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Year in review

Between January 2018 and the time of writing this chapter, there have been significant judgments, one after another, that have had a major impact on labour law practices in Japan.

i Court rulings concerning reducing disparities in labour conditions

Among the most notable lawsuits in Japan are those for reducing disparities between the labour conditions of fixed-term employees and indefinite-term employees (i.e., regular employees). Since these lawsuits concern Article 20 of the LCA, they are called Article 20 lawsuits. The number of Article 20 lawsuits is relatively small compared with cases concerning unilateral dismissals or payment of extra wages. However, they attract a lot of attention, partly because the reduction of disparities between the labour conditions of regular employees and non-regular employees has been positioned as one of the key policies under the Act on the Arrangement of Related Acts to Promote Work Style Reform, which was promulgated on 6 July 2018.

If disparities between the labour conditions of fixed-term employees and indefinite-term employees are found to be unreasonable, the employer is required to compensate for the harm suffered by the fixed-term employees. For example, if the court determines that the difference between the amounts of commutation allowances paid to indefinite-term employees and fixed-term employees is unreasonable, the court will order the employer to compensate for the difference. Whether a difference is unreasonable is determined in light of (1) the content of the duties of the workers and the extent of responsibility accompanying those duties (the content of duties), (2) the extent of changes in the content of duties and work locations, and (3) other circumstances.

Two relevant decisions were given by the Supreme Court on 1 June 2018.

In the Hamakyorex case, the Supreme Court held that under Article 20 of the LCA, unreasonable differences in working conditions between regular employees and fixed-term employees are prohibited and whether the difference in a certain working condition is unreasonable or not is determined by taking into account the details of duties of the relevant regular employees and fixed-term employees, the extent of changes between their duties and work locations, and other circumstances. The Supreme Court then examined unreasonableness of the difference in six allowances and ruled that non-payment of a perfect attendance allowance, clean driving record allowance, special work allowance, meal allowance or commuting allowance to fixed-term employees is unreasonable, but non-payment of housing allowance is not unreasonable.

In the Nagasawa-Unyu case, the Supreme Court held that non-payment of a perfect attendance allowance to fixed-term employees who have been rehired after their mandatory retirement age (rehired employees) is unreasonable, but the differences in base salaries, housing allowances and bonuses between regular employees and rehired employees are not unreasonable. Overall, regarding disparities of basic salaries, bonuses and retirement allowances, the courts tend to determine that they are not necessarily unreasonable. On the other hand, regarding disparities of commutation allowances and other allowances of which the purposes are relatively clear, they tend to determine that they are unreasonable. The courts make decisions in consideration of the purpose of other kinds of allowance on a case-by-case basis.

ii Court rulings concerning payment of extra wages

In lawsuits relating to claims for the payment of extra wages, employers often argue that the amount equivalent to the extra wages is included in the base salary as a fixed overtime allowance and thus the claimed extra wages have already been paid. In this regard, the Supreme Court's judgment in the Tec-Japan case rendered in 2012 stated that one of the requirements for the validity of a fixed overtime allowance is that the portion of the base salary that is equivalent to the extra wages and the remaining portion must be clearly distinguished (e.g., a base salary of ¥400,000 can be divided into the extra wage portion of ¥100,000 and the remaining portion of ¥300,000) (the clear distinguishability requirement). The Supreme Court's judgment in the Kokusai Motorcars case rendered on 28 February 2017 reaffirmed this requirement.

However, there have been several judgments at a lower court level that validated an argument that the amount equivalent to extra wages was included in the base salary even when the clear distinguishability requirement was not satisfied, in cases where the relevant employee's base salary was extremely high and where the employee had discretion regarding his or her work hours (e.g., the Morgan Stanley Japan case).

In Medical Corporation Y, extra wages were demanded by a doctor who received an annual salary of ¥17 million. In this case, the employer argued that the amount equivalent to extra wages was included in the base salary and the extra wages had therefore already been paid. In spite of the non-fulfilment of the clear distinguishability requirement, the Tokyo High Court affirmed the validity of the employer's argument on the ground that such an exception to the requirement would not compromise the protection of the worker considering that the agreement between the parties was reasonable in view of the nature of the duties of a doctor, that the worker had the discretion to control the provision of work and that the amount of the worker's salary was substantially high, among other factors. In contrast, the Supreme Court ruled that as long as the clear distinguishability requirement was not satisfied, it could not be said that the extra wages had been paid. This ruling reaffirmed that the clear distinguishability requirement must be met even if the relevant worker earns a high annual salary and non-application of the requirement would not compromise the protection of the worker.

Another requirement for the validity of a fixed overtime allowance is that it is paid as compensation for working overtime. In this regard, the Supreme Court's judgment in the Japan-Chemical-Industries case rendered on 19 July 2018 stated that whether a certain allowance is paid as compensation for working overtime shall be determined by taking into account factors such as descriptions in the employment contract, the employer's explanation about that allowance and the employee's actual working hours.

iii Court rulings concerning workplace bullying, sexual harassment and other cases

Today's social climate requires employers to deal severely with employees who have committed sexual harassment. Consequently, employers often take severe action. However, there are cases in which the courts find that the action taken by an employer has been too harsh.

For instance, in the Credit Suisse Japan (disciplinary dismissal) case, the employer took disciplinary dismissal action against an employee who made sexually harassing remarks to a colleague. The court stated that the acts for which the employee had been disciplinarily dismissed constituted a ground for disciplinary action and that the nature of the acts committed justified any due disciplinary action. However, the court ruled that the disciplinary dismissal was null and void on the ground that the disciplinary dismissal action was too severe considering the employer had failed to give the employee due warning and guidance (the court's opinion was that demotion would have been the appropriate level of disciplinary action).

There are also cases in which the Supreme Court's view is different from that of the lower court as to whether a disciplinary sanction is too harsh or not. For example, in the Kakogawa-city employee case, a city employee who sexually harassed a female worker at a convenience store was put on a disciplinary suspension of six months. Osaka High Court held that the disciplinary suspension was too harsh, but the Supreme Court ruled that the disciplinary suspension was not too harsh and, therefore, valid.

Outlook and conclusions

It is still worth paying heed to Article 20 lawsuits in connection with employment disputes (see Section IV.i) during 2019.

A judgment regarding the Japan Post case was rendered by Tokyo High Court on 13 December 2018, against which a final appeal was filed. Judgment regarding another Japan Post case and the Metro Commerce case will be rendered soon by Osaka High Court and Tokyo High Court, respectively. Once these judgments have been rendered, final appeals against them are expected to be filed. The consequent Supreme Court's judgments are expected to be rendered at the end of 2019 or the beginning of 2020.