Legal Effects of Dismissal Invalidity under Japanese Labor Law: Position Confirmation and Wage Claims

In the realm of Japanese labor law, there are instances where a company’s dismissal of an employee is later deemed legally invalid. Such situations extend beyond a one-time financial payment and generate significant and ongoing legal obligations for the company. When a dismissal is found to be invalid, it is treated as if it never occurred legally, meaning the employment contract between the company and the employee is considered to have continued without interruption. From this principle, employees can assert two powerful rights. The first is a ‘status confirmation claim,’ which legally affirms their ongoing employment status. The second is a ‘wage claim,’ commonly known as ‘back pay,’ for wages that should have been earned during the period they were dismissed. Notably, the obligation to pay back pay accumulates over the entire period until the dispute is resolved, which can amount to tens of millions of yen if the litigation is prolonged. This can represent an unpredictable and substantial financial risk for the company. This article will provide a detailed professional analysis of these legal effects and the associated managerial risks that companies face under Japanese law when a dismissal is ruled invalid, based on Japanese statutes and key judicial precedents.

Challenging Dismissal Invalidity and Seeking Confirmation of Employment Status Under Japanese Law

When an employee contests the validity of a dismissal, one of the core legal claims is the “request for confirmation of employment status.” This is a legal procedure in which the employee asks the court to confirm that, due to the dismissal being invalid, the labor contract with the company still validly exists, and they retain their status as an employee.

The request for confirmation of employment status is conducted as a type of declaratory judgment action based on the Civil Procedure Code. The premise of “invalid dismissal” is judged according to the discipline set forth in Article 16 of the Japanese Labor Contract Act, which states, “A dismissal shall be invalid if it lacks objectively reasonable grounds…” Based on this provision, an unfair dismissal does not produce legal effect. Therefore, if a dismissal is deemed invalid under Article 16, there is room for the request for confirmation of employment status to be recognized, as the labor contract continues. Legally, an unfair dismissal is “invalid,” meaning it does not produce any effect. Since the dismissal is invalid, the labor contract has not terminated, and the employee continues to hold the rights under that contract. This is the logical conclusion of this claim. If the court recognizes this claim, the judgment will declare that “the plaintiff holds the rights under the labor contract against the defendant.”

However, the effectiveness of this request for confirmation of employment status requires more careful consideration for employees with fixed-term labor contracts. Even if a dismissal of an employee with a fixed-term contract is deemed invalid, it does not immediately extend the contract period or convert it into an indefinite contract. The Supreme Court of Japan (First Petty Bench, November 7, Reiwa 1 (2019)) indicated in a case where a dismissal during a fixed-term labor contract was deemed invalid that the court of first instance should examine and judge ① whether the contract has ended due to the expiration of the contract period, and ② whether the contract can be said to have been renewed after expiration (success or failure of expectation of renewal), and remanded the original judgment that lacked this examination. As this precedent shows, in the request for confirmation of employment status for fixed-term contract employees, it is necessary to examine the two-stage requirements of the validity of the dismissal and the existence of contract expiration and renewal. In particular, the success or failure of the expectation of renewal is a crucial issue based on Article 19 of the Labor Contract Act.

Legal Basis for Wage Claims After Dismissal (Back Pay) Under Japanese Law

When a dismissal is deemed invalid in Japan, the employee has the right to claim unpaid wages, also known as back pay, from the date of dismissal until the dispute is resolved. This claim is distinct from a claim for damages due to the wrongful act of dismissal. It is a claim for the payment of wages themselves, based directly on the labor contract that has not been terminated by the invalid dismissal.

The obligation to pay back pay is grounded in Article 536, Paragraph 2 of the Japanese Civil Code. This provision sets out the rules for when one party to a contract is unable to perform their obligations due to the circumstances of the other party, known as the principle of “creditor’s risk.” When applied to a labor contract, the following legal structure is established:

Firstly, a labor contract is a bilateral contract where the employee has the obligation to provide labor, and the company has the obligation to pay wages in return. In this relationship, the company is the “creditor” who receives the benefit of “labor provision,” and the employee is the “debtor” who provides the labor.

Secondly, an invalid dismissal by the company creates a situation where the employee, despite their willingness, is unable to provide labor. This is considered a situation where the employee (debtor) is unable to perform their obligation to provide labor due to reasons attributable to the company, i.e., the “creditor.”

Thirdly, Article 536, Paragraph 2 of the Japanese Civil Code states, “When the debtor is unable to perform the obligation due to reasons attributable to the creditor, the creditor cannot refuse the performance of the counter-obligation.” Applied to the context of a labor contract, this means that even if the employee (debtor) is unable to work due to the company’s (creditor’s) responsibility, the company cannot refuse to pay the wages, which are the counter-obligation.

