Explanation of the Legal Effectiveness of Work Rules and the Procedures for Their Modification in Japanese Labor Law

In the management of Japanese companies, work rules serve a role far more significant than just a collection of internal regulations. They are legal documents that form the backbone of applying uniform labor conditions to a multitude of employees and maintaining corporate order. While in many other legal jurisdictions individual employment contracts are the primary means of determining labor conditions, in Japan, work rules comprehensively govern the contents of individual employment contracts and even possess the powerful function of modifying them. However, this extensive authority granted to employers is not without constraints. The legal system in Japan, centered around the Japanese Labor Contract Law, maintains a delicate balance between the employer’s right to establish and amend work rules and the necessity to protect workers from unilateral and disadvantageous changes. This legal framework has been shaped by a buildup of court precedents over the years and has been systematized as statutory law. This article will provide a detailed explanation of the legal nature of work rules, their relationship with individual employment contracts, and, particularly important for managerial decisions, the strict legal requirements for making changes that are disadvantageous to employees, based on the criterion of ‘reasonableness’ as determined by specific legislation and case law.

The Legal Nature of Work Rules and Their Impact on Employment Contracts Under Japanese Law

The legal binding force of work rules on individual employment contracts in Japan stems from Article 7 of the Japanese Labor Contract Act. This article stipulates that if an employer has made known to the workers reasonable work rules, the content of the employment contract shall be based on the labor conditions set forth in those work rules. This clarifies the ‘normative effect’ that work rules possess under the law. To invoke this effect, two critical requirements must be met: ‘reasonableness’ and ‘notification’.

The first requirement concerns the ‘reasonableness’ of the content of the work rules themselves. Provisions that are significantly unfair in light of social conventions or that unjustly infringe on the rights of workers are deemed unreasonable and may be denied legal effect. For example, excessively strict disciplinary action provisions or clauses that impose unilateral obligations on employees fall into this category.

The second, and procedurally very important, requirement is ‘notification’ to the employees. Work rules do not produce legal effects merely by being created; they must be properly communicated to the employees to have legal binding force. Article 106, Paragraph 1 of the Japanese Labor Standards Act and related enforcement regulations require specific methods of notification, such as constant posting in a conspicuous place at the workplace, providing written copies to workers, or installing devices that allow workers to check the content at any time in electronic data form. In case law, even if these formal methods are not fully complied with, if employees are placed in a situation where they can know the content of the work rules at any time, ‘substantial notification’ is considered to have been given, and legal effect may be recognized.

These requirements are not mere administrative procedures. They are the legal foundation that ensures the legitimacy of the employer’s authority over labor management. Neglecting notification can lead to a risk of the work rules being deemed ineffective. As a result, the validity of work instructions or disciplinary actions based on the work rules may be contested, potentially leading to the employer’s claims being rejected. Therefore, thorough notification of work rules is an essential duty from the perspective of maintaining corporate order and managing legal risks.

The Hierarchy of Employment Rules and Individual Agreements Under Japanese Law

In Japanese labor law, the norms for determining working conditions have a multi-tiered structure. Generally, the order of precedence in terms of legal effect is as follows: statutory provisions (compulsory laws), labor agreements, work rules, and individual employment contracts. Within this hierarchy, the relationship between work rules, which uniformly apply to all employees, and individual employment contracts, which are concluded with specific employees, is particularly important for corporate management. The Japanese Labor Contract Act provides clear rules on which takes precedence when the content of both differs.

Firstly, work rules serve as the ‘minimum standard’ for employment conditions. Article 12 of the Japanese Labor Contract Act stipulates that any employment contract that sets working conditions below the standards defined in the work rules is invalid in that respect. In such cases, the standards set in the work rules apply. This is an aspect of the ‘principle of favorability,’ which functions to protect workers by preventing employers from employing individuals under conditions that are less favorable than those set out in the work rules. For example, even if an individual contract agrees to a basic salary of 280,000 yen, despite the work rules setting it at 300,000 yen, that agreement is invalid, and there is a legal obligation to pay 300,000 yen.

On the other hand, individual employment contracts can establish more favorable conditions that ‘exceed’ the standards of the work rules. A proviso in Article 7 of the Japanese Labor Contract Act acknowledges that if the worker and employer have agreed on working conditions in the employment contract that differ from those in the work rules, the individual agreement takes precedence. This allows companies to offer compensation and benefits that exceed the standards of the work rules to personnel with specific expertise or to key position holders, enabling flexible talent management. For instance, even if the work rules provide for 120 annual holidays, an individual agreement granting 125 annual holidays to a certain employee is valid, and that employee is entitled to 125 days off.

The interaction between these two articles establishes a relationship where work rules set the ‘minimum line (floor)’ for employment conditions, which cannot be undercut, while individual agreements are not hindered from setting ‘more favorable conditions (ceiling)’ that exceed that line. Understanding this relationship is essential for reconciling unified labor management with individual and strategic personnel treatment.

Disadvantageous Changes to Employment Regulations: Principles and Exceptions Under Japanese Law

Employment conditions are contractual content between employers and employees, and as such, any changes to them fundamentally require mutual consent. Article 8 of the Japanese Labor Contract Act stipulates that both workers and employers can modify the employment conditions, which are the content of the labor contract, by mutual agreement, thereby clarifying this principle of consent.

Based on this principle, Article 9 of the Japanese Labor Contract Act prohibits employers from unilaterally changing the employment regulations, thereby altering the employment conditions to the detriment of the workers without their consent. This essentially forbids employers from making disadvantageous changes such as reducing wages or cutting holidays solely based on their own declaration of intent. This is the overarching principle regarding disadvantageous changes to employment regulations.

