Legal Constraints and Procedures for Dismissal under Japanese Labor Law

In the realm of Japanese labor law, the unilateral termination of an employment contract by an employer, known as “dismissal,” is subject to extremely stringent legal constraints compared to many other countries’ legal systems. Particularly due to the historical development based on the premise of lifetime employment, there is a strong ideology of protecting workers’ employment, imposing high hurdles for the exercise of an employer’s right to dismiss. Understanding this legal framework is an essential part of risk management for conducting business in Japan. The Japanese Labor Contract Act stipulates that a dismissal is invalid if it “lacks objectively reasonable grounds and is not considered appropriate according to social norms.” This is known as the “doctrine of abuse of the right to dismiss” and serves as a central principle in judging the validity of a dismissal. This principle examines the legitimacy of the reasons for the dismissal itself (substantive constraints). Furthermore, the Japanese Labor Standards Act also sets forth specific regulations regarding the procedures (procedural constraints) when carrying out a dismissal, particularly mandating a 30-day notice period or the payment of an equivalent allowance. This article will provide a detailed explanation of the rules surrounding dismissal under Japanese labor law, from both substantive and procedural perspectives, incorporating concrete case examples.

The Basic Principles of Termination Under Japanese Labor Law

First and foremost, organizing the concept and types of termination is the initial step in understanding the legal constraints. In Japanese labor law, ‘termination’ refers to the act of ending an employment contract by the unilateral declaration of the employer. This is distinctly different from ‘mutual resignation,’ where the contract is terminated by agreement between the worker and the employer, and ‘voluntary resignation,’ where the worker resigns on their own accord.

In practice, terminations are mainly classified into three types based on their reasons.

The first type is ‘ordinary dismissal.’ This refers to termination due to circumstances on the worker’s side, such as lack of ability, poor work performance, lack of cooperation, or a decrease in work capacity due to injury or illness. This article primarily explains the legal constraints related to ordinary dismissal.

The second type is ‘disciplinary dismissal.’ This is the most severe penalty imposed when a worker commits a serious disciplinary violation that significantly disrupts the company’s order, such as embezzlement on the job or serious harassment. Disciplinary dismissal, by its nature, is subject to even stricter validity assessments than ordinary dismissal.

The third type is ‘redundancy dismissal.’ This refers to termination conducted when there is a need to reduce personnel due to reasons such as poor business performance of the company. Although redundancy dismissal does not hold the worker responsible, it is subject to special and strict requirements for validity assessment; however, it is beyond the scope of this article.

Substantive Restrictions on Dismissal: The Doctrine of Abuse of the Right to Dismiss in Japan

At the core of Japanese dismissal regulations is the “doctrine of abuse of the right to dismiss.” This doctrine has been formed through a long history of case law and is now codified in Article 16 of the Japanese Labor Contract Act. Article 16 stipulates that “a dismissal shall be invalid if it lacks objectively reasonable grounds and is not considered appropriate according to social norms.” This provision indicates that for a dismissal to be valid, it must meet both requirements of having “objectively reasonable grounds” and “appropriateness according to social norms.”

Objectively Reasonable Grounds for Dismissal

“Objectively reasonable grounds for dismissal” refer to legitimate reasons for termination that can be understood as justified even from a third party’s perspective. Specifically, this may include an employee’s lack of ability, poor performance, bad work attitude, or breach of contractual obligations. However, the mere existence of these facts does not immediately grant rationality to the dismissal. Courts rigorously review whether the employer has made sufficient efforts before resorting to the ultimate measure of termination.

A representative case that illustrates this point is the Japan IBM incident (Tokyo District Court, March 28, 2016). In this case, a long-serving employee was dismissed due to alleged lack of ability, but the court deemed the dismissal invalid. The court pointed out that the company had not provided the employee with sufficient opportunities for improvement and had failed to consider measures to avoid dismissal, such as transferring the employee to a more suitable department.

Similarly, the Bloomberg L.P. case (Tokyo District Court, October 5, 2012) offers significant insights. An employee was dismissed for failing to meet the objectives of a Performance Improvement Plan (PIP). However, the court invalidated the dismissal, stating that the company’s goals and guidance were too abstract and that the company had not provided adequate support for the employee to understand what specific improvements were needed.

What can be derived from these cases is the reality that Japanese courts impose a de facto obligation on employers not only to point out issues but also to actively encourage improvement and seek alternative solutions. While employers have broad discretion over the placement and duties of workers, they are expected to make efforts to avoid dismissals by exercising this authority. Dismissals carried out without considering alternative measures such as reassignment or retraining, even if based on a fact such as lack of ability, run a very high risk of being deemed to lack “objectively reasonable grounds.”

The Principle of Social Appropriateness in Dismissals Under Japanese Employment Practices

Even if there is an objectively reasonable cause for dismissal, it will still be invalid if it is not considered “socially appropriate.” This means that the dismissal must be balanced in comparison to the seriousness of the conduct or event in question, i.e., whether the punishment is excessively harsh.

Courts, when determining the social appropriateness of a dismissal, take into account various circumstances comprehensively. Specifically, this includes the nature and manner of the misconduct, the extent of damage caused to the company, the employee’s past work attitude and contributions, the presence of remorse, and the balance with disciplinary actions taken against other employees in the past.

The framework for this judgment was established in the Kochi Broadcasting Incident (Supreme Court of Japan, January 31, 1977 (Showa 52)). In this case, an announcer was dismissed for oversleeping and causing a broadcasting accident. While a broadcasting accident can be an objective reason for dismissal, the Supreme Court considered (1) the accident was due to negligence without malice, (2) other staff members also bore some responsibility, (3) the announcer’s usual work attitude was good, (4) there were deficiencies in the company’s management system, and (5) the punishment was significantly harsher compared to past similar cases. The Court concluded that the dismissal was excessively severe and not socially appropriate, thus invalid.

