Dismissing an Employee in Japan: An Employer's Guide for Foreign-Owned Companies

A company in Japan cannot dismiss an employee without a reason. A dismissal that lacks objectively reasonable grounds and is not considered appropriate in light of general social norms is void as an abuse of the right to dismiss (Labor Contract Act, Article 16). The "at-will" approach familiar to many overseas headquarters does not carry over to employees of a Japanese subsidiary. If you are considering a dismissal, work through the grounds, check the rules of employment, give 30 days' notice or pay in lieu (Labor Standards Act, Article 20(1)), and keep a negotiated resignation on the table as an option.

• Headquarters has told the Japanese subsidiary to have its head of sales gone by the end of next month.
• A global headcount reduction requires the Japanese entity to cut a set number of roles.
• Group HR says an underperforming employee can be terminated now that the Performance Improvement Plan period has ended.
• You want to end a fixed-term employee's contract before it expires because the business is shrinking.

A dismissal is void if it lacks objectively reasonable grounds and is not considered appropriate in light of general social norms (Labor Contract Act, Article 16). It is not enough to have a reason. The question is also whether that reason justifies going as far as dismissal.

A void dismissal has no effect. Even if the company treats the employee as gone, the employee can dispute it and claim continued status as an employee. When you brief headquarters, start by explaining that sending a termination notice does not by itself end the matter.

This rule does not change with the employee's nationality or with whether the employer is foreign-owned. The Labor Standards Act also prohibits discriminatory treatment in working conditions on the basis of nationality (Labor Standards Act, Article 3). Japanese and foreign employees are measured by the same standard.

Some group templates make the employment contract subject to the law of the parent company's home country. Even then, if an employee working in Japan tells the employer that specific mandatory provisions of Japanese law (rules the parties cannot contract out of) should apply, those provisions also apply (Act on General Rules for Application of Laws, Article 12(1)).

For this purpose, the law of the place where the work is to be performed is presumed to be the law most closely connected to the contract (Article 12(2)). For someone working in Japan, that will usually be Japanese law. Where the contract chooses no governing law, the same presumption applies (Article 12(3)).

An employer that ordinarily employs ten or more workers must draw up rules of employment and file them with the authorities (Labor Standards Act, Article 89). The rules must cover retirement and resignation matters, including the grounds for dismissal (Article 89(iii)). If the employer has disciplinary measures, the rules must also set out their types and severity (Article 89(ix)).

Guidance from the Ministry of Health, Labour and Welfare (MHLW) likewise says that matters relating to termination, including dismissal, must be set out in the rules of employment. It also calls for the rules to be made known to employees, for example by posting or handing them out (Labor Standards Act, Article 106).

In practice, the first check is whether the Japanese entity's own rules of employment contain a ground that fits the case. Do not rely on a global policy alone if the Japanese rules say nothing on the point.

MHLW guidance describes how courts have approached dismissals for lack of ability. Falling short of the average is not enough on its own. A low ranking under relative evaluation, and whether training or guidance could still have brought improvement, are taken into account.

If you use a group performance process such as a PIP, the Japanese entity should keep its own record of the specific guidance given, the period and the progress made. Also consider whether a transfer to another role could make use of the employee's abilities.

Discipline is void if, in light of the nature and manner of the employee's conduct and other circumstances, it lacks objectively reasonable grounds and is not considered socially appropriate (Labor Contract Act, Article 15).

Disciplinary action presupposes that the rules of employment set out its types and severity (Labor Standards Act, Article 89(ix)). Decide only after investigating the facts, giving the employee a chance to respond and comparing past disciplinary cases.

A dismissal to reduce headcount for business reasons is commonly called a redundancy dismissal (seiri kaiko). It, too, is void if it lacks objectively reasonable grounds and is not socially appropriate.

MHLW guidance, drawing on past court decisions, asks employers to consider the following carefully. It also mentions consulting with any labour union and explaining the situation to employees.

• The need to reduce headcount
• Taking all reasonable measures to avoid dismissals (such as transfers, secondments or calls for voluntary redundancy)
• Objective and reasonable criteria for selecting who is dismissed

A court decision cited in the same guidance treats the need for the reduction, the reasonableness of selection, efforts to avoid dismissal and the duty to explain as important factors. These are what practitioners in Japan generally call the "four factors" for redundancy dismissals.

When briefing headquarters, explain that a global target such as "reduce headcount by X%" does not by itself show the need for cuts at the Japanese entity. Prepare materials for the Japanese entity on its financial position, the basis for the number of roles, the steps taken to avoid dismissals, the selection criteria and the explanations given.

