KOJIMA LAW OFFICES
Labor and Employment Practice Group

Vol. 4 May 2014

Labor & Employment Law Newsletter
Terminating Employees in Japan – An Overview, Common
Pitfalls and How to Avoid Costly Mistakes (Part II of III)
Editor’s Note: Part I of this article covered ordinary dismissals and was published in the previous issue of the newsletter.
Part III will address punitive dismissals
and will appear in the next issue.
Dismissals for Purposes of Downsizing

As the term suggests, dismissals forpurposes of downsizing are conductedwith the aim of reducing the size of acompany’s workforce to deal with financial difficulties or for other businessrelated reasons. Because dismissals forpurposes of downsizing are conductedwithout a cause attributable to an employee (e.g., an employee’s work performance or a violation of the company’s
rules), courts tend to apply a stricter
standard in determining the validity ofthese dismissals compared to ordinary
dismissals that were discussed in theprevious issue. Employers should notethat even the layoff of a single employee
can be regarded as a dismissal for
purposes of downsizing as long as thedismissal is done for this reason.
Relevant Factors
Japanese labor statutes do not spell out
what a company must do to validly
dismiss an employee for purposes ofdownsizing. Under the relevant case law,however, a company generally must
establish that:(1) It is critical for the company’sbusiness that it reduce the size of its
workforce;(2) it has done everything it can reasonably do to avoid dismissals;(3) the choice of employee(s) to be dismissed is reasonable; and(4) it provided the employee(s) with a fulland complete explanation of the contemplated dismissal, as well as ample opportunity for discussion.

Courts have historically treated each of
the four factors as requirements. Therefore, a finding that even a single factor
was lacking would invalidate the dismissal. However, recent court decisions have
employed a kind of “totality of thecircumstances” test. This trend suggeststhat even if one of the four factors may
not be fully satisfied, the court may
nevertheless find the dismissal valid if theother three factors were sufficiently met.
Despite this apparent relaxation of thestandard, however, a prudent HR manager would be well advised to treat eachfactor as an ironclad requirement. Even
today, some courts still find dismissals
invalid because the employer failed tomeet one of the four factors, in particular
the duty to avoid the dismissal in the firstplace and the reasonableness of the
choice of employee to be let go.
The four factors in detail are as follows.
(1) The Necessity for Downsizing
Any downsizing-related dismissals are
required to be based on a real businessneed. Some examples include the needto address sharp financial losses, to deal
with a severe economic downturn, or toadjust to a prolonged decline in theindustry that the company operates in.
While some courts have held that thisfactor is met only when bankruptcy
appears unavoidable, most courts havebeen more flexible and defer to the employer’s business judgment. For example,
in some cases the requisite necessity isfound where a company finds itself inexcessive debt or is consistently suffering losses. In other recent cases, courts
found that this factor was met when an
employer dismisses employees in orderto streamline management or to enhance their competitiveness, even when

Koinobori (carp streamers) at Tokyo Tower

Contents
Terminating Employees in Japan – An
Overview, Common Pitfalls and How
to Avoid Costly Mistakes (Part II of III) .... 1
Illustrative Cases .................................... 3
Message from the Labor and Employment Practice GroupKojima Law Offices have provided legal
services in the area of labor and employment law since its founding in 1984. Our
Labor and Employment Practice Group
represents clients in labor disputes andassists them in structuring andimplementing HR policies. We work withboth foreign headquarters and local
management to timely and appropriately
resolve employment issues that overseas
companies face operating in Japan. As
part of our continuing effort to reach out
and share our expertise with others, theLabor and Employment Practice Grouppublishes this newsletter to provide a
better understanding of this complex areaof law, thereby enabling the reader tomake more appropriate employment andlabor decisions. We hope you find thenewsletter
bothinterestingandinformative and welcome any feedback
you wish to share with us.
Labor and Employment Practice GroupKojima Law Offices
URL: http://www.kojimalaw.jp/en/index.html
Contact: (E-mail) webmaster@kojimalaw.jp(Telephone) 81-3-3222-1401

