The Legal Framework of Corporate Order in Japanese Labor Law: Work Rules, Whistleblower Protection, and the Effectiveness of Disciplinary Actions

To ensure smooth business operations and sustained growth, maintaining a clear and fair internal order is essential. However, corporate order in Japan is not established merely by customs or unilateral directives from management but is strictly regulated by a legal framework based on employment contracts. Understanding and adhering to this legal framework accurately is one of the most critical management tasks for preventing potential labor disputes and building healthy labor-management relationships. In particular, three elements form the backbone of corporate order: the ‘Work Rules’ that concretely define employee conduct, the ‘Whistleblower Protection System’ that encourages organizational self-cleansing, and the ‘Disciplinary Actions’ that serve as sanctions for order violations. These systems are detailed in Japanese laws such as the Labor Contract Act, the Labor Standards Act, and the Whistleblower Protection Act, and their operation requires meticulous attention. This article focuses on these three vital themes, explaining the legal requirements and practical considerations that companies must observe, incorporating specific statutes and case law. By doing so, it aims to assist corporate executives and legal professionals in managing legal risks appropriately and realizing effective and lawful organizational management.

The Legal Basis for Corporate Order in Japan

In Japan, the right of a company to demand and maintain a certain order among its employees originates from the labor contract concluded between the employer and the worker. This relationship is not merely a command-and-control hierarchy but is legally positioned as a contractual relationship based on the agreement between legally equal parties.

The Relationship Centered on the Labor Contract

Article 6 of the Japanese Labor Contract Act stipulates that a labor contract is established “by the agreement of the worker to work under the employer and the employer to pay wages in return.” Based on this agreement, the worker has the obligation to provide labor, and the employer has the obligation to pay wages. The obligations of the worker are not limited to performing the designated tasks. The contract also encompasses broader obligations, such as preserving the company’s property, cooperating with the smooth operation of business, and considering the overall benefit of the company. The duty to comply with corporate order is legally recognized as one of these ancillary obligations inherent in the labor contract. In other words, an employee’s adherence to company rules is interpreted as a fundamental responsibility in fulfilling the contract terms.

The Principles of “Good Faith and Fair Dealing” and “Prohibition of Abuse of Rights”

The contractual relationship is further regulated by the basic principles set forth in Article 3 of the Japanese Labor Contract Act. Paragraph 4 of the same article establishes the principle of “good faith and fair dealing,” stating that “workers and employers must exercise their rights and perform their obligations in good faith and with sincerity in compliance with the labor contract.” A violation of corporate order by an employee may be assessed as an act contrary to this principle of good faith and fair dealing.

Meanwhile, paragraph 5 establishes the principle of “prohibition of abuse of rights,” stating that “workers and employers must not abuse the rights derived from the labor contract in their exercise.” This principle serves as an important legal constraint on the exercise of the employer’s authority. If disciplinary powers exercised to maintain corporate order are deemed disproportionate in their purpose or means, they may be legally invalidated as an abuse of rights.

Thus, the corporate order under Japanese labor law is built upon a balanced structure where the bilateral relationship of the labor contract serves as the foundation, the obligation of employees to comply is grounded in the principle of good faith and fair dealing, and the exercise of the employer’s authority is strictly limited by the principle of prohibition of abuse of rights. Understanding these mutual legal obligations is the first step in considering issues related to corporate order.

Establishing Rules: Service Regulations and Work Rules in Japan

The most crucial legal document for demonstrating and enforcing corporate order to employees in a concrete and clear manner is the “Work Rules.” Within these, the “Service Regulations” are specialized documents that focus on the code of conduct for employees.

The Central Role of Work Rules

Under Japanese Labor Standards Law (Article 89), employers with 10 or more workers are obligated to create Work Rules and submit them to the local Labor Standards Inspection Office. These Work Rules must include ‘absolute necessary items’ such as work hours and wages, and ‘relative necessary items’ which must be specified if they are to be established, such as disciplinary measures. For a company to impose disciplinary action, it is a legal prerequisite that the grounds for such action and the types of penalties are clearly stated in the Work Rules.

The Position of Service Regulations

Service Regulations concretely define the disciplines employees must adhere to during employment, such as the duty of dedication to their job, the obligation to maintain confidentiality, proper use of company facilities and equipment, and the prohibition of harassment. Legally, these Service Regulations are treated as part of the Work Rules. A company can either establish a chapter called “Service Discipline” within the Work Rules or create a separate document named “Service Regulations.” Even in the latter case, the regulations are legally considered integral to the Work Rules, and thus, the creation or modification of them requires the same legal procedures as the Work Rules.