Under a fixed-term employment contract, the employer cannot dismiss the employee before the term ends unless there are unavoidable reasons (Labor Contract Act, Article 17(1)). MHLW guidance notes that this is assessed more strictly than a dismissal under an open-ended contract.

Not renewing a contract at the end of its term is also restricted in some cases. This applies where the contract has been renewed repeatedly so that non-renewal can be equated with dismissal, or where the employee has reasonable grounds to expect renewal (Article 19). In those cases, if non-renewal lacks objectively reasonable grounds and is not socially appropriate, the employer is deemed to have accepted renewal on the same terms.

Before deciding not to renew a contract that has been renewed several times, check the renewal history and what the employee was told about renewal.

In principle, an employee may not be dismissed during the following periods (Labor Standards Act, Article 19(1)):

• While the employee is on leave for medical treatment of a work-related injury or illness, and for 30 days afterwards
• During maternity leave before and after childbirth (Article 65), and for 30 days afterwards

The exceptions are where the employer pays a lump-sum compensation under Article 81, or where it becomes impossible to continue the business because of a natural disaster or other unavoidable cause (Article 19(1), proviso). The latter requires approval from the chief of the Labour Standards Inspection Office (Article 19(2); Ordinance for Enforcement of the Labor Standards Act, Article 7).

Other statutes also prohibit dismissal on particular grounds. MHLW guidance lists, among others, dismissal because of nationality, creed or social status, union membership, sex, pregnancy or childbirth, requesting or taking childcare or family-care leave, raising a harassment complaint, or reporting to the Labour Standards Inspection Office.

An employer that intends to dismiss an employee must give at least 30 days' notice (Labor Standards Act, Article 20(1)). If it does not, it must pay at least 30 days' average wages (pay in lieu of notice). The notice period can be shortened by one day for each day of average wages paid (Article 20(2)). For example, the employer can give 20 days' notice and pay 10 days' average wages.

Neither notice nor pay in lieu is required where the business cannot continue because of a natural disaster or other unavoidable cause, or where the dismissal is based on grounds attributable to the employee (Article 20(1), proviso). Both require approval from the chief of the Labour Standards Inspection Office (Article 20(3); Ordinance for Enforcement, Article 7). Calling a dismissal "disciplinary" does not let the employer skip pay in lieu on its own judgment.

The notice rules apply to employees on probation once they have been employed for more than 14 days (Labor Standards Act, Article 21(iv)). The same goes for people hired for a fixed period of two months or less once they are kept on beyond that period (Article 21(ii)).

Bear in mind that notice and pay in lieu are procedural requirements. Paying in lieu does not save a dismissal that lacks reasonable grounds and social appropriateness; it can still be void under Article 16 of the Labor Contract Act.

If the employee asks for a certificate stating the reasons for dismissal, the employer must issue it without delay (Labor Standards Act, Article 22(1)). The same applies to requests made between the date of notice and the date the employment ends (Article 22(2)). The certificate must not include matters the employee did not request (Article 22(3)).

The reasons stated on the certificate become the starting point for the employer's case if a dispute follows. Before writing it, set out which provision of the rules of employment applies and the facts behind it.

According to MHLW guidance, notifications to Hello Work (the public employment service) are required in some cases, such as when a significant number of employees leave within a certain period or when a foreign employee is dismissed. Subsidiaries that employ foreign staff should include this in their checklist.

An employer can suggest that the employee resign, and the employee can agree to leave (often called taishoku kansho, or recommended resignation). Unlike a dismissal, where the employer ends the contract unilaterally, the employee leaves by agreement. The terms, such as the leaving date, any additional severance and how unused paid leave is handled, are negotiated and recorded in a written agreement.

MHLW guidance warns, however, that a recommendation to resign that interferes with the employee's free decision may be held to be an unlawful infringement of rights. A Supreme Court decision cited in the guidance says that pressing the employee unusually many times over a long period is likely to amount to undue coercion. The number of people involved and whether favourable terms were offered are also considered as a whole.

The same guidance notes court decisions holding employers liable in tort for harassment intended to push employees out, such as isolating them or giving them no work. Keep a record of the number and length of meetings, who attended and what was said, and do not keep pressing once the employee has said no.

An employee who does not accept the dismissal will usually use one of the following routes.

