Employment litigation in Japan has expanded greatly over the past five years, mainly due to the economic recession and the introduction of labor tribunals in April 2006 as part of the government’s efforts at judicial reform (which also included the introduction of a citizen judge system and the creation of law schools).

The number of labor tribunal cases has risen steadily, reaching almost 3,500 cases in 2009. The increase is indicative of an overall rise in litigation. As the statistics show, notwithstanding the increase in the number of labor tribunal cases, the number of full merits trials has remained virtually static. Although the loser in a labor tribunal case can file an opposition proceeding against the tribunal’s decision and “appeal” to a full merits trial, only a small percentage of labor tribunal cases actually move on to full merits trials.  

(Number of Labor Tribunals in Japan)

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Faster and more flexible

Much of the increasing popularity of labor tribunals in Japan is down to their faster average processing time of 2.5 months, which compares to the 12.3 month average processing time for full merits trials. In some cases, a labor tribunal, which comprises one judge and two expert committee members (one of which is selected for being “pro-management” and one of which is selected for being “pro –labour”), notifies both sides of what the decision will be in the middle of the first hearing and persuades both parties to settle in line with this. In addition, labor tribunals have more flexibility in deciding their cases. For example, in cases of unlawful dismissal, tribunals often award severance payments in lieu of reinstatement, whereas decisions at full merits trials in favour of the employee always consist of orders of reinstatement and payment of back pay.  

Seventy percent of labor tribunal cases settle, 12 percent of the decisions are finalised (accepted by the parties and not “appealed”) and eight percent are withdrawn after out of court settlements are made. In only ten percent of labor tribunal cases does the losing party file an opposition proceeding against the decision and move the case to a full merits trial. Thus, 90 percent of the cases are concluded in labor tribunals.

The issues at stake

Half of all labor tribunal cases relate to dismissals, while some 37 percent concern unpaid wages, including overtime payments and compensation of employees, and retirement allowances. The remaining 13 percent is made up of other monetary and non-monetary claims such as unlawful disciplinary actions and workplace violence.  

(Labor Tribunals Outcomes)

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The future

Practitioners expect that in the coming years there will be a major shift in Japan from overpaid interest litigation between individuals and financial institutions, which accounted for 50 percent of all cases in district courts in 2008, to unpaid overtime litigation. Due to the lowering of the maximum interest rate not subject to criminal liability provided for in the Act for Regulation of Receiving of Capital Subscription, Deposits, Interest on Deposits, etc. (29.2 percent before the change in law) to a level equal to the maximum interest rates provided for in the Interest Rate Restriction Act (15 – 20 percent depending on the principal amount of loan) in June 2010, the number of overpaid interest cases will decrease drastically in the near future. Because of the gap in the maximum interest rates permitted by the two Acts, some financial institutions charged an interest rate between 15 and 20 percent and 29.2 percent, but to protect individuals from high interest rates, case law provides that financial services firms must refund “overpaid” interest exceeding 15 – 20 percent to individuals upon request. This case law resulted in numerous overpaid interest cases in Japan. There are many lawyers in Japan who specialise in representing individuals in overpaid interest litigation, because these cases have been profitable and are fairly straightforward for lawyers. As a result of the change in law, however, the vast majority of these “business” lawyers are expected to migrate to unpaid overtime litigation, which is considered to be quite similar in structure and process for lawyers representing individuals. Assuming that such “business” lawyers encourage employees and ex-employees to sue their employers for unpaid overtime wages, the number of unpaid overtime litigation will increase markedly in the near future.  

Due to the increasing amount of employment litigation in Japan, companies need to pay careful attention to the content and structure of employment arrangements and work rules. They will also need to consider the appropriate payment of overtime wages to reduce the risk of contentious employment matters in Japan.