Changes to Employment Contracts under Japanese Labor Law: Legal Frameworks Managers Should Know

The modern business environment is personalityized by constant change, and companies are perpetually required to make organizational and strategic adjustments. Often, these adjustments necessitate a review of employment relationships. However, in Japan, the terms of a labor contract are not solely governed by the initial individual agreement. They are dominated by a complex hierarchy of norms and case law principles that emphasize stability and worker protection. Therefore, for corporate managers to legally and smoothly implement changes in employment conditions and personnel transfers, a deep understanding of this unique legal framework is essential. This article provides a specialized commentary on the legal framework for changing the content of labor contracts under Japanese labor law. It begins by addressing the main sources that determine working conditions: the work rules and labor agreements. It then details the stringent requirements for implementing changes in working conditions that are disadvantageous to workers. Finally, it analyzes the legal structure and constraints of the three main types of personnel transfers: transfers, secondments, and changes of affiliation. The purpose of this article is to provide corporate managers and legal professionals with the sophisticated knowledge necessary to manage these processes in compliance with Japanese law.

Norms Determining the Content of Employment Contracts Under Japanese Law

In Japanese labor law, the content of an employment contract concluded between individual workers and employers is not solely determined by the contract document itself. Instead, it is complemented and sometimes overridden by comprehensive rules that apply to the entire workplace. Among these rules, the ‘Work Rules’ and ‘Labor Agreements’ are particularly significant.

The Role and Legal Effectiveness of Employment Regulations Under Japanese Law

Employment regulations in Japan are a collection of rules systematically established by employers to unify labor conditions and service discipline at the workplace. Article 7 of the Japanese Labor Contract Act stipulates that when an employer creates reasonable employment regulations and makes them known to the workers, the labor conditions set forth in these regulations become part of the employment contract. This makes employment regulations a powerful tool for standardizing labor conditions.

A critical requirement for these regulations to take effect is “notification.” Employers must ensure that workers can always check the content of the employment regulations by displaying them in a conspicuous place at the workplace, providing them in writing, or making them available in electronic data form. This obligation to notify is not merely a formal procedure; failure to fulfill it means that the employment regulations will not take effect, and the employer cannot bind the workers to its provisions. This is an extremely important compliance point for companies.

Furthermore, employment regulations also serve as a minimum standard for individual labor contracts. According to Article 12 of the Japanese Labor Contract Act, any individual labor contract that sets labor conditions below the standards defined in the employment regulations is invalid in those respects. The parts that are deemed invalid will be governed by the standards set in the employment regulations. From the perspective of management, this provision brings a certain uniformity to the labor conditions of all workers and simplifies labor management.

The Superior Legal Effect of Labor Agreements Under Japanese Law

A labor agreement is a written agreement concluded between a labor union and an employer regarding working conditions and other related matters. In Japan, labor agreements carry even stronger legal effects than work rules. Article 16 of the Japanese Labor Union Law recognizes the ‘normative effect’ of labor agreements. This means that any part of work rules or individual employment contracts that violate the standards for working conditions and other treatments of workers set forth in a labor agreement are invalid, and the invalid parts are replaced by the standards of the labor agreement.

This normative effect covers most substantial aspects of the employment relationship, such as wages, severance pay, working hours, holidays, safety and health, disaster compensation, personnel transfers, and discipline. This indicates that the legal hierarchy is clearly established as “Labor Agreement > Work Rules > Individual Employment Contract.” For companies with labor unions, understanding this hierarchy is crucial. Any attempt to change working conditions through modifications to work rules will be legally invalid if it contradicts the provisions of a labor agreement.

Therefore, for companies with labor unions that intend to implement significant changes to working conditions, the most reliable and legally stable method is not to rely on changes to work rules but to revise the labor agreement through negotiations with the labor union. This legal hierarchy is a key factor in shifting the strategy of labor management from a unilateral management process by the employer to a bilateral negotiation with the labor union.

Comparison of Japanese Employment Regulations and Labor Agreements

The comparison between the employment regulations and labor agreements, which have been explained in the text so far, is summarized in the table below.

Adverse Changes to Employment Conditions: Legal Requirements and Limitations Under Japanese Law

In response to changes in the business environment, there may be a need to revise wage systems or reduce allowances, resulting in changes to employment conditions that are disadvantageous to workers. However, Japanese labor law imposes strict constraints on such adverse changes.

