Legal Framework of Personnel Authority in Japanese Labor Law: A Guide for Managers

Personnel authority, which forms the core of corporate management, is an essential right for companies to smoothly operate their organizations, based on labor contracts with workers. This right includes a wide range of decision-making powers, such as ordering employee promotions or demotions, transfers involving changes in work location or job responsibilities, secondments to work at affiliated companies, and commanding leave of absence during an employee’s personal illness or injury. However, under Japanese labor law, this personnel authority is not unrestricted. The personnel authority held by companies must be exercised within the legal framework formed by labor laws and precedents, and the most important fundamental principle is the “doctrine of abuse of rights.” This doctrine negates the effectiveness of what may formally be a legitimate exercise of rights if it deviates from the socially acceptable limits in light of the specific circumstances. Particularly under Japanese employment practices, it is common for the basis of personnel authority to be established not by detailing every possible situation in individual labor contracts but by comprehensive company rules known as work regulations. Therefore, understanding how the extensive powers set out in the work regulations are legally restricted in individual cases is extremely important for conducting business in Japan. This article focuses on four major personnel themes: training and education, promotion and demotion, transfers and secondments, and leave of absence, and explains the legal requirements and limitations of exercising personnel authority in each area, based on specific laws and judicial precedents.  

The Legal Foundation of Personnel Authority: The Principle of Good Faith and Prohibition of Abuse of Rights

At the core of all personnel decisions made by companies lies two fundamental principles defined in the Japanese Labor Contract Law. These are the principle of good faith, which mandates that rights must be exercised and obligations fulfilled with sincerity and in accordance with good faith, and the principle prohibiting the abuse of rights, which states that the exercise of rights based on a labor contract must not be abused . These principles are explicitly stated in Articles 3(4) and 3(5) of the Japanese Labor Contract Law, illustrating the basic concepts that govern the relationship between employers and employees.

The principle prohibiting the abuse of rights is specifically articulated in individual articles for personnel authority actions that have a significant impact on workers, such as secondment (Article 14 of the Japanese Labor Contract Law), disciplinary action (Article 15), and dismissal (Article 16) . These articles codify legal theories that have been developed through a series of court precedents over the years.

The legal framework imposes not just a passive obligation on managers to comply with the letter of the law. Rather, it demands an active responsibility to be prepared to proactively prove that all personnel decisions are objectively reasonable, based on business necessity, and balanced with the disadvantages imposed on the workers. In the event that the exercise of personnel authority is contested in court, the company bears the burden of proving that its decisions were not arbitrary but were justified management judgments based on fair procedures. Therefore, establishing clear and fair internal regulations, documenting the reasons for personnel evaluations and transfer orders, and ensuring consistent implementation are essential for managing legal risks.

Mandatory Training as a Business Order Under Japanese Employment Practices

Under Japanese employment practices, the authority of a company to mandate employee participation in training programs is recognized as part of the employer’s broad right to issue business orders, which is inherent in the employment contract. Although there are no articles in the Japanese Labor Standards Act or the Labor Contract Act that directly stipulate the right to order educational training, it has been established through case law as part of the authority to give necessary instructions for the smooth execution of work and the development of employee skills. In principle, employers can mandate training for their employees based on business necessity at their discretion.

However, this right to issue business orders is also subject to restrictions based on the abuse of rights doctrine. If a training order lacks significant reasonableness in its purpose, content, or method according to societal norms and infringes upon the personal rights of employees, it can be deemed an illegal abuse of rights and its effectiveness denied.

An important case in this regard is the Honjo Maintenance District Case (Akita District Court, December 14, 1990). In this case, a railway company ordered an employee to copy the work rules in front of other staff for about a day and a half, citing a violation of the work rules. The court assessed that although this order was named ‘training,’ it lacked a legitimate educational purpose such as skill improvement and was instead a punitive act performed as a public spectacle. The method was deemed to significantly infringe upon the employee’s personality and was judged to be illegal as it exceeded the discretionary range of the business order right.

As this case demonstrates, courts scrutinize the substantive purpose and intent of ‘training,’ not just its formal name. Particularly when implementing training due to a specific employee’s lack of job performance ability, it must be objectively demonstrated that the program is not for punishment or harassment but truly aimed at improving abilities. Therefore, companies must clearly document the purpose, content, and duration of the training program and ensure that the methods are appropriate in light of societal norms. This can demonstrate that the order is not punitive but based on constructive management judgment, serving as an effective rebuttal against claims of abuse of rights.

Assessing Promotions, Upgrades, and Demotions: Legal Considerations Under Japanese Employment Practices

Deciding on employee promotions, upgrades, and demotions is one of the core elements of personnel authority. Especially for promotions and upgrades, a company’s broad management judgment is often respected. However, when it comes to demotions, which can be disadvantageous for employees, a more cautious decision-making process is required to ensure that such decisions do not constitute an abuse of rights. If a demotion order lacks business necessity, is based on unfair motives or purposes (such as harassment), or imposes disadvantages on an employee that significantly exceed what is socially acceptable, it may be deemed invalid as an abuse of personnel authority.

