1. What Are the Sources of Japanese Labor Law?

Japanese labor law derives from statute, e.g., the Japanese Labor Standards Act and Labor Contract Act, and the precedents established by the Japanese courts.  

2. Who is an Employee?

The Japanese Labor Standards Act defines an employee as “a person who (i) is used in a business or office, regardless of the occupation, and (ii) gets paid salary.” In practice, the distinction between an employee and an independent contractor, and between an employee and a non-employee director, is not always easy to determine.

As noted in the first article of this issue, the distinction between an employee and an independent contractor is a question of fact, and will depend on, among other things, the level of discretion afforded to the individual as to when and how they perform work for the service recipient/employer, whether the individual is personally obliged to provide the service and how the individual is remunerated for the work that he does.

A Japanese company must have at least three directors on its board. One or more of those directors are appointed as Representative Directors, who have unlimited authority to sign documents on behalf of, and to otherwise represent, the company. Ordinarily, a Representative Director is not an employee, although a non-representative director may have a hybrid status as both an employee and a director.

3. Are There Restrictions on Employing Non-Japanese Nationals?

A working visa is necessary for a non-Japanese national to work in Japan. Otherwise, there are no restrictions on employing non-Japanese nationals.

4. Are There Any Minimum Terms on Which Employees Are Employed in Japan?

  • Wages: The government determines the minimum hourly wage applicable to each region and industry, which is reviewed annually. For example, the current hourly minimum wage for employees in the retail sector working in Tokyo is ¥792.
  • Overtime rate: An employer is required to pay an additional 25 percent of average hourly salary for overtime work, an additional 25 percent for work between 10 p.m. and 5 a.m. and an additional 35 percent for work on holidays. These are cumulative (e.g., an additional 60 percent for work between 10 p.m. and 5 a.m. on holidays).
  • Notice period: An employer must give an employee a minimum of 30 days’ prior notice (or payment in lieu of 30 days’ notice) before dismissal.
  • Vacation: An employee who has worked for an employer for six months is entitled to 10 days of paid vacation per year. The minimum days of paid vacation increases annually up to a maximum of 20 days per year.

5. Which Rules Apply When Dismissing an Employee in Japan?

Employees in Japan have a high level of protection from termination. “At will” employment is not permitted, even with an employee’s consent.

There are broadly two types of employees in Japan: regular employees, employed for an indefinite period until they reach mandatory retirement age (which is, typically, 60 or 65), and contract employees, who are employed for a limited term of usually less than three years. The difference between a regular employee and a contract employee primarily relates to the level of protection local law affords them from dismissal.

A. Regular Employees

Japanese employment law provides that dismissal of an employee is void if such dismissal is not based on “objectively reasonable grounds” and is not “considered to be appropriate in general societal terms.” The following have been recognized as “objectively reasonable grounds” for dismissal by Japanese courts and legal commentators:

  • The employee commits a serious violation of the company’s written internal rules and that violation is stated in the rules to be a ground for dismissal.
  • The employee commits serious misconduct.
  • The employee continuously fails to perform his work at all, or continuously performs his work in a substantially deficient manner.  

Traditionally, Japanese courts consider dismissals “to be appropriate in general societal terms” only if the ground is material, the employer has made efforts to avoid dismissal, and there are no extenuating circumstances. There is always a risk that if a dismissal is challenged, the court may order the employer to reinstate the dismissed employee.

Japanese courts also take a strict approach to termination of employees for redundancy, considering whether the redundancy is:

  • Unavoidable because of extraordinary operational or financial difficulties faced by the employer
  • The last resort (i.e. has the employer taken steps to avoid the redundancy by seeking to redeploy the employee, using temporary layoffs, requesting voluntary resignations for additional severance, etc.)
  • Taken after a proper procedure has been followed, including objective and reasonable selection, the employer explaining the rationale, timing, scale and method of selection to the labor union or workers, and the employer discussing the redundancy in good faith the with employees

Because of the risk that the Japanese courts may consider these requirements have not been met in any particular case, employers often offer severance packages and seek employees’ voluntary resignations rather than making them redundant.