The Principle of Mutual Agreement

In principle, since an employment contract is a type of contract, any changes to the terms of employment require the mutual agreement of both parties involved. Article 8 of the Japanese Labor Contract Act stipulates that workers and employers can modify the terms of an employment contract by mutual consent. Therefore, it is generally not permissible for an employer to unilaterally change the terms of employment to the worker’s disadvantage without the worker’s consent.

Unilateral Changes to Employment Regulations and the Legal Principle of ‘Rationality’ Under Japanese Law

However, obtaining individual consent from all employees is not practical, especially for large organizations. Therefore, Article 10 of the Japanese Labor Contract Act provides an important exception. According to this provision, employers can unilaterally change employment conditions to the detriment of employees by amending the employment regulations. However, to do so, two strict requirements must be met: first, the post-change employment regulations must be made known to the employees, and second, the change must be ‘rational’.

The assessment of this ‘rationality’ is one of the most important and complex issues in Japanese labor law practice. According to case law, rationality is determined by comprehensively considering specific factors. The Supreme Court established this judgment framework in its decision on February 28, 1997 (The Fourth Bank Case). The factors considered in this decision are as follows:

1. The degree of disadvantage suffered by the employees
2. The necessity of changing the employment conditions
3. The appropriateness of the content of the post-change employment regulations
4. The status of negotiations with labor unions, etc.
5. Other relevant circumstances (such as alternative measures or improvements to other employment conditions)

These factors are not merely a checklist. Courts carefully weigh the employer’s managerial necessity against the disadvantages suffered by the employees. For example, regarding the ‘necessity of change,’ mere desire to cut costs is insufficient; there must be an objective and significant managerial necessity, such as consecutive fiscal deficits or drastic changes in industry structure. Furthermore, the greater the ‘degree of disadvantage,’ such as significant reductions in wages or retirement benefits, the more the courts will demand a higher level of necessity and substantial transitional measures (such as the provision of adjustment allowances) to mitigate the disadvantages.

This case law serves as a practical framework for managers to manage legal risks. Companies considering disadvantageous changes should prepare from the planning stage with these factors in mind to reduce the risk of their rationality being contested later. Specifically, (1) objectively documenting the managerial necessity with financial statements, (2) designing a fair system to prevent disadvantages from being biased towards specific employee groups, (3) establishing transitional measures to ease the impact of changes, and (4) earnestly engaging in discussions with labor unions or employee representatives are extremely effective in laying the foundation for the rationality of the changes and ensuring legal stability.

The Validity of ‘Consent’: From Form to Substance Under Japanese Law

Employers in Japan may opt to obtain individual consent forms from employees for disadvantageous changes to employment terms, rather than unilaterally altering company work rules. However, the mere existence of a signed and sealed consent form does not guarantee its legal validity.

The Supreme Court of Japan’s decision on February 19, 2016 (Yamanashi Prefectural Credit Union case) provided important criteria for this issue. According to the ruling, the validity of an employee’s consent to disadvantageous changes must be substantively judged, not merely by the formality of signing the consent form, but also by whether there are reasonable grounds to recognize that the consent was given based on the employee’s free will. In this assessment, factors such as the information provided and explanations given by the employer, as well as the content and degree of the disadvantage, are taken into consideration. Consent obtained without sufficient explanation or under semi-coercive circumstances may later be deemed invalid.

This case law suggests the precariousness of a formalistic consent acquisition process. There are two paths for changing employment conditions to the detriment of the employee: unilateral changes through the modification of work rules (Article 10 of the Japanese Labor Contract Act) and changes based on individual agreements (Article 8 of the same Act). However, these two are not unrelated. Ultimately, what Japanese courts emphasize is the fairness of the procedure. Procedural justice, such as adequate information provision, sincere explanation, and the guarantee of free decision-making, underpins the ‘reasonableness’ of unilateral changes and supports the validity of individual ‘consent.’ Regardless of the legal means employed, practicing a transparent and fair process is the best strategy to avoid legal disputes.

Legal Framework of Personnel Transfers in Japan: Differences and Constraints between Transfers, Secondments, and Changes of Affiliation

In the realm of corporate management, altering employee placements for purposes such as business restructuring, talent development, and organizational revitalization is an essential activity. Under Japanese labor law, personnel transfers are primarily categorized into three types: “transfers,” “secondments,” and “changes of affiliation,” each with its own legal framework and constraints.

Employee Transfers Under Japanese Employment Practices

An employee transfer refers to a change in job duties or work location within the same company in Japan. The employer remains the same party to the labor contract. If there are provisions in the labor agreement or work rules that allow for transfers, employers generally have broad authority (the right to order transfers) to mandate transfers without the individual consent of the employee.