For instance, in the case of the Independent Administrative Institution Japan Tourism Agency (Tokyo District Court, May 17, 2007), a demotion based solely on the subjective evaluation of a supervisor who lacked a sufficient understanding of the realities of overseas assignments was invalidated for lacking objective and rational reasons. This precedent suggests that personnel evaluations, which form the basis for demotions, should be conducted based on fair and objective criteria.

Furthermore, when considering a demotion, it is crucial to legally distinguish between a ‘demotion’ in terms of a reduction in position and a ‘pay cut’ in terms of salary reduction. A demotion in position does not automatically justify a reduction in salary. A pay cut is a significant adverse change in labor conditions for the worker, and unless there is a clear basis in the work rules or wage regulations that links positions or job grades with salary amounts, it cannot be unilaterally implemented. In the Japan HP case (Tokyo District Court, June 9, 2023), a reduction in basic salary accompanying a demotion from a managerial position was deemed invalid because the rules for the reduction were not sufficiently known within the company.

The management guidelines derived from these court cases emphasize the importance of establishing and operating a systematic and transparent personnel system as a prerequisite for exercising the right to demote. Specifically, it is essential to clearly define the job responsibilities and competency requirements for each position and to establish an objective evaluation system based on these criteria. Additionally, it is necessary to clearly link job grades and salary tables in the work rules. Without such a systematic foundation, even a seemingly legitimate demotion, particularly one involving a pay cut, carries a high risk of leading to legal disputes.

Employee Reassignment: Transfers and Secondments in Japan

In Japan, personnel changes involving the reassignment of employees can be broadly categorized into two types: ‘transfers’ and ‘secondments,’ each with distinct legal personalityistics and requirements.

Transfers Within the Same Company in Japan

A transfer refers to changing an employee’s job duties or work location within the same company. When the change involves a change in work location, it is particularly referred to as a “relocation.” The employer’s authority to order a transfer is based on the labor contract itself, and if the employment rules or labor agreement includes a comprehensive provision stating that “employees may be ordered to change their placement due to business needs,” it is understood that there is no need to obtain individual consent from employees for each transfer.  

However, this authority to order transfers is not unrestricted and is limited by the doctrine of abuse of rights. A leading Japanese case on this point is the Toa Paint case (Supreme Court of Japan, July 14, 1986). In this decision, the Supreme Court set forth the following three criteria to determine whether a transfer order constitutes an abuse of rights:  

1. When there is no business necessity for the transfer order.
2. When the transfer order is made with other improper motives or purposes.
3. When the transfer order imposes a disadvantage on the worker that significantly exceeds what is normally acceptable.

Particularly requiring a modern interpretation is the third point, “a disadvantage that significantly exceeds what is normally acceptable.” At the time of the decision, practices such as long-distance assignments that resulted in separation from family were often considered within the range of disadvantages that full-time employees should accept. However, in light of the subsequent enactment of the “Act on Welfare Measures for Workers Taking Care of Children or Other Family Members, Including Child Care and Family Care Leave,” there is now a stronger demand for consideration of the disadvantages employees face in their family lives, especially in terms of childcare and family caregiving. Therefore, when a company orders a transfer that involves relocation, it is important to check the family situation of the affected employee and make decisions with full consideration of their circumstances to avoid the risk of being judged as an abuse of rights.  

Employee Secondment to Other Companies

Secondment refers to an arrangement where an employee, while maintaining their employment contract with the original company, works under the direction and orders of another company (the host company) for a significant period. Since the authority to give instructions shifts from the original employer to the host company, this can lead to substantial changes in the employee’s working environment. Therefore, a more stringent legal basis is required to mandate a secondment than for a simple transfer.  

Article 625, Paragraph 1 of the Japanese Civil Code prohibits employers from transferring an employee’s rights to a third party without the employee’s consent, and this principle is understood to apply to secondments as well. Consequently, as a general rule, an employee’s consent is necessary for a secondment order. However, case law indicates that even without individual consent, if the employment regulations or labor agreement includes provisions that secondments may occur, and if the terms of labor at the host company, the duration of the secondment, and the rules regarding return are clearly defined, then a comprehensive consent is considered to exist, and the secondment order can be valid.  

Furthermore, Article 14 of the Japanese Labor Contract Act explicitly stipulates the abuse of rights doctrine in relation to secondment orders. According to this article, even if an employer is entitled to issue a secondment order, if the order is deemed an abuse of rights considering the necessity, the selection of the targeted employee, and other circumstances, then such an order is invalid.  

