Update on statutory severance in employment termination

On April 12, 2022, a study group organized by the Ministry of Health, Labour, and Welfare (“MHLW”) published a report examining options for statutory severance in employment termination. The recommendation took nearly four years after the Labor Policy Council asked legal experts for this analysis in December 2017. As this mechanism might be included in forthcoming legislation, we summarize some of the key discussions in the report below.

What is the scope of discussion?

The scope of mechanism for consideration is for employees wrongfully terminated by their employers to receive severance pay in lieu of recovering their employment status. Under the current legal framework, the sole remedy for wrongful termination is restitution: employees will be reinstated to their original employment positions and receive unpaid salaries retroactively while unemployed for the wrongful termination. Unless parties agree otherwise, courts cannot order employees to leave companies in wrongful termination cases, even if reinstatement is not a practical solution.

Thus, in this framework, companies continue to be subject to the same restriction in terminating employees. In other words, severance payments discussed here do not lower the bar for termination by companies. Statutory severance is the exclusive option for employees who were wrongfully terminated. If they no longer wish to return to their previous workplace, they can receive payments by judgment instead of reinstatement to their original positions.

What is the legal nature of the rights?

The report illustrates two structures: when employees are wrongfully terminated, they have an option to claim severance payments or the right to sue for such severance. In the latter, severance payment is generated only via judgment, whereas in the former, the right to claim severance exists before judgment. Either way, there is no difference that employees can realize the claim only through court proceedings, and employment will be terminated when they receive severance payments.

How is the statutory severance calculated?

The report recommends creating some calculation formula so that the parties may predict the amount of severance in advance. It also mentions that the formula should reflect the employee’s salary amount, years of service, age and seniority, and expected window to find a new employment. However, the report does not suggest a particular formula or calculation method, merely referring to the factors to be considered. The report also suggests considering the employee's specific circumstance that leads to wrongful termination. Thus, the amount is likely reduced if the employee has attribution in termination.

Is this paid in lieu of unpaid salary during wrongful termination?

This is an additional payment in consideration for terminating employment and thus different from salaries. Terminated employees may be eligible for their unpaid salaries during their absences for wrongful terminations in addition to the statutory severance.

Is this option waivable?

A waiver of this option or claim in advance is likely null and void for public policy reasons. On the other hand, an employee's voluntary waiver after their termination can be enforceable as long as it derives from their true intention.

How long is the severance available?

The report mentions that the severance rights should be available at least two years from the termination date but subject to policy consideration. Thus, this could be extended or altered depending on the discussion in the legislation process.

When will this become a new law?

The report states that it has only examined legal issues in introducing the statutory severance and that it is a matter of policy consideration whether to legislate such a mechanism. However, considering that the government has invested a fair amount of time and resources on this topic, it is reasonable to presume that this may be coming. It is hard to predict the timing, however, because the Labor Policy Council usually continues the discussion further to make recommendations before the formal legislation. Given it took so long to publish the report, we would not be surprised if it takes a few more years.

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