FAQs on Reduction in Force
Reflecting recent economic trends, over the last several months we have received several inquiries on how to implement reduction in force in Japanese workplaces. Below are frequently asked questions we have received from our clients and our answers. We think this may be of interest to you when considering workforce reductions in Japan.
Q: What is the legal framework underpinning reduction in force?
A: Japan does not have particular legislation setting out rules for reduction in force. Rather, to the extent an employer implements reduction in force through unilateral termination, its validity is considered under the regular framework set out in the Labor Contract Act. The Labor Contract Act provides that abusive termination by an employer shall be null and void. This means that, if a termination is found abusive, a terminated employee is reinstated and entitled to back-pay of salary during his or her absence from work. Generally speaking, this standard is implemented strictly, and many cases are found to be abusive when challenged in local courts. For reduction in force, Japanese courts have established the following four prongs to determine whether a reduction in force is abusive:
Whether reduction is necessary. This is typically found in distress situations where a company needs to downsize its workforce to survive. However, beyond that, courts have also accepted the necessity of reductions for strategic reasons, such as closure or disposition of particular business divisions.
Whether a company tries its best to avoid termination. Termination of employment is considered the most drastic measure, and therefore should be exercised as a last resort. In a reduction in force, a company terminates employees for its business reasons, not for any cause by employees, and this may only happen when it is absolutely necessary. Before considering a termination, a company should ask itself whether it has implemented suspension of pay raises for other employees, reduction of executive compensations, solicitation of voluntary retirements, transfers and secondments of affected employees, and any other measures that may possibly help to avoid terminations. Courts would not expect the company to conduct something completely unrealistic, but would expect it to explore all other options before proceeding with the terminations.
Whether selection criteria for targeted employees are objective and fair. In other words, a reduction in force should not be used as an excuse to eliminate undesirable employees or personal enemies. In this sense, a company does not have absolute discretion to select affected employees. In court precedents, certain (possibly) discriminative criteria such as age or family status are permitted only when combined with other thresholds.
Whether a company has had good faith discussions with employees. This is rather procedural requirement whereas the other three elements are more substantive. Usually, various factors such as how many times a company holds town hall meetings, how much information it provides during the consultation process, and whether it takes employees’ comments into account, are considered when determining whether the company meets this requirement.
Q: Is it necessary to meet all 4 of these elements?
A: Not necessarily. Some court cases appear to hold that these 4 pillars are merely factors in overall considerations, as opposed to elements required to meet the standard. However, in most cases where terminations are sustained, companies have met these four elements. If a termination is flawed in the second or third element, it could be easily found abusive.
Q: You said companies may not reduce their workforce easily by terminating employees. How can you make that happen then?
A: The standard practice is to solicit voluntary retirements by offering attractive packages. This is critical in validating subsequent unilateral terminations if you do not receive sufficient volunteers, as this is considered one of the options that companies can take to avoid unilateral terminations.
Q: Our global performance is not doing great, but our Japanese business is doing well. Can we still proceed?
A: You can still proceed, and this alone is not likely to be the reason for negating a reduction in force. However, Japanese courts tend to focus primarily on a Japanese entity to consider the satisfaction of the requirements, and the global dynamics can be considered only as an influential factor. As far as your proposed plan is carefully designed and properly communicated, you have a good chance that it will be sustained in the courts.
Q: What is the market standard in offering severance packages?
A: There is no set formula, and there are wide variations depending on the circumstances of each company. Nevertheless, many companies adopt severance scales that correspond to years of service.
Q: In offering a severance package, are there minimum legal requirements?
A: No, there are no statutory standards or requirements in offering the packages. Companies have discretion to design packages that help in achieving their goals.
Q: Can we select the targeted employees based on their performance?
A: It is possible as far as targets are selected objectively, but it is risky, as performance can often be a reflection of subjective preferences. In court precedents where reductions are sustained, companies adopt objective benchmarks such as absence from work, combined with criteria other than performance.
Q: When our employees apply for voluntary retirement, do we have to accept all the applications? What if our high performer who we don't want to resign applies for it?
A: It is not always necessary to accept all applications for voluntary retirement. You can set a maximum number and make a selection if the number of applications exceeds that number. Or you can set the terms for the application so that these applications are subject to your acceptance. In either case, communicating these terms in advance is important in constructing a reduction in force that is fair, and that will be viewed as such by the courts if it is challenged.
Disclaimer
The information contained in this newsletter is for informational purposes only, and should not be construed as legal advice on any matter. The material herein may not reflect the most current legal developments. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this newsletter to the fullest extent permitted by law. Do not act or refrain from acting upon this information without seeking professional legal counsel.