Therefore, the employee retains the right to claim the full amount of wages based on the effectively continuing labor contract, even if they have not actually worked. It should be noted that although the wording of Article 536, Paragraph 2 of the Japanese Civil Code was slightly amended with the revised Civil Code enacted in 2020 (Reiwa 2), the drafters of the law reform have stated that this amendment is not intended to change the traditional interpretation of case law regarding back pay when a dismissal is invalid, thus maintaining the stability of this legal basis.

Scope of Wages Subject to Back Pay in Japan

The range of wages that should be paid as back pay includes all the money that the employee would have certainly and regularly received if the dismissal had not occurred. However, not all salary items are eligible for back pay, and determinations are made according to their nature.

Fixed monthly wages such as base salary, position allowances, and housing allowances naturally fall within the scope of back pay.

The wage items that are subject to back pay are judged not by their nominal title but by their nature and the requirements for payment. For example, there is a case law (Tokyo District Court, July 6, 2012 (Heisei 24)) that used an amount excluding commuting allowances in the calculation of wages after the dismissal was declared invalid. On the other hand, there is also a decision (Supreme Court, July 14, 1988 (Showa 63)) that recognized commuting allowances as “wages” under the Japanese Labor Standards Act. However, even if the commuting allowance is recognized as wages, whether it is included in the back pay calculation depends on the purpose and nature of the payment (whether it is for actual expense reimbursement or a fixed amount). Therefore, the treatment of commuting allowances is divided depending on whether they are personalityized as actual expense reimbursements or as fixed wages.
Overtime allowances (overtime pay) are generally not included unless there is actual work performed beyond the prescribed working hours. However, there are cases where a fixed overtime allowance (deemed overtime pay), which is paid in a fixed amount every month regardless of actual performance, is included as a fixed wage.
As for bonuses, if the payment amount varies based on performance or evaluation, claims tend to be denied on the grounds that no performance or evaluation has been conducted (example: Tokyo District Court, August 9, 2016 (Heisei 28)). On the other hand, there are cases where bonuses were included when the amount and calculation criteria were clearly defined in the labor contract or work rules, and no evaluation was required.
Thus, the treatment of each item is not uniform and requires specific judgments based on individual contract contents, payment conditions, and the presence of wage personalityistics, taking into account the trends in case law.

Deduction of Intermediate Income: Reduction from Back Pay in Japan

When an employee who has been dismissed earns income (intermediate income) by working for another company during the dismissal period, the company is not required to pay the full amount of back pay. Instead, it is permitted to deduct the amount of such income based on a certain calculation. This adjustment prevents the employee from receiving an unfair benefit by double-dipping, i.e., receiving wages from the original company and income from the new job. However, the method of calculating this deduction is not a simple subtraction; it must follow a special and complex set of rules established by the Supreme Court of Japan.

The method was established by the Supreme Court’s decision on April 2, 1987 (the Akebono Taxi case). This decision demonstrated a sophisticated judgment that harmonized the demands of two different laws. One is the principle of the Japanese Civil Code Article 536, Paragraph 2, which states that any profit gained should be returned. The other is the imperative provision of Article 26 of the Japanese Labor Standards Act, which requires employers to pay at least 60% of the average wage as a leave allowance when the suspension of work is due to the employer’s convenience.

As a result of reconciling these two principles, the Supreme Court established the following step-by-step deduction rules. First, the portion equivalent to “60% of the average wage,” which is guaranteed by Article 26 of the Japanese Labor Standards Act, cannot be reduced by intermediate income under any circumstances, due to its purpose of ensuring the minimum livelihood of the worker. Deductions of intermediate income are only allowed for the portion exceeding 60% of the average wage, that is, the “40% of the average wage” portion.

The specific calculation procedure is as follows:

1. For each wage payment period during the dismissal period, deduct the intermediate income earned during the corresponding period from the wage amount that should be paid. However, this deduction is capped at an amount equivalent to 40% of the average wage.
2. If the amount of intermediate income exceeds 40% of the average wage and there is an amount that cannot be deducted, the remaining amount can be deducted from wages that are not included in the calculation basis of the average wage, such as bonuses. Since bonuses are not covered by the leave allowance protection of Article 26 of the Japanese Labor Standards Act, the full amount is subject to deduction.

It is important to note that the intermediate income that can be deducted is limited to the income earned during the period that corresponds temporally to the wage payment period. For example, income earned in May cannot be deducted from the wages for April. This complex calculation rule is summarized in the table below.

