Labor and Employment Practice Group

Vol. 8 December 2015

Labor & Employment Law Newsletter
Trouble reducing headcount in Japan?
Try cutting pay instead.
INTRODUCTION
Companies with a legitimate need to cut costs in Japan face tremendous
hurdles in reducing their workforce due to the country’s strong pro-laborlaws (this issue was covered in depth in Volumes 3-5). This is also true for
employers looking to shed subpar workers. A less drastic alternative would
seem to be cutting pay instead of laying people off. But is it a realistic option?
BACKGROUNDCompanies seek to cut pay for two main reasons. First, companies often
wish to reduce overall costs, typically through across-the-board pay cuts.
Although companies can generally implement company-wide pay reductions
under Japanese law, the cuts must be reasonable both in terms of size andnecessity. The second reason is to implement selective pay cuts for subpar
employees who fail to pull their weight. This is typically accomplished bydemotions. We discuss below the requirements and limitations of both.
ACROSS-THE-BOARD CUTS
By having everyone share the pain, across-the-board pay cuts would seemto be an attractive option in Japan, where layoffs are both frowned uponand legally difficult. However, as with most employer actions in Japan thatare detrimental to employees, the issue is typically not so clear-cut. There
are three main ways to implement across-the-board pay cuts.
First, a company can obtain consent from each of its employees individually. If all agree, the company has effectively implemented anacross-the-board pay cut. Even if there are a few holdouts, however, thecompany will still enjoy significant cost savings. Employers should ensurethat the consent is in writing to avoid potential challenges down the line.

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Kodai-ji Temple in Kyoto

Contents
Trouble reducing headcountin Japan? Try cutting pay instead. ...................... 1
Stress Check FAQs ............................................ 3

A company can also implement across-the-board-pay cuts by reachingan agreement with the union. This agreement will of course apply to thecompany’s unionized workers but may under certain circumstances also
apply to non-union members. There is a catch, however. Even agreements that are “blessed” by the union can be found invalid in whole or inpart if the pay cuts end up being applied unevenly to certain employees.

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The other possible way to implement across-the-board pay cuts is to revise
the company’s rules of employment to provide for such cuts (within certainlimits, of course). The rules should also contain a reasonably detailed calculation of how the company determines the salary of its employees. For employ-URL
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Labor & Employment Law Newsletterers that decide to go this route, the revision must:• Not be unreasonably detrimental to the workers• Be made to address a genuine need for cost reduction• Be appropriate in light of the company’s particular
circumstances• Take into account the status of any negotiations withthe union or, if the employees are not unionized, witha representative of a majority of the employees
Passing the reasonability test requires employers to demonstrate dire financial circumstances and the necessity of pay
cuts to restore the health of the company. In addition, thepay for directors and highly compensated employees should
be cut first before cutting the pay of regular employees. If thecuts will instead be made all at once, the employer should
consider applying deeper cuts for directors and highly compensated employees than it imposes on regular employees.
POOR PERFORMERS
It would perhaps be more appropriate to call this section“Demotions” because that’s the basic mechanism ofcutting the pay of poor performers. The demoted employee’s pay is technically not “cut”; it is simply reduced
to match the employee’s new (lower) position or title.
Perhaps it is this distinction that gives employers relatively broad discretion to demote subpar employees.
This discretion isn’t without its limits, of course. The
company’s rules of employment must allow for the possibility of demotion-based pay cuts. The same goes forthe company’s employment agreements. Moreover,companies may find it harder to demote individuals hired
for a specific job or title, at least compared to those who
follow the traditional career path of being hired straightout of college and working their way up through theranks of the company. Companies should also as specifically as possible inform at-risk employees what goals
or performance targets the company expects them toachieve. By doing so, companies will have an easier time
demoting employees who fail to meet these targets.
As is the case with layoffs, companies must be careful not
to abuse their power as employers when conducting demotions. In this connection, the validity of a company’s actions are determined by several factors, including the necessity for the demotion, the skills and experience of theaffected employee in relation to his or her current position,and the impact of the demotion on the employee. As longas it’s not too drastic, a pay cut that accompanies a valid
demotion is generally also regarded as valid. (However, thecase discussed below shows that this isn’t always true.)
HOW LOW CAN YOU GO?
Regardless of the approach, there’s a limit to how drastic