Mandatory Procedures for Creation and Modification

When creating or modifying Work Rules (including Service Regulations), strict procedures set by the Japanese Labor Standards Law must be followed. Employers must first solicit the opinion of a labor union representing a majority of the workers, or if no such union exists, the opinion of a representative of the majority of the workers, and prepare a written statement of this opinion. The law requires the ‘solicitation’ of opinions, not necessarily the ‘consent’ of the representatives. However, this procedure of solicitation is mandatory, and if it is determined through communication with the Labor Standards Inspection Office that the procedure has not been properly followed, the submission of the Work Rules may not be accepted.

Furthermore, once the Work Rules are created or modified, employers are obligated to make all employees aware of them by posting them in a visible location within the company, distributing written copies, or publishing them on the intranet. If this obligation to inform is neglected, even if the Work Rules are legally established, the company may not be able to assert its rights based on the content of the Work Rules (for example, implementing disciplinary action). These procedures are not merely formalities but are fundamental requirements for giving legal effectiveness to the Work Rules.

Protection of Integrity: The Whistleblower Protection System in Japan

Maintaining corporate order is a broad concept that not only involves adherence to internal rules but also encompasses the ability to self-detect and correct misconduct within an organization. Legally supporting this self-purifying function is Japan’s “Whistleblower Protection Act.”

Overview of the Japanese Whistleblower Protection Act

The law aims to protect individuals, such as employees, who report misconduct, such as violations of laws and regulations at their workplace, to designated reporting entities without wrongful intent. Specifically, it clearly prohibits employers from demoting, reducing the salary of, or otherwise treating the whistleblower unfavorably because of the report. Such retaliatory measures are deemed invalid under the law.

Strengthening of Employer Obligations by the 2022 Amendment

The amended Whistleblower Protection Act, which came into effect on June 1, 2022, significantly strengthened the measures that employers must take. In particular, employers with a constant workforce of more than 300 people are now legally “obligated” to establish a system to appropriately handle internal whistleblowing reports (employers with fewer than 300 employees have a “duty of effort”).

This system establishment obligation specifically includes setting up an internal reporting desk and appointing a “Whistleblower Response Officer” responsible for receiving reports, conducting investigations, and implementing corrective measures. This officer is subject to a strict duty of confidentiality regarding information that could identify the whistleblower. If this information is leaked without a valid reason, the officer may be subject to criminal penalties, including a fine of up to 300,000 yen. This amendment has significantly changed the nature of the internal reporting system from a mere recommendation to a mandatory compliance function with concrete legal responsibilities.

Judicial Invalidity of Retaliatory Measures

Courts strictly apply the prohibition of unfavorable treatment against whistleblowers. As an example, the Yokohama District Court’s decision on April 14, 2022, can be cited. In this case, a company operating pachinko parlors engaged in activities that violated Japanese laws related to adult entertainment businesses. When employees of the company reported these facts to the police, the company demoted them and significantly reduced their salaries as a consequence. The court ruled that the police report qualified as a protected public interest disclosure under the Whistleblower Protection Act and that the resulting demotion and salary reduction were in violation of the law and therefore invalid. This case clearly demonstrates that even if a company exercises its personnel authority in retaliation against a whistleblower, the judiciary can nullify its effect.

Enforcement of Rules: Essential Requirements for Disciplinary Action Under Japanese Law

In order to maintain corporate order, employers have the authority to take disciplinary action against employees who violate workplace regulations. However, the exercise of this disciplinary right is not unlimited; it is subject to stringent requirements under Japanese labor law.

Types of Disciplinary Actions Under Japanese Employment Practices

There are several types of disciplinary actions in Japan, which vary according to their severity. Generally, they are as follows, starting from the least severe:

• Reprimand/Admonition: This is a formal warning given either verbally or in writing to caution the employee about their future conduct. In the case of an admonition, it is common to request the submission of a written explanation.
• Pay Reduction: As a sanction, a certain amount is deducted from the wages that would normally be paid.
• Suspension from Work: For a set period, the employee is prohibited from working while the employment contract remains in effect. Wages are not paid during this period.
• Demotion: This action involves lowering an employee’s rank or position.