Labor & Employment Law Newsletter© Kojima Law Offices 2014

Labor & Employment Law Newsletterthe company’s overall financial condition is not in dire jeopardy.
On the other hand, courts often findthat a company is not justified in dismissing employees if the employer
acts in a way that contradicts its claimof needing to reduce its head count(such as giving out significant pay
raises or hiring a large number of new
employees shortly after deciding to
implement the dismissals).
(2) Efforts to Avoid Dismissals
Under the relevant case law, dismissals must essentially be considered
only as a last resort since the impact
on the targeted employee will be immense. Prior to dismissing an employee, a company must do its utmost to
avoid the dismissal. For instance, acompany could initiate cost cutting
measures (including across-the-board
pay cuts, reducing overtime pay by
cutting back on or eliminating overtimework), less reliance on temporary
workers, a moratorium on new hiring,
the secondment of targeted employees (so-called shukkou, which refers
to the temporary transfer of an employee to another company while that
individual remains an employee of his/her original company), shifting target
employees to other positions or
departments (companies should consider offering transfer or secondment
opportunities to employees whose
workplaces are fixed under their employment agreements before deciding
to dismiss them), job-sharing (a flexible work option in which two or
possibly more employees share asingle job), temporary lay-offs, andcalling for and encouraging voluntary
resignations.
Generally, courts have identified thislast measure as crucial. Employers
should therefore make a good-faitheffort to promote voluntary resignations. This objective can often beachieved by having the company offer
employees various financial incentivesprior to dismissing them (even if thetarget employee declines to resign
voluntarily).
Overall, courts will determine whether
a company has taken adequate steps

2Vol. 4 May 2014

to avoid dismissals by looking at avariety of factors. These factors include the size of the company, thecompany’s financial condition, thecomposition of the company’s workforce (e.g., the ratio of regular seishain
employees to non-regular employees,
employees’ ages, etc.), the degree ofthe necessity and how urgently thecompany needs to downsize. The
complexity of this determinationmeans employers should consult witha specialist as early as possible about
the steps it should take to validly
dismiss employees.
(3) Reasonableness of Selection of
Employee(s) to be Dismissed
Employers are required to apply specific, objective and reasonable criteria in
determining which employees are to
be dismissed. Companies using criteria that are not specific, objective andreasonable face an increased risk thatthe dismissal will be invalidated.
Acceptable criteria can include thefollowing: (i) quantifiable factors suchas length of service, workplace attendance and disciplinary violations; (ii)contributions made to the company interms of business results; (iii) the
status of employment (e.g., regularseishain employees are afforded
greater protection than non-regular
workers); and (iv) how difficult it will be
for the dismissed employee to be
reemployed and the impact of thedismissal on the employee’s family.
Employers have the sole discretion todetermine the criteria that they will use.
They are not required to consult with
their employees or the labor union beforehand. However, employers need to be
extremely vigilant about keeping bias
and subjectivity out of the equation.
(4) Adequacy of the Termination Pro-

cess: Sufficient Explanation andDiscussion
Before dismissing employees for the
purpose of downsizing, an employer isrequired to provide the target employees (including their unions) with a fulland complete explanation about theneed to downsize and the importanceof the downsizing efforts to the futureof the company. Moreover, the employer must provide ample opportunities for employees to discuss thedownsizing plans with the company.
Ideally, of course, the objective is tohave the employee fully understandthe necessity of the company’s actions. However, failing to achieve thislofty goal does not necessarily meanthat the dismissal will be declaredinvalid. As long as the employer provides the targeted employees with boththe opportunity and the means to learn
about and understand the need todownsize, a court will likely find that theemployer has taken adequate measuresin preparation for the dismissal.
Specifically, employers need to describe the necessity, contemplated
date and scale of the dismissals, aswell as details about how the dismissals will be carried out. The employers
should discuss these matters openly
and in good faith. As part of this effort,
employers should provide employeeswith documentation: (i) establishing thatthe downsizing is necessary; (ii) showing how the downsizing will benefit thecompany; and (iii) illustrating that thecompany has a viable plan to return toprofitability. The company should also
provide the employee with the company’s current financial statements.
If an employer’s explanation is lacking
or if the employer unilaterally breaks
off discussions with the employee prematurely, a court may find thedismissal invalid.
Final Pointers
It is not uncommon for targeted employees to join a union with significant
know-how in dismissal matters before orsoon after being dismissed. If, as often
happens, the union requests that theemployer explain and discuss the dismissal with the union, the company isrequired to comply with the request.
Failure to do so may constitute unfair
labor practices and invalidate the dismissal, so employers should not takeunion requests lightly. These unions
typically have access to experts with vast
knowledge of dismissal matters. Therefore, employers should consult with theirown experts as early as possible
regarding how to deal with labor unions.