2Vol. 8 December 2015

the pay cuts can be. A review of the relevant case law does
not provide absolute numbers, but the upper limit for
across-the-board cuts seems to be somewhere in therange of a 10-20% reduction, while the comparable figure
for subpar employees is higher, perhaps between 30-40%.
More than one case found a 20% or 30% across-the-board
cut to be too high, even though the company had revised its
rules of employment to allow for such cuts. The reasoning
was that an across-the-board pay cut can have a drastic
impact on the livelihood of many employees who may nothave been responsible for the company’s financial problems. In one extreme case involving a company on the brinkof bankruptcy, the court allowed a 40% reduction. Thiscase is probably an outlier, however. In practice, such large
cuts are very rarely permitted.

Passing the reasonability test
requires employers to demonstrate
dire financial circumstances andthe necessity of pay cuts to restore
the health of the company.
Of course, this rationale does not apply to subpar employees, which may explain the court’s greater tolerance fordeeper cuts. In one case involving a poorly performing
employee, the court found that a 40% cut was too high. Inthat case, the company demoted a manager and cut hisannual pay from 11,500,000 yen to just 6,900,000 yen.
Although the court found the demotion itself valid, the court
deemed the pay cut too extreme. The court cited the lackof provisions in the company’s rules of employment thatwould justify such a large cut, meaning that the company
had almost unfettered discretion in this area. As a result,the employee had no way of knowing that the company
could cut his pay so drastically, and did not know the basis
for the cut. This leaves open the question of whether acourt would allow a 40% cut that was provided for in therules of employment, assuming the employee was fully
aware that such a large pay cut was possible.
AVOID USING PAY CUTS AS RETALIATION
Although pays cuts may be valid depending on thecircumstances, companies are typically not allowed touse them to pressure an employee to resign. Even if
this was not the company’s intention, a court could
find a violation if there’s an appearance of coercion. To
minimize the chances of this happening, a company
should cut an employee’s pay prior to any suggestionor proposal that the employee resign. Reversing theorder of these two steps could create the appearanceof retaliation, which is prohibited.

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Labor & Employment Law NewsletterVol. 8 December 2015

Stress Check FAQs
INTRODUCTION
Japan has the highest suicide rate among the G7 countries,and some of those suicides are due to work-related stress.
The government’s own statistics show an increasing
number of mental disorders caused by work such as anxiety and depression. In addition, employers are beginning torealize that healthy workers boost the company’s productivity and overall business performance. For these reasons,Japan passed legislation requiring that certain companies
offer their employees the opportunity to take a “StressCheck” designed to identify work-related mental health issues and address them as early and as effectively as possible. Here we answer some of the most commonly asked
questions about the new Stress Check requirement.

What is a Stress Check?
Starting on December 1, 2015, companies in Japan with atleast 50 employees at a given workplace will have to offer
those employees the opportunity to complete an annualStress Check questionnaire designed to ascertain theirmental health. The first one needs to be conducted no later
than November 30, 2016.

My company has more than 50 employees but theywork in different offices across Japan. Does the Stress
Check requirement apply?
Only if there are at least 50 employees working in the same
location. Otherwise, no. For example, a single workplacewith 50 employees would be covered under the Stress
Check law, but two offices with 25 employees each would
not. The Stress Check requirement would apply to the 70
employees at a company’s Tokyo headquarters, but not to
the 30 employees at its Nagoya office.

We have a large number of part-time and temporaryworkers. Are they counted for purposes of the50-employee requirement?
Yes.

