If we were to list the “frequently asked questions” by multinationals doing business in Japan, the first question on the list might be “how do we dismiss employees?” The short answer is “with extreme care,” as Japan is famous for its “lifetime employment” system, and the law here is very protective of employees. Many multinationals have tried to fire an unnecessary or problematic employee in Japan, only to see that employee sue for reinstatement and damages (and, in most cases, win).

The statutory law on dismissal is remarkably vague: the Civil Code provides seemingly straightforward termination provisions for employment contracts, and Article 16 of the Labor Contract Act merely states that “a dismissal shall, if it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, be treated as an abuse of right and be invalid.” However, courts generally follow certain principles in determining what constitutes “reasonable” and “appropriate” grounds for dismissal.

There are essentially three ways for an employer to rid themselves of an unwanted employee:

1: Negotiated voluntary resignation

The most common method of dismissing employees in Japan (and, in most cases, the only method likely to work) is to negotiate the employee’s resignation on a voluntary basis. Employees will typically require a lump-sum payment equivalent to several months’ salary, in addition to any other accrued severance pay and benefits. The “acceptable” amount varies based on the employee’s position, age, family circumstances and other factors that may affect their future employability (keeping in mind that Japan has a fairly static labor market, and finding a new job can be very difficult and time-consuming, particularly for older employees). Companies that need to downsize their workforce for strategic or financial reasons will often solicit voluntary resignations through an early retirement program.

The process of a negotiated resignation is important, as a court may void a resignation if it is later determined to have been coerced or otherwise involuntary. The employer must give the employee time to consider and negotiate the resignation terms, and must avoid unfair tactics that pressure the employee to resign.

2: Termination for cause

Disciplinary dismissal can be upheld in instances of severe misconduct, such as criminal conduct in the workplace, extended or repeated absence from work, or misrepresentation of material qualifications at the time of hiring.

Termination for less severe offenses may also be possible if the employee has been warned of their misconduct and has failed to improve, but the employer should tread slowly and gradually, and have strong evidence of the warning process in anticipation of a challenge in court. In practice, Japanese employers tend to use less severe sanctions, such as reprimands, suspension, and demotion, for all but the very worst offenses (but these sanctions can also be challenged; see our post last year on the Osaka Aquarium case).

Any termination for cause must be in accordance with the employer’s written rules of employment, which must themselves be reasonable by Japanese standards. There is also a statutory 30-day notice period, which may be shortened with the approval of the regional Labor Standards Office.

3: Economic circumstances

Layoffs are a rare occurrence in Japan, and are only permitted in cases of truly severe financial distress where the employer can demonstrate that a reduction in workforce is necessary in order to avoid insolvency. In the case of a multinational employer, this necessity is judged based on the employer’s worldwide operations, not just its operations in Japan. Even in clear-cut bankruptcy cases, there are further procedural hurdles for the employer to clear.

Before implementing layoffs, the employer must make efforts to avoid layoffs by implementing other cost reduction measures. The scope of measures required can vary depending on the circumstances of the employer, but may include reduction of working hours, reduction of executive compensation, personnel reallocation and solicitation of voluntary resignations. If a terminated employee can demonstrate that alternative cost reduction measures were available to the employer, their termination may be declared invalid.

The selection process must also be reasonable. Case law suggests that employers can consider certain objective factors such as disciplinary history, attendance rates, and family support obligations when deciding which employees should be terminated. Age-related considerations have been upheld in certain cases and invalidated in others. The use of subjective or unclear standards, such as personnel evaluation results, may allow employees to challenge the process.

Throughout the process, the employer is required to consult with any applicable labor unions and to explain the process to employees in good faith. As in the case of disciplinary termination, there is a statutory 30-day notice period, which may be shortened with the approval of the regional Labor Standards Office.

Structuring around the restrictions

Japanese employers have several techniques for dealing with the limitations on dismissal of employees. Many companies use temporary, contract, or dispatched employees who are hired for a fixed period of time (typically a year) on a renewable contract. These arrangements are often used for lower-level administrative and labor jobs, but there are limitations on the types of jobs for which these contracts may be used, and fixed-term employees become subject to permanent employee protections once they have been employed for an extended period of time, making this far from a comprehensive solution. Another common technique is to pay a large portion of annual compensation in the form of discretionary bonuses, which can be reduced as an incentive for employees to depart. When employees steadfastly refuse to leave, they are often reassigned to undesirable jobs, or even placed in special “boredom rooms” with minimal responsibilities and no outside contact, in hopes of inducing a departure. All of these strategies carry their own legal implications and must be employed with care.

Dismissal situations are inevitable for most employers, so multinationals have to consider these limitations when setting up on-shore operations in Japan, and structure their work rules, labor contracts, and compensation packages accordingly.