international employment law firm alliance L&E Global

6. Cost-Reduction Strategies

To what extent can employers implement the following cost-reduction strategies as a result of COVID-19, and what are the primary limitations on each? 

  • Furloughs.

A unilateral reduction in working days or working hours (including furloughs) is permitted only if based on reasonable grounds. A material reduction in business activity, or a requirement to furlough employees as a result of COVID-19, or a government order (but not a request) may constitute reasonable grounds, but each case would have to be examined based on its own facts. If an employer reduces an employee’s working days or hours, or the employee is absent from work due to a cause attributable to the employer, even if there are reasonable grounds for such reduction or absence, the employer must pay the employee: (i) for a reduction in days worked, at least 60% of the employee’s average wage for the days the employee does not work; and (ii) for a reduction in hours worked in a day, normal salary for the hours worked, but not less than 60% of the average wage for the day.

  • Salary reductions.

In general, a unilateral reduction in salary is not allowed and neither can an obligation be waived based on the employee’s employment contract. However, an employer and employee are otherwise free to voluntarily agree on payment terms for a reduction in working days, hours and salary.

  • Redundancy.

The COVID-19 crisis does not provide an employer with any additional rights to terminate an employee. Termination of employment must be objectively reasonable. In the case of redundancy, termination must be based on a cause that would objectively be considered reasonable, and must generally satisfy four tests:

  • there must be a genuine and significant economic need for the termination;
  • the employer must have taken all reasonable steps to avoid the termination, e.g. reassigning the employee(s) to other roles, reduction of payments other than salary and reduction in hiring;
  • if only some employees from within a discrete group in the affected business are being terminated, the criteria for selection of those to be terminated must be fair and not discriminatory; and
  • the employer must have consulted with the affected employee(s) and any labour union.

Terminating an employee as a result of a reduction in, or reorganisation of, the employer’s business resulting from COVID-19 is, depending on the situation, unlikely to be considered objectively reasonable and/or satisfy the four tests. Therefore, the employer should seek to agree on a voluntary termination with the affected employee, including an appropriate severance payment.

  • Facility closure.

Facility closure can be considered as an example of furloughs or redundancy.

Any questions

Ask our member firm Atsumi & Sakai in Japan