The Japanese economy has suffered severely from the financial crisis. Many companies were forced to dismiss employees through corporate reorganisation or carry out redundancies (Seiri-Kaiko). However, under Japanese law, it is generally difficult to terminate employees and the courts have found many of the redundancies to be invalid, due to employers' failure to satisfy the conditions laid down by judicial precedent, even in this difficult economic climate.
The state of the law
As Japan does not have any specific statutory regulations concerning redundancies, the rules that regulate the dismissal of employees also apply to redundancies. Until 2003, Japan did not have any general statutory regulations concerning the dismissal of employees, and whether or not a dismissal was lawful had to be determined by examining the conditions established by court precedent. In 2003, the general rule on the dismissal of employees as established by court precedent was codified into Article 18-2 of the Labour Standards Act (later relocated to Article 16 of the Labour Contract Act) of Japan, which provides that "a dismissal shall, if it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, be treated as an abuse of right and be invalid."
Redundancies due to business necessity might appear to be dismissals made on objectively reasonable grounds and considered to be appropriate in general societal terms. But even if they are due to business necessity, they are not necessarily lawful in Japan. As redundancies are dismissals made in circumstances where there is no fault on the part of the affected employees, the courts have established four conditions that they will consider in determining the validity of redundancies: (i) whether there exists a business necessity for workforce reduction, such as a financial or operational necessity; (ii) whether the employer has made reasonable efforts to avoid making the redundancies; (iii) whether the employees were selected on an objective and reasonable basis; and (iv) whether due process was observed and whether the employer consulted with the employees to be made redundant or the labour union in good faith.
Although these four conditions have traditionally been considered prerequisites that must all be satisfied before redundancies, a number of recent court decisions have treated them as factors, and there have been cases where redundancies were found to be valid even though one of the conditions was not strictly satisfied. However, from a labour management perspective, it would be prudent for employers to consider that satisfaction of all four conditions is still required practically to ensure that the redundancies would be found to be valid, if challenged. The following section provides a brief explanation of the elements of these four conditions, and identifies, by analysing recent court precedent, the issues that employers should keep in mind when considering redundancies.
The four conditions
The first condition relates to the existence of a business necessity for a workforce reduction. This depends on the company's financial position. To satisfy the condition, the company must objectively be experiencing financial difficulties, and making the redundancies must be a reasonable way to alleviate such financial difficulties. On the other hand, the company does not need to be at risk of bankruptcy to satisfy this condition. It is generally considered that the courts in Japan tend to respect the management's decision that it is necessary to carry out a workforce reduction. Therefore, the business necessity criteria are comparatively easy to satisfy, unless there is no genuine problem with the company's financial position, or if the company acted in a way that is inconsistent with a company experiencing financial difficulties, such as hiring a number of new employees immediately after deciding to carry out redundancies or substantially increasing other employees' wages soon after the redundancies.
The next condition, namely the employer's duty to make reasonable efforts to avoid the redundancies, is one of the most important. The key point for employers is that they should consider all the possible ways to avoid making redundancies, as courts scrutinise the efforts made by the employer. The employer must try to reassign employees to other positions, transfer employees to related companies, to not renew fixed-term employees and to solicit voluntary retirement, or the court will likely find the redundancies invalid. The court takes into account the steps taken by the employer (in particular reassigning or transferring employees, and soliciting voluntary retirement) in assessing how much effort it made to avoid the redundancies, and what is required depends on the circumstances of each case.
The third condition is also an essential element for valid redundancies. This requires employers to make and apply objective and reasonable selection criteria in determining which employees should be made redundant. It is essential for employers to put in place selection criteria. Without these, it is highly likely that the court will find the redundancies invalid, if challenged. The court tends to find unreasonable any selection criteria that are abstract or vague, lack certainty, or allow room for decisions to be influenced by subjective considerations. The criteria encompass various factors that reflect the contribution of the employee to the company (such as the employee's position, performance, length of service, work behaviour and any history of disciplinary actions) and the detriment the employees may suffer (such as the employee's family structure, age, and possible difficulty in finding alternative employment). Furthermore, the selection criteria must be applied objectively and fairly. Even if the selection criteria are objective and reasonable, if the employees are selected on a subjective and arbitrary basis, the redundancies would likely be found invalid.