However, this authority to order transfers is not without constraints. It is limited by the legal principle of ‘abuse of rights.’ The leading case on this point, the Supreme Court decision of July 14, 1986 (Toa Paint case), identified the following three types of situations where a transfer order would constitute an abuse of rights:

1. When there is no business necessity for the transfer,
2. When the transfer is made with an unfair motive or purpose (e.g., harassment, forcing resignation),
3. When the transfer imposes a disadvantage on the employee that significantly exceeds what is normally acceptable.

From a management perspective in Japan, ‘business necessity’ is interpreted relatively broadly, and it is considered sufficient if there is a point that contributes to the rational operation of the company. However, the ‘degree of disadvantage to the employee,’ the third type, is critical. For example, ordering a transfer that involves relocation to a distant location without an alternative means, for an employee who has a family member requiring care, is likely to be deemed an abuse of rights and thus invalid.

Secondment in Japan

Secondment refers to a situation where an employee provides labor under the direction and orders of a different company (the host company) while maintaining their employment contract with the original company (the home company). Unlike a transfer, a distinctive feature of secondment is the change in the person or entity with the authority to give instructions and orders.

When ordering a secondment, individual consent from the employee is not always necessary. If the employment rules or labor agreement includes comprehensive provisions regarding the authority to order secondments, the duration of the secondment, and the status and working conditions at the host company, the employer can issue a secondment based on these provisions.

However, secondment orders are also subject to restrictions based on the abuse of rights principle. The Supreme Court decision on April 18, 2003 (the New Japan Steel case) indicated that when assessing the abusiveness of a secondment order, even more detailed consideration is required compared to a transfer. Specifically, the following factors are comprehensively considered: (1) the business necessity of the secondment, (2) the rationality of the selection of the targeted employee, (3) the degree of economic and lifestyle disadvantages suffered by the employee due to the secondment, and (4) the appropriateness of the procedures leading to the order. This clarifies that the employer’s discretion is not unlimited and that secondments must be carried out for legitimate business purposes such as technical guidance, management guidance, or employment adjustment, with sufficient consideration for the disadvantages to the employee.

Transfer of Employment in Japan

Transfer of employment in Japan involves terminating an existing labor contract with the original employer and establishing a new labor contract with a different employer. This personnel transfer entails the most fundamental change, as it involves altering the employer party to the labor contract itself.

Given the nature of transfer of employment, which includes the termination of a labor contract, the clear and individual consent of the employee is essential. Even if a comprehensive consent form has been obtained at the time of hiring, agreeing to transfer to an affiliated company as directed by the company in the future, this alone is generally insufficient and cannot serve as a basis for ordering a transfer. Consent must be obtained anew at the time the transfer is actually carried out, with the destination company and the applicable labor conditions being specifically stated.

These three types of personnel transfers are distinctly differentiated by their legal nature and the level of consent required. A job reassignment involves the lowest degree of intervention, a secondment is intermediate, and a transfer of employment requires the highest degree of intervention. Accordingly, the level of consent required also becomes progressively more stringent, ranging from comprehensive consent being sufficient to individual and specific consent being mandatory. Understanding this ‘spectrum of consent’ is a crucial guideline for companies to select the appropriate method of personnel transfer when executing strategies such as organizational restructuring or business sales, and to plan the necessary legal and HR procedures.

Comparison of Three Types of Personnel Transfers Under Japanese Employment Practices

The comparison of transfers, secondments, and changes of registration, which have been explained in the text, is summarized in the table below.

Conclusion

As this article has demonstrated, altering employment relationships in Japan is a legally complex task. The process is governed not by a single contract, but by a hierarchy of norms that includes labor agreements and work rules, which play a decisive role. Employers do have the authority to unilaterally change working conditions or order personnel reassignments, but these powers are significantly limited by case law principles such as “reasonableness” and “abuse of rights.” The overarching theme is the importance of procedural justice. Regardless of the type of change being implemented, transparent communication, a fair process, and sincere consultation are key to avoiding legal disputes and maintaining healthy labor-management relations.

Monolith Law Office has a track record of providing rich and practical advice on these complex issues related to Japanese labor law to a diverse range of clients, both domestic and international. Our firm includes several English-speaking attorneys with foreign legal qualifications, enabling us to bridge the gap between global business practices and the unique requirements of the Japanese legal system. We offer strategic counseling to help clients navigate the complex processes of changing employment conditions and personnel reassignments while achieving business goals and ensuring compliance. We can provide comprehensive support for all the matters discussed in this article.