Labor & Employment Law Newsletter© Kojima Law Offices 2014

Labor & Employment Law Newsletter

It is also important to note that the
restrictions applicable to ordinary dismissals also apply to dismissals forpurposes of downsizing. Therefore,
the company’s work rules must set
forth that employees are subject tobeing dismissed for purposes ofdownsizing. Furthermore, employers
cannot dismiss employees who: (i) are

Vol. 4 May 2014

on maternity leave and for 30 days thereafter; and (ii) are on medical leave to
receive treatment for injuries or illnesses suffered in the course of employment and for 30 days thereafter.
Lastly, employers are required to takeone of the following steps to validly
dismiss their employees:(i) provide the target employees withat least 30 days’ written notice;(ii) in lieu of 30 days’ written notice,provide the target employees with atleast 30 days’ worth of pay; or(iii) a combination of notice and pay(e.g., 15 days’ written notice and 15
days’ pay).

Illustrative Cases
To understand how the four factors
are applied in practice, it is useful toreview actual court cases involving
dismissals for the purpose of downsizing. Below are summaries of
selected cases where the court foundin favor of the dismissed employees.
1. May 17, 2007 Judgment of the
Osaka High Court
Kansai Kinzoku Kogyo KabushikiKaisha (“Kankin”) dismissed 10 regular “seishain ” employees in 2004 forthe purpose of downsizing. Kankin
had been under extreme financialpressure. Its gross revenue plummeted by more than half from 5
billion JPY in 1992 to just 1.8 billion
JPY in 2001. This steep drop meantthat Kankin had been operating in
the red since 1998. Plaintiffemployees challenged all 10 dismissals and sought both reinstatement to their positions and back wages.
The Osaka District Court found for theemployees, and Kankin appealed.
Prior to dismissing the employees,
Kankin took the following actions:(1) It slashed operating costs from46 million JPY in 2001 to 31 million
JPY in 2003.
(2) It let go 22 part-time and temporary employees, and furloughed its
entire workforce three times in 2002.
(3) It cut employee bonuses startingin 1998.
(4) It cut pay for its officers andadministrative employees in 2002.
(5) Kankin sought the voluntary retirement of 20 employees, and managed to get 26 to leave.
(6) Kankin implemented a turnaround plan in 2002 but the plan failed
to achieve the desired results.
(7) Kankin sold its employee dormitory.
(8) Kankin explained to their employees and the union that unless it
could convince six employees toresign voluntarily, it was considering

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dismissing six employees.
After taking steps (1) to (6), Kankin
offered employees with more than 30
years of service the chance to voluntarily resign, saying that it was seeking
the resignation of six such employees.
The response was poor, however, andno employees offered to leave.
In response, Kankin on April 16, 2004
notified all employees with more than
25 years of service that Kankin would
dismiss all such employees on May
20, 2004 for the purpose of downsizing. Kankin indicated that it would
then re-employ the dismissed employees under less-favorable work
conditions, but that the re-employment was not assured.
All of the targeted employees except
for the 10 plaintiff-employees agreed
to follow Kankin’s plan. These employees were dismissed and then reemployed, as Kankin had indicated it
would do. Kankin thereafter terminated all 10 plaintiff-employees on May
20, 2004.
On appeal, the court held that Kankin’s downsizing efforts required a
reduction of its head count by up to
six employees, but that Kankin failed
to prove it needed to dismiss 10. The
court also held that Kankin failed toadequately explain to the target
employees and their union why it wasnecessary to dismiss 10 employees.
Accordingly, all 10 of the dismissals
were found to be invalid.
Practical Pointers
Employers need to specifically andconcretely explain how, when andhow many employees will be dismissed in order to validly conductdismissals for the purpose of downsizing. In this case, Kankin failed to
explain why the number of employees that it needed to terminate

jumped from 6 to 10. For this reason,all 10 dismissals were invalidated. Of
course, unexpected events can sometimes cause employers to increase
the number of employees targeted
for dismissal as part of its downsizing plans. When this happens,
employers need to fully explain anddiscuss the amended plan with theiremployees and the union (if any) sothat all involved will have a complete
understanding of why more workers
need to be let go.
Also, employers should prepare
different scenarios in advance todeal with potential obstacles they
may face in the dismissal process.
Whether the problem is one ofseverance pay, timing of the dismissal, or assistance in securing new
employment for the target employees, it is important for companies tobe flexible and have alternate solutions ready to go in order to achieve
the contemplated dismissals assmoothly and as efficiently as possible.
2. January 17, 2006 Judgment of
the Nagoya High Court
Yamada Boseki Kabushiki-kaisha(“Yamada”) operated both a realestate and a textile business. On
November 15, 2000, Yamada filed an
application to enter into civil rehabilitation proceedings, a common formof bankruptcy protection in Japan.
Shortly thereafter, Yamada decided tofocus on its real estate division andbegan the process of exiting the textile business. Accordingly, on February 20, 2001 Yamada terminatednearly all of its textile workers, whichthen totaled over 100 employees. The
textile workers challenged the dismissals. They asked the court to reinstatethem to their former positions anddemanded back wages. The trial
court found in favor of the workers.
On appeal, Yamada argued that thetermination of the textile workers

