Overview

Terminating regular employees in Japan is always a difficult issue, due to the restrictive regulatory environment. Lifetime employment is no longer a guarantee for most Japanese, but this has not been accompanied by more flexible standards on termination itself. Firing regular employees almost always requires “just cause,” which is held to a very high standard. HR managers at foreign companies in Japan must have an excellent understanding of relevant laws and business practices in Japan, to avoid exposing their firms to liability. This article will start by describing the strict Japanese legal requirements governing termination, and then explain best practices for working in this environment.

Statutes

The main statute governing employment in Japan is the Labor Standards Law (LSL). Positively illegal reasons for firing someone under the LSL and other laws are:

• Based on nationality, sex, beliefs, or social status (i.e., race or other inborn traits).
• Due to a work-related injury or illness. A termination will be considered to be for that reason if it is done during an employee’s leave for work-related injury or illness, or if it is within 30 days after such leave.
• For acting as, or trying to become, union officials.
• For reporting violations of the Industrial Safety and Health Law
• For becoming pregnant; for requesting or receiving maternity or childcare leave; or during or within 30 days of maternity leave.
• For lowered performance during pregnancy or childbirth.

For most termination, the LSL requires 30 days’ prior notice. The following are exceptions where notice is not required:

• The employee commits a crime such as to damage the company’s reputation and/or business relationships. This refers to serious crimes such as theft or assault, not misdemeanors.
• The employee disrupts work discipline through misconduct in the workplace, such as gambling, disorderly conduct, etc., or through misconduct outside the workplace, if it could damage the company’s reputation and/or business relationships.
• The employee is found to have made false statements about their background during the hiring process, on issues relevant to the hiring decision.
• The employee is absent without reasonable cause for 2 weeks or more.
• The employee is tardy or absent for work several times and does not improve after repeated warnings.

Although the LSL does not specifically mention the option of giving 30 days’ pay in lieu of notice, that is a standard practice in Japan.

The LSL does not merely require notice, though: it also requires just cause. It specifically states: “In cases where a dismissal is not based upon any objectively reasonable grounds, and is not socially acceptable as proper, the dismissal will be null and void as an abuse of rights.” This section was only added to the law in 2003. Previously, the same requirement had existed based on judicial decisions. In civil law, it is interpreted very strictly and unfavorably to employers.

Civil Law

Although the LSL now includes a requirement of just cause, it is vague, making judicial interpretation critical. The requirement of just cause was in fact originally developed in civil suits, based on Japan’s Civil Code, which states simply, “The abuse of rights is not permitted.” Japan’s courts held that firing someone without just cause constitutes “abuse of the right to fire.” If an employer fires someone without just cause, the courts may reinstate their employment with back pay, as well as have the employer pay their legal fees.

In deciding what constitutes just cause, the courts take a restrictive view. They do not consider “poor performance” by itself cause for termination. The performance must be “markedly” poor. For performance problems as well as disciplinary problems, the employee must have had many chances to improve, possibly including a transfer to another department or function.

Two examples, one older and one more recent, will demonstrate the practical difficulty of firing employees in Japan, even on grounds that Americans would consider inarguable.

First, in the 1970’s, a radio announcer had overslept and missed his 6AM shift, leaving dead air on the radio, and attempted to cover it up – twice. He was fired, but the courts nullified the firing, since the company had not made a serious effort to address and resolve the issue’s causes.

Second, in 2007, an employee at a staffing firm called his boss an “idiot” and was fired soon afterward. A judge later found that since it was a one-time occurrence and the employee had been given no chance to improve, his termination was also illegitimate. This shows how strong the norms against easy firing are in Japan, since here they overrode the strong Japanese focus on respect for authority.

It is also not possible to institute more favorable “at-will” employment status by contract in Japan. If your employee signs a contract stating that their employment can be terminated for any reason, or if this statement is in their employee handbook, those terms will still not be enforceable in any court.

All of these protections, however, apply primarily to “regular” workers, who are employed on an indefinite basis. It has become common in Japan to limit a company’s exposure to possible wrongful-termination lawsuits through use of probationary periods and non-regular employment.

Probationary Periods

Japanese law allows for probationary periods at the beginning of employment. It is important to establish such a period in the letter of employment, contract, or employee handbook, as it greatly increases flexibility on the part of the employer. An employer may extend a probationary period past its original end date if the situation calls for it.

However, even probationary employment is not considered “at-will.” Employers terminating probationary employees should still have a justifiable reason, although they are held to lower standards than when terminating a regular employee. Unlike with regular employees, simple poor performance is an acceptable reason. Many Japanese companies use a formal “three strikes” policy, under which three warnings of shortfalls justify the termination of a probationary employee.

According to the LSL, termination during a probationary period still requires 30 days’ notice, unless the employee has been on the job for less than 2 weeks.

There are no legal restrictions on how long a probationary period may be, but the customary length is three months. In practice, employees would consider probationary periods of more than six months excessive, and judges are unlikely to honor probationary periods of over one year.

Contract Workers

With Japan’s economic sluggishness over the last 15 years, employers in Japan have been keenly aware of how the laws limit their flexibility. A very common solution is to hire employees on a fixed-term contract. Then, the employer can choose not to renew the contract at its end, with relative freedom. Termination before the contract is up still requires just cause and 30 days’ notice.