B. Contract Employees

The requirement for “objectively reasonable grounds” for dismissal does not apply to contract employees retained with a limited term of employment. Contract employees have stronger protection from termination during the agreed-upon term and no protection at the end of the term. During the term, the employer may terminate the employee only if there is an “unavoidable” reason, which is interpreted even more narrowly than “objectively reasonable grounds.” At the end of the term, the employer is not required to renew the employment agreement and may discontinue employment.  

6. Are There Any Forms of Prohibited Discrimination?  

The Japanese Constitution prohibits discrimination on the grounds of race, creed, sex, social status or family origin. In the context of employment, this means that employers may not discriminate with respect to salary, working hours and other employment terms on any of these grounds. In the case of job applicants (rather than employees), discrimination on the ground of sex or age is strictly prohibited, but discrimination for any other reason is not.  

7. Do Japanese Employees Have Rights of Collective Representation?

Yes. The rights of employees to collective representation are contained in the Japanese Constitution (although these rights are more limited for government workers engaged in office work, and policemen, firemen, employees in the self-defense force and employees working in jails have no right of collective representation).

8. What are Typical Japanese Pension and Share Incentive Arrangements?

In Japan, there is a mandatory governmental defined benefit pension plan, where contributions are determined based on the employees’ salary. The employee and the employer are both required to contribute one half of those contributions. In addition to the government pension, smaller companies often provide a “retirement allowance” — a lump-sum amount payable upon departure from the company because of retirement or other reasons. The amount of allowance is calculated primarily by the employee’s salary at the time of departure and the number of years the departing employee has worked for the employer. Larger companies typically implement tax-qualified pension plans, which historically were defined benefit pension plans, but which are now shifting to defined contribution pension plans (known as the “Japanese version of the 401(k) plan.”)

Stock options are the most common form of share incentive for employees. It is said that 40 percent of listed Japanese companies have implemented stock options.

9. What Happens to Employees When Their Employer (Company or Business) is Sold?

This depends on the legal structure of the sale:

  • Share sale: The employees continue to be employed by the employing entity, which is, post-sale, owned by the acquirer.
  • Merger: Where all of the contracts, property and liabilities of a company are transferred to a buyer or into a new entity upon a merger, and the original company ceases to exist, the employees automatically move with the merged business and become employed by the merged entity on the same employment terms.
  • Statutory spin-off: Where some, but not necessarily all, of the contracts, property and liabilities of a company are transferred to a buyer or into a new entity, the employees continue to be employed by the spun-off entity, and their employment terms are unaffected by the transaction.
  • Asset/business sale: The employees do not automatically transfer to the buyer, and so if the buyer wishes to engage these employees, it needs to obtain individual consents from each employee. In addition, because the sale of a business does not necessarily enable the seller to terminate the employment of the employees by reason of redundancy (because the legal test for redundancy is so exacting), if the seller wishes to terminate the employees’ employment, it would probably need to seek the employees’ consent to voluntary resignation. It is common for the parties to a business sale to jointly seek employees’ agreement to resign from the seller’s employment and to enter into employment with the buyer, and to facilitate this, the seller often requires the buyer to agree to maintain employment terms for a certain period after the business sale completes.

10. Are There Any Particular Issues to be Aware of When Looking to Hire Employees in Japan?

The two key issues that typically arise in relation to employees in Japan are:

  • The difficulty of terminating the employment of those employees (see Question 5 above) as well as seeking to change employment terms to the employees’ detriment. Generally, such changes are unenforceable unless deemed by the courts to be necessary and reasonable.
  • The regulation and calculation of overtime work — it is often also difficult to track employees’ overtime entitlements, and disputes in relation to this are fairly common. Some senior employees may be excluded from entitlement to overtime, but this can be a complex area of Japanese law.