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07. Termination of Employment Contracts

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07. Termination of Employment Contracts

Grounds for Termination

Japanese law requires that the termination of a regular employment relationship shall be considered objectively, deemed reasonable and appropriate upon social convention, which is read rigidly in light of Japanese judicial precedent. Typical grounds for termination include the following: (i) an employee’s inability to provide labour due to injury, disability, illness or permanent damage, significantly poor performance, or loss of the trust relationship due to material fraud in an application for employment; (ii) breach of work responsibilities and duties, orders, or workplace disciplines, policies and internal rules; and (iii) loss of job responsibility, redundancy due to business downsising, economic reasons, or corporate dissolution. All grounds for dismissal shall be set out in the work rules or in the employment contract.

Termination due to economic reasons such as redundancies is rigorously restricted in Japan. Japanese judicial precedent has established the practice that the following four factors should be met: (a) necessity of decreasing the number of employees; (b) necessity of adopting the “unilateral termination of employment contract” method as a means of employment adjustment; (c) adequate selection of the employees whose employment contracts are to be terminated; and (d) adequacy of the termination procedure. Importantly, with regards to (b), it requires that the employer fulfills its best effort obligation to avoid the termination.

With respect to an employment contract with an indefinite term, the termination due to redundancy is considered to be a last resort under Japanese labour law, and is only permitted where employers have no choice but to terminate the employment of their employees. The management of the employer must have made a best effort to avoid the termination. This means that the employers should use any available means within the company prior to the termination to satisfy their best effort obligation to avoid termination. This includes, but is not limited to, reduction of compensation for directors, curbing new hires, soliciting voluntary retirement, encouraging early retirement, personnel relocation and employee transfers.

With regards to fixed-term employment contracts, an employer may not dismiss employees until the expiration of the employment term thereof, without “unavoidable reasons”. The “unavoidable reasons” are read narrowly and are considered to be more rigid than the objectively reasonable requirement, in the case of an indefinite term employment contract.

Furthermore, an employer shall not dismiss an employee during a period of absence from work for medical treatment with respect to work-related injuries or illnesses. Also, an employer shall not dismiss an employee within 30 days thereafter. In addition, an employer shall not dismiss any woman during a period of absence from work before and after childbirth, nor within 30 days thereafter.

Collective Dismissals

Not applicable under Japanese law.

Individual Dismissals

Under Japanese law, all dismissals are deemed individual dismissals.

Is Severance Pay Required?

Under Japanese law, there is no statutory obligation to pay severance allowance upon termination, except in circumstances when payment is in lieu of notice.

Separation Agreements

Generally, any employment contract may be terminated upon agreement between an employer and employee. Since dismissals are severely restricted in Japan, soliciting voluntary retirement is a common practice used to reach an agreement with an employee, terminating his/her employment contract.

What are the standard provisions of a Separation Agreement?

Solicitation of voluntary retirement is commonly offered with an amount to pay salaries of several months to one year, as the special retirement allowance. The amount of special retirement allowance is not governed by Japanese law however, but rather is agreed upon between the employee and employer, and in practice, would necessarily vary depending on the circumstances. Furthermore, in the case of redundancy, the conditions surrounding the application for voluntary retirement should be fair and reasonable. In other words, issues would arise if the targeted employees had no choice but to apply for voluntary retirement and/or if such conditions could be deemed to be targeting only specific employees.

Does the age of the employee make a difference?

Theoretically, the age of the employee does not make a substantial difference. In practice however, age could play a significant role, since separation agreements are subject to employer-employee negotiations.

Are there additional provisions to consider?

Additionally, consideration should be given to employing restrictive covenants.

Remedies for Employee Seeking to Challenge Wrongful Termination

An employee may bring a claim against the employer and seek a declaratory judgment determining that their dismissal is null and void. An employee may also bring a claim for a decision confirming his/her position as an employee, by filing a petition before the labour tribunal for the commencement of labour tribunal proceedings or before the courts, with a request for provisional injunction(s) or by bringing a claim/dispute for litigation. If a dismissal is found to be null and void, the employee may return to the company.

Generally, an employee may also demand payment of the employee’s withheld wages or salary for the period since the date of dismissal up to the time of judgment, with interest. A claim seeking reversal of a dismissal is not barred by the statute of limitation. However, in general, a five-year statute of limitation period applies to claims for wages, retirement allowances and other labour-related entitlements under the Labour Standards Act.

Whistleblower Laws

Japanese law protects whistleblowers who come forward with information regarding criminal activity in the workplace relevant to life, body, property, and other interests of citizens, that has occurred or is about to occur. Consequently, employers are required to appoint an appropriate point of contact within the company, who is to be located either within the premises of a particular workplace, or at an outside location where the relevant administrative organ of the company operates, to receive and respond to any of the abovementioned concerns as may be raised by an employee whose intentions are lawful and trustworthy. An employer is prohibited from any detrimental treatment of the whistleblower on the basis of whistleblowing, and a dismissal of the whistleblower on such grounds will be declared null and void.

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