Thus, even if a dismissed employee earns a high income from another job, the company’s obligation to pay back pay is not completely waived. There remains at least an obligation to pay an amount equivalent to 60% of the average wage, which is an important risk for management to consider.

When Wage Claims Are Limited: Loss of Willingness to Work Under Japanese Employment Practices

The right to claim back pay is not granted indefinitely. Under Article 536, Paragraph 2 of the Japanese Civil Code, a prerequisite for this right is that the employee continues to have the willingness and ability to work at their original workplace. If an employee’s actions objectively indicate a loss of this “willingness to work,” then the right to claim back pay from that point forward is no longer recognized.

The loss of “willingness to work” is determined by the courts based on the specific actions of the employee. For example, if an employee obtains a permanent full-time position with another company after being dismissed and starts earning a stable income that is equal to or exceeds their previous wages, it is likely to be judged that they no longer have the intention to return to their former company. In a decision by the Osaka District Court on September 29, 2021 (the NIK case), it was recognized that a former employee had lost the willingness to work when, after initially filing a lawsuit seeking reinstatement, they subsequently began earning an income significantly higher than their former company’s wages through a personal business. Similarly, in a decision by the Tokyo District Court on August 7, 2019 (the Dream Exchange case), while the court deemed the cancellation of an employment offer invalid, it denied back pay from a certain point onwards due to the plaintiff’s actions indicating a loss of willingness to work.

However, the mere fact of employment with another company does not immediately negate the willingness to work. Situations where the employment is a temporary part-time job to maintain livelihood or where the individual continues to seek reinstatement with their original company can still be judged as retaining the willingness to work.

Furthermore, there is no obligation for a company to pay back pay for periods when the employee is unable to work due to personal reasons. For instance, if an employee is unable to work for an extended period due to a private injury or illness unrelated to the dismissal, the company is not obligated to pay wages for that period, as the employee would not have been able to provide labor services even if they had not been dismissed. Thus, the actions of an employee after dismissal are extremely important in determining the extent of a company’s obligation to pay.

The Escalating Risks of Back Pay and Practical Considerations Under Japanese Employment Practices

One of the greatest risks for companies in disputes over wrongful termination in Japan is the snowballing debt of back pay, which can accumulate throughout the entire period from the filing of the lawsuit until the judgment becomes final. In the Japanese judicial system, it is not uncommon for dispute resolution to take several years if the case is contested from the first instance court up to the Supreme Court. As a result, the total amount of back pay a company may ultimately have to pay can become extremely high.

Past court cases have concretely demonstrated the severity of this risk. For example, in a judgment by the Tokyo High Court on August 31, 2016 (the Toshiba case), the company was ordered to pay approximately 52 million yen after a dispute that lasted about 12 years. Additionally, in a judgment by the Tokyo District Court on February 9, 2010 (the Mitsui Memorial Hospital case), a substantial payment was ordered for a dispute period of about two years.

The factors contributing to the high amount of back pay primarily include the following:

• The dismissed employee’s wages are high.
• The legal proceedings, such as litigation, are prolonged.
• The employee does not find a new job after dismissal, preventing the deduction of interim earnings.
• Multiple employees are contesting similar dismissals.

When these factors coincide, the financial impact on the company can be immeasurable. The existence of this cumulative risk suggests how dangerous it can be to adopt a strategy of waiting for the final judgment in disputes over the validity of dismissals. Therefore, as a management decision, it is extremely important to aim for a strategic and swift resolution, such as settlement negotiations at an early stage of the litigation.

Summary

Under Japanese labor law, a dismissal deemed invalid does not simply end as a matter of the past. It brings about significant ongoing legal risks for the company, such as a “confirmation of status claim,” which legally affirms that the employment contract continues, and a “back pay claim” for the payment of all wages during the dispute period. The amount of back pay is calculated based on complex rules formed by case law, intertwining principles of the Japanese Civil Code and the Japanese Labor Standards Act, including deductions for interim earnings and the treatment of bonuses. If the dispute drags on, the sum can balloon to tens of millions of yen. To manage this risk appropriately, a deep understanding of not only the validity of the dismissal but also the legal effects if it is deemed invalid is essential.

Monolith Law Office has a wealth of experience in dealing with dismissals under Japanese labor law for numerous clients within Japan. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to provide specialized support for international management teams to understand Japan’s complex labor legislation and to conduct appropriate risk analysis and strategic planning. If you are faced with critical management issues such as disputes over dismissals, please do not hesitate to consult with our firm.