Strict Legal Restrictions on Salary Reductions Under Japanese Law

In particular, salary reductions are strictly limited by Article 91 of the Japanese Labor Standards Act to protect the livelihood of workers. Specifically, the amount of a salary reduction for a single incident cannot exceed half of the worker’s average daily wage. Furthermore, even if there are multiple disciplinary violations in a single wage payment period, the total amount of the salary reduction must not exceed one-tenth of the total wages for that payment period. These restrictions apply to salary reductions as a disciplinary measure and do not directly apply to unpaid wages due to suspension from work or non-payment of position allowances due to demotion.  

The Principle of Disciplinary Action Abuse Under Japanese Employment Law

One of the most important legal principles in the exercise of disciplinary authority is the “Principle of Disciplinary Action Abuse,” which is explicitly stated in Article 15 of the Japanese Labor Contract Act. It stipulates that “In cases where an employer is entitled to discipline an employee, if such discipline lacks objectively reasonable grounds in light of the nature and manner of the employee’s conduct and other circumstances, and is not deemed appropriate according to social norms, then the right is considered abused, and the disciplinary action is invalid.”  

This article indicates that for a disciplinary action to be considered valid, it must meet the following two requirements:

1. Objective Rationality: The employee’s conduct must objectively fall under the disciplinary reasons stipulated in the work rules. Sufficient evidence to support the facts is required.  
2. Appropriateness According to Social Norms: The severity of the punishment must be balanced in light of various factors such as the nature, manner, and consequences of the conduct in question, the employee’s intent, the extent of damage caused, past work attitude and disciplinary history, and the degree of remorse.  

Judicial Decisions and Case Law

In Japan, courts strictly apply the doctrine of abuse of disciplinary authority, assessing the validity of disciplinary actions based on objective criteria rather than the subjective judgment of the employer.  

For instance, in a case where an associate professor at a university received a six-month suspension for harassment (Kanazawa District Court, January 25, 2011 (Heisei 23)), the court acknowledged some of the inappropriate conduct by the associate professor but ruled that the actions were not severe enough to warrant a six-month suspension. Considering that the associate professor had no previous disciplinary record and showed remorse, the court deemed the punishment excessively harsh and lacking “socially acceptable appropriateness,” thus invalidating it as an abuse of disciplinary authority.  

Furthermore, disciplinary actions for employees’ private conduct are deemed valid only when such conduct is objectively assessed to have a significantly adverse impact on the company’s social reputation. For example, a minor private crime committed by an ordinary employee, which is not reported and unknown within the company, is likely to be judged as lacking appropriateness for severe disciplinary action. Conversely, if a person in a key corporate position commits a serious crime that receives significant media attention, a severe punishment may be justified due to the substantial damage to the company’s reputation. Ultimately, the validity of disciplinary actions is determined by comprehensively considering the specific circumstances of each individual case.  

Understanding the personalityistics and legal constraints of each type of disciplinary action is extremely important when considering their validity. Below is a table comparing the main types of disciplinary actions.

Summary

Maintaining corporate order in Japan is based on a multi-layered legal framework that includes the obligations of both employers and employees under the Japanese Labor Contract Law, the strict procedural requirements for work rules set by the Japanese Labor Standards Act, and the rigorous oversight by the judiciary against the abuse of disciplinary authority. To achieve effective and lawful organizational management, it is essential to accurately understand these three pillars. First, work rules must be properly established and thoroughly communicated to employees in accordance with legal procedures. Second, a compliance system must be built to meet the requirements of the revised Whistleblower Protection Act in Japan, ensuring that whistleblowers are reliably protected from retaliation. Third, when imposing disciplinary actions, it is crucial to carefully consider whether they can meet the strict standards of ‘objective reasonableness’ and ‘socially accepted appropriateness’ applied by Japanese courts. Adhering to these legal demands will protect companies from unnecessary legal risks and provide a strong foundation for sustainable growth.

Monolith Law Office has a wealth of experience in dealing with complex issues related to Japanese labor law for a multitude of clients both domestically and internationally. Our firm is home to a diverse team of attorneys, including English speakers with foreign legal qualifications, who can provide comprehensive legal support on the themes discussed in this article. This includes the creation and review of work rules, assistance in building compliance systems, and evaluation and advice on legal risks in individual disciplinary cases. We are committed to strongly supporting all those who aim to balance the maintenance of corporate order with legal risk management, leveraging our expertise and experience.