Labor & Employment Law Newsletter© Kojima Law Offices 2014

Labor & Employment Law Newslettershould not be considered dismissals
for the purpose of downsizing, but are
instead easier-to-justify ordinary dismissals (as noted earlier, courts apply
less stringent rules for ordinary dismissals). Yamada contended that byentering into civil rehabilitation proceedings, it effectively had no choice but
to shut down its textile division;
management had very little discretion
to do otherwise. The court disagreed,
however, holding that the dismissals
were necessary only because ofmanagement missteps, not due toanything attributable to the employees.
The court therefore concluded that thedismissals constituted dismissals forthe purpose of downsizing.
The court then turned its attention towhether Yamada validly conducted
the dismissals. As explained below,
both the trial and appeals courts heldthat Yamada failed to satisfy any of
the four factors.
(1)

The necessity for downsizing

Yamada had been losing money from1989 to 2000 (the losses ranged frombetween 187 and 956 million JPY). A
large part of the blame for Yamada’s
poor performance was its textile
division, which had become extremely
unprofitable. Taken together, these
two facts made it certain that Yamada
would need to downsize. However,Yamada’s sales from January toAugust2000
totaledanotinsignificant 602 million JPY and it
had lost only 861,036 JPY during thisperiod. The court therefore disagreed
with Yamada that it had to dismiss

Vol. 4 May 2014

almost all the workers in its textile
division. Moreover, Yamada’s president made the decision to close its
textile business on his own without
first consulting with Yamada’s board.
Neither did he take into accountYamada’s profitability numbers before
ordering the dismissals. Under thesecircumstances, Yamada failed toprove that it needed to dismiss all of
its textile employees.
(2)Efforts to avoid dismissals

Yamada failed to ask any of its
employees to resign voluntary before
dismissing them. Yamada also failed
to consider transferring the textile
employees to its real estate division or
to one or more of its affiliates.
Yamada therefore clearly did not
make the requisite effort to avoid thedismissals.
(3)

Reasonableness of selection of
employees to be dismissed

Yamada failed to establish any standards whatsoever for the choice of
employees to be dismissed.
(4)Adequacy of the termination process - sufficient explanation anddiscussion

After applying for civil rehabilitation on
October 4, 2000, Yamada explained
to its employees that it intended tomaintain its textile business. However,as soon as the civil rehabilitation
process formally began on November
15, 2000, Yamada abruptly changed
course and promptly shut it down.
Furthermore, Yamada did not disclose

any information related to its financial
affairs.
In light of the above, the court concluded that these dismissals for the
purpose of downsizing were invalid.
Practical Pointers
When employers seek bankruptcy
protection through such processes ascivil rehabilitation (minji-saisei ) or a
corporate reorganization (kaishakosei ), courts generally apply the four
factors to determine the validity of any
dismissals for the purpose of downsizing that may result. Admittedly, a
rebuttable presumption that the employer is suffering a severe financial
hardship may arise when a company
seeks bankruptcy protection. This
fact alone, however, does not automatically mean the employer has
established the necessity for downsizing. On the contrary, courts will
scrutinize every detail to see whether
the employer has abused its right todismiss employees under the cover ofbankruptcy protection. Obviously, theprompt and efficient dismissal of employees is a crucial component of
most reorganization plans, and acompany should not risk undermining
its own rehabilitation efforts by failingto properly dismiss the target employees. These companies should therefore consult with advisors that haveexpertise on how to best proceedwith dismissals for the purpose ofdownsizing.

The contents of this publication, current at the date of publication, are for reference purposes only. They do notconstitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances
should always be sought separately before taking any action based on this publication.

Labor and Employment Practice Group
Partner
Hiromasa Ogawa
Counsel/Associates
Izumi Okada
Hitomi Sakai
Norio Mitsuuchi
Tatsuro Terada
Ayako Shinmura

Darcy H. Kishida *Hirokazu Amemiya
Minoru Saito
Seizaburo Taira* Mr. Kishida is licensed to practice law in Hawaii,
New York and Washington, D.C. and is admitted inJapan as a Registered Foreign Lawyer (gaikokuho
jimu bengoshi ). He provided editorial assistance forthis newsletter.

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Labor & Employment Law Newsletter© Kojima Law Offices 2014