Article 16 of the Japanese Labour Contracts Act provides that “If a termination lacks objectively reasonable grounds and is not considered to be appropriate in general social terms, it is treated as an abuse of rights and is invalid”. Obviously the terms “objectively reasonable grounds” and “appropriate in general social terms” are ambiguous but here is a case which sheds a little light on those two phrases.

On March 29, 2016 the Tokyo District Court ruled that the termination of the five plaintiff employees by Japan IBM was invalid. Chief Judge Toru Yoshida ordered Japan IBM to reinstate them and to pay their salary retroactive to the date of termination. The plaintiffs were all dismissed without notice based on what IBM said was their poor performance. The employees alleged that the real reason was a desired reduction of the workforce and that IBM picked on them because they were members of a labour union which was against any restructuring, and not because their performance actually justified their dismissals.

The Court did indeed find that the plaintiffs’ performance was lower than average. However, it ruled that continuous lower evaluation based on a relative evaluation system is not enough to justify the termination. Merely because their performance was poorer than their colleagues’ did not mean that they were objectively unable to perform the duties of the role to an adequate standard. As a result, said the Court, Japan IBM had abused the right to terminate.

The plaintiffs’ lawyer said proudly during media interview at the Court, “This judgement is a landmark case because the judgement proved that the Japanese legal theory of “abuse of right” can serve as a brake on US-style terminations”. In fact it was already very clear that Japanese law would block dismissals without very good reason (i.e. not including performance unless supported by very strong evidence of very serious shortcomings), but we can probably forgive him in his moment of triumph. Even if it is not strictly a landmark, the decision does make it clear that relatively (as opposed to absolutely) poor performance will not count as “objectively reasonable grounds” for a dismissal, and that a termination without prior warning (or which is stated to be for an untrue reason) will not be found to be “appropriate in general social terms”.

Therefore, unilateral terminations in Japan are often litigated. Since the sanction of default is usually reinstatement rather than a cash payment, getting it wrong for the sake of expediency is often not a sensible option. This IBM case is a good lesson for employers in Japan accustomed to US or similar employment systems that poor performance is not always a justifiable reason to dismiss. Establishing objectively reasonable grounds is a very high hurdle in Japan and may strain the patience of employers not used to that burden. It is therefore much preferable to try to agree a severance with the employee. While this may be expensive it will at least be effective to terminate his employment and draw a conclusive line under the matter. The employee in turn gains a cash cushion and an opportunity to leave his employment with little loss of face and a clear record and reference.