However, business management must constantly adapt to changing environments, and there are times when revising employment conditions becomes inevitable. To address such managerial necessities, the Japanese Labor Contract Act allows for exceptions under strict requirements. This is where Article 10 of the act comes into play. This provision opens the possibility for legally valid changes to employment conditions through unilateral amendments to the employment regulations, provided two conditions are met. The first condition is that the revised employment regulations must be made known to the workers. The second, and most crucial, condition is that the changes to the employment regulations must be ‘reasonable’.

The legal structure of the Japanese Labor Contract Act, where Article 9 establishes the ‘general prohibition’ and Article 10 stipulates the ‘provided that’ exceptions, is extremely important. It legally positions disadvantageous changes to employment regulations not as an inherent right of the employer but as an exceptional measure. Therefore, if the validity of a disadvantageous change is contested in court, the burden of proof that the change is ‘reasonable’ falls entirely on the employer. The court starts from the principle (the change is invalid) and rigorously examines whether the employer’s arguments and evidence possess enough persuasive power to apply the exceptional provision (Article 10). For this reason, as a manager, when considering disadvantageous changes, it is essential not only to recognize the necessity but also to strategically prepare how to construct and prove ‘reasonableness’ from a legal perspective.

Criteria for Determining the “Rationality” of Disadvantageous Changes Under Japanese Employment Law

The key to the validity of disadvantageous changes to employment regulations is the assessment of “rationality,” which is not determined mechanically by a single criterion but is made by comprehensively considering multiple factors. This framework for judgment, as stipulated in Article 10 of the Japanese Labor Contract Act, has been formed over many years through a buildup of court precedents, even before the enactment of the law. Notably, the Supreme Court’s decision in the 1968 Akihoku Bus case established the fundamental principle that rational changes to employment regulations are binding even without the individual consent of workers. The specific elements for assessing rationality were detailed in the Supreme Court’s decision in the 1997 Daiyon Bank case, which is strongly reflected in the current text of Article 10 of the Labor Contract Act.

Article 10 of the Japanese Labor Contract Act lists the following points as factors to consider when determining rationality:

1. The degree of disadvantage to the worker: This refers to how severe the disadvantage suffered by the employee is due to the change. The greater the impact on the employee’s life, such as significant reductions in wages or retirement benefits, the higher the hurdle for recognizing rationality.
2. The necessity of changing employment conditions: The extent of the employer’s need to make the change, such as responding to a serious management crisis or unavoidable measures accompanying a business restructuring, rather than merely for profit expansion. A high degree of necessity is required.
3. The appropriateness of the content of the new employment regulations after the change: Whether the new employment conditions system is itself unreasonable or whether it is considered reasonable in terms of social norms. Consideration is also given to whether it is significantly lower than the standards of other companies in the same industry.
4. The state of negotiations with labor unions, etc.: The history of negotiations between the employer and the labor union organized by the majority of workers or the representatives of the majority of workers regarding the change. If an agreement has been reached with the labor union after sincere negotiations, the change is strongly presumed to be rational.
5. Other circumstances related to the change in employment regulations: This includes all other relevant circumstances. For example, the presence of transitional measures to mitigate the disadvantage (gradual adjustment measures) or compensatory measures for the disadvantage are important factors.

A representative case that illustrates how these factors are comprehensively judged is the aforementioned Daiyon Bank case. In this case, the bank made a change to the employment regulations that lowered the wage level after the age of 55 in exchange for extending the retirement age from 55 to 60. The Supreme Court emphasized that although the disadvantage of reduced wages for employees was significant, the benefit of extended retirement (compensatory measure) was provided, there was a need to secure employment in an aging society, and above all, an agreement had been reached after sufficient negotiations with the labor union, which about 90% of the employees belonged to, and judged the change to be rational and valid.

As this case demonstrates, when determining the rationality of disadvantageous changes, courts place great importance not only on comparing the conditions before and after the change but also on the “process” leading up to the change. Whether the employer side has provided a careful explanation to the employee side, negotiated sincerely, and made efforts to mitigate the disadvantage as much as possible will significantly influence the final legal judgment. Therefore, to successfully implement disadvantageous changes, it is essential to ensure the transparency and fairness of the change process, not just the appropriateness of the content, for legal risk management.

Summary

In the realm of Japanese labor law, work rules serve as a powerful legal tool for companies to establish uniform working conditions and smoothly operate their organizations. These rules have the authority to comprehensively regulate the contents of individual employment contracts and, under certain conditions, even unilaterally modify them. However, this potent authority is under strict control by the law. Particularly when making changes that are disadvantageous to employees, employers must prove that such changes are “reasonable,” and this hurdle is by no means low. The assessment of reasonableness includes not only the substantive aspects, such as the necessity of the change and the degree of disadvantage, but also the fairness of the process, including the history of negotiations with labor unions and the presence of measures to mitigate the disadvantages. Therefore, for managers and legal professionals, a deep understanding of legal requirements and careful, strategic process management when creating or modifying work rules, especially when considering disadvantageous changes, is key to preventing future labor disputes and achieving stable corporate management. At Monolith Law Office, we have a wealth of experience advising on the legal challenges related to work rules discussed in this article for numerous clients within Japan. Our firm includes attorneys who are native English speakers with foreign legal qualifications, enabling us to meet the unique needs of companies with an international perspective. From the creation of new work rules, reviewing current regulations, adapting to legal amendments, to the implementation of the most cautiously approached disadvantageous changes, we provide optimal legal support tailored to your business strategy.