Requirements for Redundancy Dismissals under Japanese Labor Law

The business environment for companies is constantly changing due to market fluctuations, technological innovations, and intensifying global competition. In such circumstances, reviewing business structures and reorganizing organizations become essential management strategies for companies to sustain growth and maintain competitiveness. In this process, unfortunately, companies may find themselves in situations where they must consider personnel reductions, namely ‘restructuring dismissals.’ Restructuring dismissals refer to terminations carried out by employers for managerial reasons, such as poor business performance or business reorganization. However, Japanese labor law strongly protects the status of workers and severely limits the right of employers to unilaterally terminate employment contracts. The legal basis for this is Article 16 of the Japanese Labor Contract Act, which states, ‘A dismissal shall be deemed abusive and invalid if it lacks objectively reasonable grounds and is not considered appropriate in light of societal norms.’ This provision codifies the principle known as ‘abuse of the right to dismiss,’ which has been established through years of case law. Particularly in cases of restructuring dismissals where the worker is not at fault, courts apply this principle of dismissal right abuse more strictly. The framework for this judgment has established four elements known as the ‘four requirements for restructuring dismissals’ from past case law. These elements are not merely a checklist but guidelines for courts to comprehensively consider the specific circumstances of each case and determine the validity of the dismissal. This article aims to provide a detailed explanation of these four requirements for restructuring dismissals, along with Japanese case law, to help business managers and legal professionals understand this important theme under Japanese labor law.

Key Element One: The Necessity of Workforce Reduction

The first key element for the validity of a dismissal due to restructuring is the necessity of workforce reduction. This means that a company must prove, based on objective data, that reducing its workforce is essential for business management. It is difficult to meet this requirement if the sole reasons are a desire to increase profits or vague concerns about the future.

Typical situations where courts affirm the necessity of workforce reduction include continuous and significant deficits, insolvency, or the closure of specific business divisions or factories. For instance, in the United Airlines case (Tokyo High Court, December 22, 2021), the airline’s dismissal due to the restructuring following the closure of its Narita operations, which was caused by a drastic decrease in international flight operations, was contested. The court recognized that the management’s decision to close the business unit was rational and that the necessity for the accompanying workforce reduction was substantial.

On the other hand, there are cases where the necessity of workforce reduction is denied. In the Barclays Securities case (Tokyo District Court, December 13, 2021), a foreign financial institution dismissed an employee following the abolition of a specific managerial position. However, the court ruled the dismissal invalid, stating that the overall management of the company was not in a critical situation and that the abolition of a single position did not immediately imply the necessity of workforce reduction. This case suggests that the “necessity of abolishing a position” and the “necessity of workforce reduction” are judged separately.

Furthermore, when claiming the necessity of workforce reduction, the consistency of other management actions by the company is questioned. If a company carries out workforce reductions while simultaneously hiring a large number of new employees, courts tend to question the necessity of the workforce reduction. In the Senshu Gakuen case (Osaka High Court, July 15, 2011), the court pointed out that the method of dismissing employees with high personnel costs and hiring almost the same number of employees with lower personnel costs is not permissible in principle.

Therefore, companies need to prepare objective evidence such as financial statements, business plans, and minutes of board meetings, and argue logically and consistently that workforce reduction is an unavoidable management measure.

The Second Element: Efforts to Avoid Dismissal

The second element concerns the efforts made to avoid dismissal. Japanese courts position layoffs as a “last resort,” and employers are considered to have an obligation to take all possible alternative measures before resorting to dismissal.

The duty to make efforts to avoid dismissal, as expected by the courts, includes various measures. Specifically, these can include:

• Reducing overtime work
• Restraining or halting new hiring
• Stopping the renewal of contracts for non-regular employees
• Transferring or seconding employees to other departments or affiliated companies
• Reducing executive compensation
• Implementing temporary layoffs
• Recruiting voluntary retirees by offering favorable conditions such as an increased retirement allowance

The extent to which these measures should be taken varies depending on the case. In assessing the validity of a layoff, these efforts to avoid dismissal are an extremely important element. A classic leading case is the Asahi Nursery School incident (Supreme Court of Japan, October 27, 1983), where the Supreme Court invalidated the dismissal because the employer made no effort to recruit voluntary retirees or to explain the necessity of personnel reduction and seek the cooperation of employees. This judgment clarified that efforts to avoid dismissal are not merely formalities but are obligations based on the principle of good faith.

Conversely, the United Airlines case is an example where efforts to avoid dismissal were deemed sufficient. The company proposed a transfer to ground staff positions with the same level of salary and an early retirement scheme that added 20 months’ worth of basic salary to the retirement allowance. The court evaluated these measures as “reasonable efforts to avoid dismissal” and recognized them as a factor in validating the dismissal. However, in the Hokuetu Fukui case (Kanazawa Branch of the Nagoya High Court, May 31, 2006), the recruitment of voluntary retirees was conducted, but the increase in retirement allowance was deemed insufficient as it was only about one month’s basic salary.