However, more cases involving such contract workers have come through the courts recently. Employers should not simply assume anymore that their contract employees can be hired or fired at will. In some cases, if a fixed-term contract has been renewed repeatedly and routinely, the contract employee may gain a legal “expectation” of employment. In this case, just cause could become required in order to not renew their contract. However, the law is not yet clear on this issue.

Temporary Workers

Another employer strategy is the use of temporary workers. This practice has shot up since 2004, when it became legal to put such workers in manufacturing jobs. Terminating temporary workers is also mostly unproblematic. One law to keep in mind is the Worker Dispatch Law. This states that if a company employs a temporary worker in the same position for over a certain length – usually 3 years – they should “endeavor” to give them regular employment in the same position. However, this requirement is not very enforceable.

Layoffs

After Japan’s long-running economic hardships, layoffs, once unthinkable, have become at least possible. Many major Japanese firms were forced to cut their payrolls by various methods during the 1990’s and 2000’s, and a legal framework for layoffs evolved. Layoffs still require justification: the company must try a number of other measures first. In particular, voluntary early retirement has often been offered by large manufacturers prior to layoffs.

Japan’s courts have worked out the following criteria to help determine whether layoffs are appropriate. This is not a litmus test – individual circumstances can be taken into account – but it is a guideline for the kinds of issues that will be considered:

• Layoffs must be strictly necessary from a business standpoint to keep the employer in operation.
• The employer must already have made an effort to avoid layoffs. This may include cutting executive compensation; cutting work hours, wages, or bonuses; instituting a voluntary early retirement program; etc.
• The people to be laid off must be selected on an appropriate basis, i.e., with consideration of their salary, benefits, age, function, etc.
• Employees must have the situation sufficiently explained to them in advance.

Severance Pay

Severance pay is not required by Japanese law. However, in practice, it is customary to give an employee one month’s pay per year worked at the company, unless they have committed gross misconduct. The rate is usually higher for executives. If the case for termination is not airtight, offering such severance can be an excellent way to mollify an employee and persuade them to leave voluntarily.

Best Practices for Termination

Foreign HR managers must understand that employing someone regularly in Japan is considered a long-term commitment. They should not assume that the justification for firing someone will be obvious, since assumptions in Japan are different (as in the above examples).

When Japanese employees press their legal rights to the maximum extent possible, it can cause many difficulties. The following discussion will illustrate what to do at each step.

If the employee begins to show problems during his probationary period, these problems should be quickly documented. The employee should be met with to discuss and hopefully correct these problems. This process should start quickly, so as to produce a paper trail and take advantage of the lighter requirements for termination during probation. If there is not enough concrete evidence by the end of the probation period, extending the period another 3 months is a useful step.

If the employee is kept past their probation period for whatever reason, this will change the power dynamic: they are now a regular employee in the eyes of the law, and have a strong legal claim to their job.

Suppose that a regular employee appears completely unable to improve his performance and there is no choice but to fire him. This will still require long and careful groundwork, and it is important not to tell them to leave before a full plan has been created. Sometimes, Western managers heading foreign-invested companies make the situation difficult by trying to fire the employee summarily. This is legally risky; also, if the employee forces the termination notice to be revoked, or even if the employee simply hears that the management wants to get rid of him, it may put him on his guard and make him more difficult to work with going forward.

The first step in safely firing an employee is a Performance Improvement Plan, or PIP. The employee’s boss as well as the HR manager should meet with the employee and discuss why his problems have brought them to this point. The PIP should include concrete, measurable goals as well as frequent meetings to monitor progress (at least every two weeks).

This PIP should be rigorously followed to make the best argument possible for firing the employee later. It should be done in good faith, and not give the employee unreasonable benchmarks, which would look bad in court.

At the same time, as much evidence as possible on the employee’s problems should be gathered. In some cases, companies hire a private investigator to check if he had similar problems elsewhere.

One optional interim measure is to transfer the employee to a lower-paid position, possibly in another department. This may be done before or after initiating the PIP, and is particularly useful if the employee’s performance has a bad effect on co-workers. Intra-company job transfers in Japan are not very restricted, even in unionized workplaces, so they can usually be done fairly freely. This may help motivate the employee to quit.

If the employee stays on, once a good case has been built against him, an effort should be made to persuade him to resign with a Voluntary Separation Agreement. Such an agreement should include a severance package at market rates. It could also include minor perks, such as paying for an employment agency to help him find new employment, or paying into his retirement account.

If the employee refuses this agreement, you can increase the amount of severance offered, but that should be the final offer. However, you should not begrudge the price: several months’ severance pay (which might be required for someone in an executive-level position) is well worth it to avoid a costly lawsuit.

Another optional measure at this stage, for a particularly difficult employee, is to suspend the employee with pay, keeping him out of the office on a “furlough.” This helps convey your determination.

Finally, if he continues to refuse reasonable offers, you can terminate him with the basic one month’s notice as required by law. At this point, if he chooses to sue, his case will be very weak, since he has been offered plenty of chances to improve or to settle out of court.

In many cases, such careful strategy will not be necessary: most Japanese will not stay where they’re not wanted. In addition, younger Japanese are more open to switching jobs these days, as the old ideal of lifetime employment dwindles. However, the potential liability for wrongful termination is very high, so HR managers should always be prepared for trouble. HR managers should go about terminating regular employees firmly and patiently, with a clear long-term strategy that takes Japanese laws and business practices into account.