The fourth and final condition requires that, in making the redundancies, employers observe due process and consult with the employees to be made redundant or the labour union in good faith. Redundancies made without consultation are considered invalid if there is a duty on the employer to engage in such consultations before making the redundancies by the rules of employment, employment contract or any collective bargaining agreement with a labour union. Even if the employer is not subject to any contractual obligation, there have been many court decisions where the court considered that, according to the doctrine of good faith, the employer is under a duty to consult with the employees to be made redundant or the labour union, and a breach of such duty renders the redundancies invalid.
Recent judicial precedent
As discussed above, a company cannot carry out redundancies just because it is experiencing financial difficulties, or because business conditions are worsening; that is just one of the conditions that must be satisfied.
In the Yokohama Shogin Credit Union Case (Yokohama District Court, May 17 2007), after consolidations of unprofitable branches by the company, redundancies were made pursuant to selection criteria that took into account the age, position and performance of the employees, but the company did not solicit voluntary retirement and did not have any justifiable reason for failing to do so. The court held that management's decision to consolidate was appropriate but the redundancies were invalid. It considered soliciting voluntary retirement to be an extremely useful measure for workforce reduction and cutting payroll costs, although the court noted that it is just one of the options available to employers to try to avoid making redundancies and is not a requirement in every case. And although factors such as the employees' age, position and performance could be considered objective and reasonable selection criteria for choosing which employees to be made redundant, in this case the application of the criteria was unreasonable because it depended upon the priority or weight given to each of the factors, which was not clearly specified. Finally, the company did not notify the employees about the redundancies until four or five days beforehand, did not provide sufficient explanation about the financial position of the company and the selection criteria and did not make any genuine effort to consult with the affected employees.
In the Hokuetsu Fukui case (Nagoya High Court, Kanazawa Branch, May 31 2006), the company, a manufacturer and seller of concrete pipes, carried out redundancies due to a business downturn. The court held that the redundancies were invalid because, while there was a necessity for workforce reduction at the time, the level of necessity was not too high, and although the employer solicited voluntary retirement, the package offered was not attractive enough to suceed in inducing voluntary retirements and avoid making the redundancies. Whether the package is attractive enough depends on the financial position of the company in each case, and in this case, where the package consisted of an additional one month's salary on top of the ordinary retirement allowance, it was not attractive enough for the employees that wanted to remain with the company (and, in fact, no one accepted the offer). Further, the employer did not seriously consider transferring or reassigning the employees. The selection criteria, which consisted of the employees' salary increase evaluations over the previous three years and their history of disciplinary infractions, were considered reasonable as salary increase evaluations may be considered a tentative index of the employees' contribution to the company and the information about the history of disciplinary infractions was based on objective materials. But the employer failed to observe due process because it did not consult with the labour union in good faith, as it did not give them information about the timing of the redundancies, how the redundancies would be carried out or the substance of the selection criteria.
Like most court precedents, these courts examined all of the four conditions for making redundancies. However, there are also some cases in which the courts found that the redundancies were invalid without having to examine all of the conditions. For example, in the Meiko case (Kofu District Court, May 21 2009), the company carried out redundancies and dismissed some employees in December 2008, when the sales of its systems division, the company's main revenue-earning division, deteriorated severely in the second half of the year and there was no prospect that the number of new orders would increase. The court held that one of the redundancies was invalid because, although workforce reduction seemed necessary at the time of the redundancies considering the business downturn, the employer made little or no effort to avoid the redundancies and the application of the selection criteria was unreasonable as the dismissed employees did not fall within the criteria (the court noted, however, that the selection criteria, which were based on any "defect in the employees' work attitude and performance," seemed reasonable). The court did not express its opinion regarding the due process condition.
Finally, in the Rodo Daigaku second provisional disposition case (Tokyo District Court, May 17 2001), the court held that, as a general rule in determining the validity of redundancies, the four conditions should be considered. But in this case, the redundancies were designed so that particular employees would be dismissed, and as such the selection of the employees to be made redundant was unreasonable. Therefore, the redundancies were invalid because of the disparity between the end (improvement of the company's financial position through reorganisation) and the means (the dismissals), even if an examination of the other three conditions would not result in adverse findings against the employer.
Lessons from recent precedent
So most of the cases in which the court found that the redundancies were invalid were due to the employers' failure to meet the second condition (reasonable efforts to avoid making redundancies) and/or the third condition (selection on an objective and reasonable basis). Therefore, employers must pay special attention to ensure satisfaction of these two.