However, the degree of efforts to avoid dismissal required correlates with the first element, the “necessity of personnel reduction,” and also takes into account the specific circumstances of the company. For example, the Carnival Japan case (Tokyo District Court, May 29, 2023) involved a layoff by a company that could no longer operate cruise ships due to the impact of the novel coronavirus. Although the company did not recruit voluntary retirees, the court did not judge the efforts to avoid dismissal as insufficient. The court recognized the company’s decision as rational, noting the risk that recruiting voluntary retirees could lead to the resignation of highly specialized employees essential for business resumption. This case illustrates that the four elements are not a rigid checklist but are flexibly judged according to the situation faced by the company.

The Third Element: Rationality in the Selection of Dismissed Employees Under Japanese Employment Practices

The third element is that the criteria for selecting individuals for dismissal must be objective and rational, and their application must be fair. Since a layoff is a dismissal without fault on the part of the employee, there is no room for arbitrary judgment or discriminatory intent on the part of the employer.

The courts tend to recognize the following as reasonable criteria for selection:

• Objective results of personnel evaluations
• Attendance records (such as the number of unauthorized absences)
• The presence or absence of specific skills or qualifications necessary for the company’s future
• Belonging to a business division that is being closed

Conversely, there are criteria that are often deemed irrational or legally risky. For example, abstract and subjective criteria such as “potential” or “cooperativeness” may be rejected due to a lack of objectivity. Additionally, selection based on gender, nationality, or union membership is highly likely to be illegal as discrimination. Using age as the primary criterion also carries the risk of being deemed irrational due to difficulties in re-employment, among other reasons.

What is crucial is not only that the criteria themselves are rational but also that their application is carried out fairly. Even if there are rational criteria on paper, if the underlying personnel evaluations are unfair, or if the criteria are applied arbitrarily to target specific individuals, the rationality of the selection will be negated. Companies should establish objective selection criteria before identifying the employees to be dismissed and keep a record of why those criteria were applied to each individual.

Furthermore, under Japanese employment practices, courts tend to expect that before dismissing full-time employees, companies should first reduce the number of non-regular employees, such as temporary and contract workers. Whether such measures were taken before proceeding with the dismissal of full-time employees can also be considered when judging the rationality of the selection.

The Fourth Element: Procedural Fairness Under Japanese Employment Practices

The final element is procedural fairness. This means that employers in Japan have the duty to provide a sufficient explanation to the employees or labor unions subject to dismissal, regarding the necessity and details of the workforce reduction, and to engage in sincere discussions .

These explanations and discussions should not be mere unilateral notifications. They must be two-way communications aimed at gaining the understanding and cooperation of the employees. The content typically discussed includes the following:

• The managerial reasons necessitating staff reductions (the first element)
• The timing, scale, and method of the workforce reduction
• The efforts made to avoid dismissals (the second element)
• The criteria for selecting individuals for dismissal (the third element)

The importance of this procedure has been emphasized in many court cases. In the Asahi Nursery School case, the employer’s failure to provide any prior explanation or discussion before notifying of the dismissal was a significant reason for the invalidation of the dismissal . Conversely, in the United Airlines case, the company’s multiple rounds of collective bargaining with the labor union and thorough explanations were evaluated as satisfying procedural fairness . Even if the negotiations did not ultimately lead to an agreement, the process of sincere negotiation itself is crucial.

Typical examples of deemed procedural unfairness include refusing to present financial statements to explain the management situation , having an extremely low number of discussions, or conducting them only formally just before the dismissal . For companies, it is essential not to underestimate the negotiation process, to take ample time for careful explanation, and to keep records of these discussions as evidence to prevent future disputes .

Comparative Analysis of Key Court Cases

To understand how the four elements we have discussed are applied in actual court cases and how decisions can differ, let’s compare some of the main cases. The table below summarizes the contested elements and the key points of the court’s decisions for the representative cases covered in this article.

Summary

In Japanese labor law, layoffs for organizational restructuring, known as “seiri kaiko,” are subject to extremely strict judicial scrutiny based on Article 16 of the Japanese Labor Contract Act. Courts comprehensively consider four elements: the necessity of personnel reduction, efforts to avoid dismissal, the rationality of the selection of employees to be dismissed, and the appropriateness of the procedures. These elements are not rigid requirements but are evaluated comprehensively based on the company’s management situation and the specific circumstances of each case. For companies considering layoffs, it is essential to prepare objective evidence that forms the basis of management decisions, make sincere efforts to avoid dismissals, select targets based on fair criteria, and above all, engage in honest discussions with employees and labor unions. The entire process must be meticulously recorded and documented. Neglecting any of these processes could result in the dismissal being deemed invalid, leading to serious management risks for the company, such as being ordered to pay a significant amount of back pay.

Monolith Law Office has a wealth of experience supporting a large number of domestic and international clients with Japanese labor law, particularly in corporate restructuring and the accompanying personnel and labor issues. Our firm is staffed with attorneys who are not only qualified in Japan but also include English-speaking lawyers with foreign legal qualifications, enabling us to address the unique challenges faced by companies in an international business environment. When facing the critical management decision of layoffs, we provide strategic legal support at every stage, from the initial planning phase, consideration of measures to avoid dismissal, development of selection criteria, consultation with employees, and even through to potential legal disputes in court.