From a management perspective, it is important to clarify the ‘purpose’ of the secondment. The Japanese Employment Security Act generally prohibits the ‘labor supply business,’ which involves supplying workers to other companies for profit. Therefore, secondments must be carried out with a clear and legitimate business purpose, such as technical guidance between group companies, personnel development, or temporary employment adjustments. Documenting this purpose and being able to objectively explain the business necessity not only meets the requirements of Article 14 of the Labor Contract Act but is also essential to avoid suspicion of illegal labor supply activities.  

Comparison Between Transfers and Secondments Under Japanese Employment Practices

To clearly understand the legal differences between transfers and secondments, the key points are summarized in the table below.

Employee Leave of Absence and Response Measures Under Japanese Employment Practices

The Process of Mandating a Leave of Absence

When an employee becomes unable to perform their duties for an extended period due to personal illness or injury not related to work (private injury or illness), a company may mandate a leave of absence in accordance with the provisions of its work rules.

Under Japanese labor law, there are no direct legal provisions regarding leave of absence for private injury or illness; this system is established independently by each company through its work rules. Legally, the leave of absence system for private injury or illness is positioned as a “deferment measure against dismissal.” Normally, a long-term inability to provide labor due to private injury or illness could constitute a breach of employment contract and be a valid reason for dismissal. However, by establishing a leave of absence system, companies can wait for a certain period for the employee’s recovery, reserving the right to dismiss during this time.

When mandating a leave of absence, clarity of procedure is extremely important. Rather than giving verbal instructions or allowing continued absence in an ambiguous state, it is essential to avoid future disputes by issuing a “leave of absence order” to the employee. This document should be based on the relevant article of the work rules and clearly state the start and end dates of the leave period, the method of contact during the leave, and the handling of the situation if the employee cannot return to work by the end of the period (often resulting in voluntary resignation or dismissal).

The Decision-Making Process for Returning to Work

As the end of the leave period approaches and an employee applies for reinstatement, the company must carefully decide whether to allow the return to work. This decision-making process is not merely a procedure to confirm medical recovery but is also a crucial risk management process related to the company’s duty of care for safety.

The final authority to approve a return to work lies with the company. The standard criterion for reinstatement is essentially “recovery to a health condition that allows the performance of the same duties as before the leave to a normal extent.” This decision must be made comprehensively based on objective evidence.

Central to this process are the medical opinions of the employee’s attending physician and the company-appointed occupational physician. While the attending physician’s certificate stating “fit for return to work” is an important document, it alone is not sufficient to decide on reinstatement. The attending physician is an expert in routine treatment but may not necessarily be familiar with the patient’s specific job duties or workplace environment. On the other hand, the occupational physician is a specialist who can provide an opinion on the feasibility of employment from a medical standpoint, understanding the company’s workplace environment and the employee’s job duties.

In practice, it is not uncommon for the opinions of the attending physician and the occupational physician to differ. Recent court cases tend to give more weight to the opinion of the occupational physician when there is a conflict. In the Hope Net case (Tokyo District Court, April 10, 2023), despite the attending physician’s judgment that the employee was fit to return to work, the company’s decision not to allow reinstatement and to treat the end of the leave period as a resignation was upheld by the court, based on the occupational physician’s opinion that the employee’s specific behavior and symptom progression made return to work difficult.

Therefore, it is advisable for companies to establish a process in their work rules that involves obtaining a diagnosis from the attending physician and then conducting an interview with the occupational physician to hear their opinion. If there is uncertainty in the decision, it can be effective to use a “trial work” system that allows the employee to work on a reduced workload for a certain period to objectively assess their recovery state. Hasty decisions on reinstatement can lead to the recurrence of the employee’s illness and raise the risk of being accused of violating the company’s duty of care for safety, thus demanding careful and multifaceted consideration.

Conclusion

As outlined in this article, the exercise of personnel authority under Japanese labor law requires a balance between the extensive discretionary power of companies and the strict legal constraints of the abuse of rights doctrine. In various scenarios such as training and education, promotions and demotions, transfers and secondments, and leaves of absence, it is key to objectively demonstrate that decisions are based on the rational necessity of the business, conducted through fair procedures, and not lacking in consideration for the workers. This is essential to avoid legal risks and maintain healthy labor-management relations. These personnel issues are not only closely related to the organizational management of companies but are also areas prone to legal disputes.

Monolith Law Office has a proven track record of providing extensive advice on all aspects of labor law, including the themes covered in this article, to a diverse range of clients within Japan. Our firm boasts professionals who are not only qualified as Japanese attorneys but also hold foreign legal qualifications and are English speakers, deeply understanding both international management perspectives and Japanese legal regulations. This enables us to bridge any gaps that may arise between foreign corporate cultures and human resource systems and the requirements of Japanese labor law, providing practical and effective legal support tailored to each company’s situation. From the construction of personnel systems to consultations on individual personnel changes, our firm is committed to robustly supporting your business activities from a legal standpoint.