On the other hand, the judgment of social appropriateness can also be influenced by the size of the company. In the Negishi Incident (Tokyo High Court, November 24, 2016 (Heisei 28)), a company dismissed an employee whose behavior, lacking cooperation, led to the resignation of several part-time employees. The High Court deemed this dismissal valid. In doing so, the court emphasized that the company was a small business with only about a dozen employees, and that problem-solving through reassignment was practically difficult. This case illustrates that, while large companies may be expected to make efforts to avoid dismissal, such as reassignment, small businesses may have limited alternatives, making dismissal an inevitable choice.

Comparing Ordinary Dismissal and Disciplinary Dismissal Under Japanese Employment Practices

Understanding the legal constraints of ordinary dismissal is crucial, and recognizing the differences from disciplinary dismissal is extremely important. Both actions terminate an employment contract, but they have significant differences in their legal nature, requirements, and effects.

Ordinary dismissal is the termination of a contract due to incomplete performance of the obligation to provide labor, such as insufficient ability or poor work attitude, under the employment contract. In contrast, disciplinary dismissal has the nature of a sanction for serious violations against corporate order.

These differences in nature lead to several important distinctions. First is the necessity of a basis in the work rules. Disciplinary dismissal, being a sanction, cannot be carried out unless the grounds for discipline and the type of punishment are clearly defined in the work rules. On the other hand, for ordinary dismissal, it is theoretically sufficient if the work rules comprehensively stipulate the reasons for dismissal.

Second is the strictness of judicial review. Because disciplinary dismissal has a very large adverse effect on the worker, courts tend to apply the abuse of dismissal rights doctrine more strictly than in the case of ordinary dismissal.

Third is the impact on severance pay. In the case of ordinary dismissal, severance pay is generally paid according to the company’s regulations, but in the case of disciplinary dismissal, all or part of the severance pay may be withheld based on the provisions of the work rules.

The following table summarizes these differences.

Procedural Regulations for Dismissal

In order for a dismissal to be valid, it is necessary to comply with procedural regulations established by law, in addition to the substantive requirements mentioned earlier.

Notice of Dismissal and Dismissal Allowance

Article 20 of the Japanese Labor Standards Act sets out the central rules for the procedure when an employer dismisses an employee. According to this article, employers must, in principle, provide at least 30 days’ notice before dismissing an employee.

If the employer fails to give 30 days’ notice, they must pay an allowance equivalent to at least 30 days’ average wages (referred to as “dismissal allowance”). It is also possible to shorten the notice period, in which case the employer must pay a dismissal allowance for the number of days by which the 30-day period is reduced. For example, if notice is given 10 days in advance, the employer must pay a dismissal allowance for the remaining 20 days.

This 30-day period starts from the day following the notice and includes holidays. To avoid disputes, it is strongly recommended in practice to provide a written notice of dismissal (dismissal notice letter) specifying the date of dismissal and the reason for dismissal.

It is crucial to understand that complying with the dismissal notice procedure does not automatically validate the dismissal itself. The dismissal notice system is a procedural regulation intended to provide dismissed workers with time and financial leeway to find new employment. The validity of the dismissal itself is judged based on the substantive requirements of “objectively reasonable grounds” and “socially acceptable standards” as mentioned in Article 16 of the Japanese Labor Contract Act. Therefore, even if the full dismissal allowance is paid for immediate dismissal, if the dismissal lacks reasonable grounds and appropriateness, it will be deemed invalid.

Opportunity for Explanation

When carrying out an ordinary dismissal, there is no explicit legal obligation to provide the affected worker with an opportunity to explain or contest the decision (“opportunity for explanation”). In the case of disciplinary dismissal, if there are provisions in the work rules, it is necessary to follow them, and the opportunity for explanation is considered important from the perspective of proper procedure, but there is no such direct provision for ordinary dismissal.

However, it is extremely risky to disregard this procedure simply because it is not a legal obligation. Courts place importance on how carefully the employer has followed the process when making the significant decision of dismissal when judging the “socially acceptable standards” of the dismissal. If an employer unilaterally decides to dismiss without giving the worker an opportunity for explanation, it may give the impression that the employer has acted arbitrarily and without fair procedure.

As a result, even if the reason for dismissal is somewhat objective, the lack of procedural consideration could be a significant factor leading to the dismissal being judged as lacking “socially acceptable standards” and therefore invalid. Thus, providing an opportunity for explanation, although not a legal requirement, can be understood as a de facto requirement to ensure the validity of the dismissal, and it is wise to implement it carefully.

Conclusion

As detailed in this article, dismissals under Japanese labor law are strictly regulated from both substantive and procedural aspects. Employers must prove that the reason for dismissal is “objectively reasonable” and that the action is “socially acceptable” based on Article 16 of the Japanese Labor Contract Act. As case law analysis shows, these requirements are extremely high, positioning dismissal as a last resort. Additionally, employers must comply with the procedural requirements of either providing notice of dismissal or paying a dismissal allowance as stipulated by Article 20 of the Japanese Labor Standards Act. Accurately understanding these legal frameworks and conducting careful examination and response in individual cases are essential to avoid unnecessary legal disputes and achieve stable labor management.

Monolith Law Office possesses deep expertise and extensive practical experience in Japanese labor law. In particular, regarding the legal constraints on dismissals discussed in this article, we have provided comprehensive legal services to numerous domestic and international client companies, from specific situation analysis and risk assessment to the formulation of appropriate response strategies. Our firm also employs several experts who are native English speakers with foreign legal qualifications, enabling us to accurately meet the unique needs of clients in an international business environment. If you are facing complex issues related to employee dismissal, please do not hesitate to consult with us.