More specifically in regards to the second condition, it is important for employers to exhaust the other available options, such as transferring or reassigning the employees and soliciting voluntary retirement, before carrying out the redundancies. It would be prudent for employers to solicit voluntary retirement because in virtually every case where the employer carried out redundancies without soliciting voluntary retirement, the court found the redundancies to be invalid. As the court in the Yokohama Shogin Credit Union case also indicated, soliciting voluntary retirement is considered by the courts to be an extremely useful means of workforce reduction. In addition, the employer must offer a package that is attractive enough to give the employees sufficient incentive to accept the offer to voluntarily retire: see Hokuetsu Fukui.
Some recent court decisions have been more flexible in considering the circumstances of the company when determining the measures that had to be taken before carrying out the redundancies. For example, in the National West Minster Bank case (Tokyo District Court, January 21 2000), the court held that the employer should, in principle, make reasonable efforts to maintain the employment relationship, but where the company is experiencing financial difficulties, there are situations in which it is acceptable if the employer provides the employees to be made redundant with only financial compensation and re-employment support. The court, considering the circumstances of the case, found that the redundancies were valid, in particular because the employer proposed to pay the employees that were made redundant quite a large amount of retirement allowance and provided re-employment support.
As to the third condition, it is important to ensure that the selection criteria consist of objective factors, and to make clear how they are prioritised or weighted, and how the selection criteria will be applied to each affected employee. Also, considering that arbitrary selection of the employees to be made redundant may vitiate the redundancies, regardless of whether the company satisfied the other conditions, as seen in Rodo Daigaku, it is essential for employers to be able to demonstrate that the selection of the employees was made properly pursuant to the criteria, in addition to the selection criteria themselves being objective and reasonable.
Employers must also keep in mind the other conditions for making redundancies, and, in particular, ensure that due process is observed before making the redundancies (the fourth condition). The company should consult with the affected employees or the labour union and provide as much specific information concerning the proposed redundancies as possible, such as the reasons for making the redundancies, the financial position of the company, how many employees would be made redundant, when the redundancies are scheduled to occur, whether alternative positions are available within the company (and, if not, the reason for that), the selection criteria for choosing which employees would be made redundant, how such selection criteria would be applied, the details of the package offered for voluntary retirement, and so on.
Carrying out redundancies in Japan is not straightforward, so much so that, financial difficulties are not enough to justify redundancies under Japanese law. Although business rationalisation is an important and urgent issue for companies all around the world, especially in this economic climate, workforce reduction in Japan must be done cautiously and employers must pay special attention to various issues, in order to ensure that the redundancies, if challenged, would be upheld.
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About the author
Hironobu Tsukamoto is a partner at Nagashima Ohno & Tsunematsu. He specialises in litigation and arbitration of a broad range of commercial disputes, employment disputes and intellectual property disputes. Tsukamoto counsels and represents both domestic and international clients. He is also experienced in advising clients on non-contentious general corporate matters including employment law and intellectual property. Tsukamoto also counsels clients regarding employment law issues arising in relation to M&A.
Tsukamoto graduated with an LLB. from Kyoto University in 1998 and with an LLM. from the University of Chicago in 2005. He was admitted to the Japan Bar in 2000 and the New York Bar in 2006. He worked at Weil Gotshal & Manges (Silicon Valley) from 2005 to 2007. |
Contact information
Hironobu Tsukamoto
Nagashima Ohno & Tsunematsu
Kioicho Building,
3-12, Kioicho,
Chiyoda-ku Tokyo 102-0094, Japan
Tel: +81 3 32887000
Email: hironobu_tsukamoto@noandt.com
Fax: +81 3 5213 7800
Web: www.noandt.com |
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About the author
Toshiaki Kobayashi is an associate at Nagashima Ohno & Tsunematsu. He specialises in litigation and dispute resolution, and advises clients on general corporate matters including employment law and intellectual property issues. He also advises on employment law issues arising in relation to M&A. Kobayashi graduated in 2004 with an LLB from the University of Tokyo and in 2006 with a JD from Keio University Law School. He was admitted to practice law in Japan in 2007. |
Contact information
Toshiaki Kobayashi
Nagashima Ohno & Tsunematsu
Kioicho Building,
3-12, Kioicho,
Chiyoda-ku Tokyo 102-0094, Japan
Tel: +81 3 32887000
Fax: +81 3 5213 7800
Web: www.noandt.com |