• Labour tribunal (rodo shinpan): At the court, a labour tribunal committee made up of a judge and members with expertise in labour relations hears the case, tries mediation and, if no settlement is reached, issues a labour tribunal decision (Labor Tribunal Act, Article 1). Unless there are special circumstances, the hearing must be concluded within three sessions (Article 15(2)).
• Objection and transfer to litigation: If either party objects within two weeks, the tribunal decision loses its effect and a lawsuit is deemed to have been filed (Articles 21(1) and (3), 22(1)). Without an objection, the decision has the same effect as a judicial settlement (Article 21(4)).
• Conciliation at the Prefectural Labour Bureau: According to MHLW, conciliation by the bureau's Dispute Coordinating Committee is free and confidential, and either the employee or the employer can apply.

Because a labour tribunal is completed within three sessions, the employer needs its arguments and evidence ready by the first hearing. Pulling the reasons and the history into a single file at the point the dismissal is decided makes the later response much faster.

Headquarters usually understands the position more quickly if you put three points briefly:

1. In Japan, a dismissal without reasonable grounds and social appropriateness is void (Labor Contract Act, Article 16). A termination notice may not end the employment.
2. The grounds must be in the Japanese entity's rules of employment, and the facts supporting them must be documented. For redundancies, the need, the avoidance efforts, the selection criteria and the explanations must be shown for the Japanese entity itself.
3. A negotiated resignation is often considered in practice, but it must be handled in a way that does not become coercion.

Build the timetable around 30 days' notice (or pay in lieu), the review of the rules of employment and the time needed to put the records together. Working backwards from a group year-end or reorganization date tends to produce an unrealistic schedule.

For our work with foreign companies doing business in Japan, see "International & Cross-Border". For governance and corporate matters at the Japanese entity, see "Corporate". The governing law of contracts, including employment contracts, is also covered in "Entering Japan as a Foreign Company".

1. Check whether the Japanese entity's rules of employment contain a ground for dismissal or discipline that fits the case.
2. Confirm that the employee is not on leave for a work-related injury or illness, or on maternity leave (or within 30 days after either).
3. Gather the records: guidance given for performance cases, the factual investigation for disciplinary cases, or the need for cuts and avoidance measures for redundancies.
4. For fixed-term employees, check the contract term, the renewal history and what was said about renewal.
5. Decide between 30 days' notice and pay in lieu, and work back from the date. If you intend to dispense with notice, check whether approval from the Labour Standards Inspection Office is needed.
6. If you plan to recommend resignation, decide in advance on the number of meetings, who attends and the terms, and keep a record.
7. Give headquarters a written briefing based on Japan's dismissal rules and the Japanese entity's own records.

• Headquarters has instructed you to remove a particular employee by a fixed date.
• The Japanese entity is considering redundancies affecting several employees.
• You are considering a disciplinary dismissal but are unsure about the rules of employment or the investigation.
• An employee has refused a recommendation to resign and you are unsure how to proceed.
• An employee has requested a certificate of reasons for dismissal, or you have received a labour tribunal petition.

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If an employee working in Japan tells the employer that specific mandatory provisions of Japanese law should apply, those provisions also apply (Act on General Rules for Application of Laws, Article 12(1)). The law of the place where the work is performed is presumed to be the most closely connected law (Article 12(2)), so for employees working in Japan this is usually Japanese law. It is safest to assume that a governing-law clause alone will not take the employee outside Japan's dismissal rules.

Paying at least 30 days' average wages takes the place of 30 days' notice (Labor Standards Act, Article 20(1)). But that is only the procedural requirement. If the dismissal lacks objectively reasonable grounds and social appropriateness, it can be void even though pay in lieu was made (Labor Contract Act, Article 16).

A dismissal during probation is still a dismissal and needs reasonable grounds and social appropriateness (Labor Contract Act, Article 16). The notice rules apply to an employee on probation once they have been employed for more than 14 days (Labor Standards Act, Article 21(iv)).

Notice and pay in lieu can be dispensed with only where, for example, the dismissal is based on grounds attributable to the employee and the chief of the Labour Standards Inspection Office has approved it (Labor Standards Act, Article 20(1) proviso and (3); Ordinance for Enforcement, Article 7). Labelling the dismissal "disciplinary" is not enough. The discipline itself is void if it is not appropriate (Labor Contract Act, Article 15).

Suggesting resignation is a common way of seeking a departure by agreement. MHLW guidance warns that a recommendation that interferes with the employee's free decision may be held to be an unlawful infringement of rights. Be careful about the number and length of meetings, who attends and the terms offered, and do not keep pressing once the employee has said no.