Letting go of employees--the Japanese way

By Jun Kabigting

Whether your firm is planning to penetrate the Japanese market, or is already in Japan, you have to be aware of the legal risks and management issues surrounding staff reductions.

This becomes more important considering that Japan’s current economic woes seem to be adding to the rise of employer-employee disputes in recent years. In addition, Japan’s uniform labor model is disappearing, causing a shift from collective disputes to individual disputes.

Japan does not have a labor court system although a Law on Promoting the Resolution of Individual Labor Disputes was enacted in 2001. It may be worth mentioning too that the issue of dismissal has a deep cultural context in a country traditionally known for lifetime employment and seniority-based pay.

This editorial aims to present the practical issues surrounding employee downsizing in Japan to provide employers with accurate and socially responsible guidance. It will not deal with work contracts and collective bargaining but instead focus on responsible practices during collective dismissals or downsizing.

In general, there are four main work streams that must be considered
— legal, HR & cost management, budgeting/security and communications.

Article 27 Sec. 1 of the Japanese Constitution provides that the right to work is a fundamental right of the Japanese people. Japan also has a Labor Standards Act (LSA) which regulates hours of work, holidays, disciplinary actions, and the contract of employment by providing certain minimum standards. Article 20 of the LSA states that a 30-day advance notice is necessary before an employee can be dismissed. Without this notice, the employer is bound to pay the employee’s average wage for a period of not less than 30 days. Discriminatory dismissals (e.g., gender, race, creed, national origin, etc.) are also illegal and invalid under various laws prohibiting discriminatory treatment.

The basic law on dismissal is relatively straightforward but Japan’s civil law framework has allowed the courts leeway to interpret the law broadly. This led to the ambiguous “doctrine of abusive dismissal” which has become the de-facto law on the issue.

If the employer's right to dismiss is judged to be abusive under the doctrine, the employer is obliged not only to pay wages lost during the period of dismissal but also to reinstate the dismissed worker as the dismissal becomes null and void. In theory, under normal civil law procedures the burden of proof is on the employee for individual dismissals. However, the courts can practically shift this burden to the employer anytime. Under the doctrine, a dismissal is abusive unless it meets these four requirements:

1. There must be a business necessity to resort to the reduction of personnel;

2. The employer is obligated to have taken various measures to avoid adjustment dismissals such as:
* reduction in overtime
* reduction in mid-term recruitment,
* implementation of transfers or farming outs (very common in Japanese keiretsu-member companies),
* non-renewal of fixed term contracts,
* curtailment of regular hiring (i.e., freeze hiring),
* reduction in number and/or salaries of executives and managers,
* temporary stoppage of operation with reduced pay, and,
* solicitation of voluntary retirement;

3. The selection of those workers whose employment contract is to be terminated must be made on an objective and reasonable basis;

4. Lastly, management is required to explain the necessity of the dismissal, its timing, scale and method to the labor union or worker group if no union exists, and consult with them regarding dismissals in good faith.

The starting point for firms considering an employee downsizing is to look at the company’s own work rules and seek sound legal advice on current interpretation and application of the doctrine.

Parent company executives must also recognize the unique nuances of this issue in Japan. “Western style downsizing” will likely cause significant morale problems for the remaining employees and will make them lose trust in management. The current realities of the Japanese labor market, however, make the promise of lifetime employment more uncertain so employees are becoming more realistic about the possibility of involuntary termination.

These barriers to staff reduction undoubtedly prevent Japan’s labor market from clearing in an efficient manner. Some of the best solutions, however, are preventive in nature. In other words, a firm’s recruitment selection, assessment, performance and workforce management practices should all work together in a well managed organization to both minimize the need for large scale downsizings and to make the necessity for downsizing much more manageable.

Western firms are perceived to be more apt than Japanese firms to sacrifice employees on the altar of short term profitability. The following are some communication guidelines that can help a company manage perceptions of downsizing and preserve the support and goodwill of both internal and external stakeholders.

1. Start early. Involve communications experts from the earliest possible stage and ensure that a comprehensive internal and external communications strategy is developed in lock-step with progress on the other work streams.
2. Be clear and be consistent. Management must speak with one voice—in both English and Japanese—because there is nothing more disconcerting than different versions of a company’s story.
3. Be proactive, open and honest. Do not hold information back long enough to breed suspicion.
4. Match form with content. Choose the right venue and the right people to convey the message.
5. Prepare a leak strategy. Be ready for statements to the media, customers, suppliers, and other who will need to be assured.
6. Use the best media relations expertise available. Foreign companies downsizing employees in Japan are natural targets for the media so utilize the best media relations resources available.

It is well worth remembering that the social responsibility firms are expected to bear in the Japanese marketplace around employee downsizing is much greater than foreign firms are used to. Hence, if downsizing becomes inevitable, adapt accordingly and recognize the shared interests between the employer, the employee and your organization’s extended community. As Shakespeare once said: "Parting is such a sweet sorrow...," letting go of employees in Japan need not be a horrific experience so long as you do it the Japanese way.--JK

Important Notice and Disclaimer:

This Editorial is based from the original joint whitepaper, entitled: "Employee Downsizing in Japan" published in October 2002 by PricewaterhouseCoopers (Bob Zukis and Jun Kabigting), Baker & McKenzie (Hiroshi Kondo and Kerry Weinger), and Kreab Gavin Anderson (James Weeks). Hence, changes in law or interpretation since the time of its first publication should be checked with appropriate counsel. Further, the views and opinions expressed herein are for information purposes only and are not meant to substitute competent legal advice from your legal counsel. To learn more about this topic or to request a copy of the original whitepaper, send us an email at

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