Contracts, which protects an employee’s reasonable expectation of continued employment, even if the contract is formally for a fixed term.

“Equivalent to Without Fixed-Term Contracts” (article 19(1) of the Labour Contract Law), the doctrine is based on factors such as:

1. The nature of work is not different from those of an employee without a fixed-term contract;
2. The parties’ subjective intentions to renew a fixed-term contract; and
3. Whether the renewal process is ambiguous or not, terminating the fixed-term employment contract is deemed equivalent to terminating a labour contract without a fixed term.

On the other hand, “Reasonable Expectation to be Renewed” (article 19(2) of the Labour Contract Law) applies when there is no long history of repeated renewals, and the renewal process is not ambiguous, but the employee’s expectation of renewal is reasonable, based on the nature of work and subjective intention of the parties.

Key takeaways

Japanese labour law imposes strict restrictions on the termination of employment contracts to protect employees. If a dismissal (or refusal to renew) is found to be invalid, the employer may be required to pay back wages and may often incur additional costs to terminate the contract with the employee, resulting in significant financial costs.

Additionally, since April 2024, employers are required to specify in the employment contract potential duties and locations where the employee might engage in them. Failing to comply with these requirements could disrupt employment management, including planned relocation of employees, during the contract period.

Given the complex regulations, it is essential for employers to have a thorough understanding of Japanese labour law when employing workers. To ensure flexible and proper employment management, it is advisable to consult with a lawyer not only when terminating an employment contract but also when concluding one.