3Is the Stress Check a psychological exam?
Not exactly, at least not on the employer’s side. Here in anutshell are the steps involved in a Stress Check:• The employer first needs to retain the services of adoctor or other qualified health-care professional(“doctor”) who will help the employer comply with
the Stress Check requirements.
• The employer must provide its employees with the opportunity to complete a Stress Check questionnaire.
• The doctor then reviews the questionnaire at theemployer’s expense.
• If the results raise sufficient concerns over the employee’s stress level or mental health, the doctor
may recommend that the employee undergo amental-health evaluation.
• If the employee would like to follow that recommendation, the employer is required to pay for the evaluation.

If a company has to pay for mental-health evaluations,shouldn’t it be able to know why the evaluations arenecessary?
Yes. The law tries to balance the needs of the company
and the employees’ privacy interests by permitting companies to request access to the questionnaire results. The
idea is that employers who must pay for an evaluation
should be able to confirm that the employee in question
satisfies the eligibility requirements for that evaluation.
However, if the employee doesn’t request an evaluation,
the questionnaire results remain strictly confidential.

Employers are required to offer
the Stress Check questionnaire
to their employees even if noone requests it.
Only the employee and the reviewing doctor have access to
the questionnaire results (doctors disclose results directly toemployees). The employer will not get a copy unless theemployee consents. However, employers can obtain questionnaire results without consent if the results do not identify
the employee. If they choose, companies can use theseanonymous results to make improvements to the workplace.

No one in my office is talking about the Stress Checkor asking for a questionnaire? Does that mean we
don’t have to worry about it?

Does the employer need to do anything else?

No. Employers are required to offer the Stress Checkquestionnaire to their employees even if no one requests it.

If the examining doctor suggests ways to improve the employee’s mental health, the employer is required to take

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Labor & Employment Law NewsletterVol. 8 December 2015

reasonable measures to do so. These steps could include reducing the employee’s scheduled working hours
and overtime, limiting business trips, and lightening theemployee’s workload.

Will the government provide the Stress Check questionnaire?
Yes and no. The government has prepared long and shortversions of a multiple-choice questionnaire that companies may use, and the majority of companies have indicated that they will use one of them. Employers are free tocome up with their own questionnaires. In practice, however, there is little incentive to do so. Why? Because using
the government’s questionnaire ensures compliance with
the Stress Check requirements. It also eliminates theburden of having to prepare one from scratch.

What must the questionnaire contain?
The questionnaire needs to cover three main areas:
the causes of work-related stress, the physical condition of employees suffering from work-related stress,and the level of support from coworkers.
Can employers require employees to complete thequestionnaire?
No, the questionnaire is purely voluntary. This obviouslymeans that employers are prohibited from making thequestionnaire a requirement in their rules of employment. It also means that employers can’t penalize employees who: (i) choose not to take part in the Stress
Check; (ii) either request or refuse a mental-healthevaluation based on the results of the questionnaire; or(iii) refuse to disclose the questionnaire results.
How does the government know that companies areproperly conducting Stress Checks?

If the examining doctor suggests
ways to improve the employee’s
mental health, the employer isrequired to take reasonablemeasures to do so.

Employers are required to file an annual Stress Checkreport with the applicable labor office.
What are the consequences of non-compliance?

My company operates in a notoriously high-pressure
industry and we would like to do everything possible toprotect our employees’ mental health. Can we use amore detailed Stress Check questionnaire than thegovernment’s?
Yes, but the safest approach is to simply augment thegovernment’s version with additional questions.

Failure to file the annual Stress Check report carries amaximum fine of 500,000 JPY.
This all sounds a bit complicated and messy. Can’t wejust outsource this?
Yes. In fact, a recent survey showed that at least 60% ofemployers will retain an outside company to handle allor part of their Stress Check obligations.

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

Labor and Employment Practice GroupPartnerCounsel/Associates

Hiromasa Ogawa

Norio Mitsuuchi
Nozomi Watanabe
Tatsuro Terada

Darcy H. Kishida *Toshihiko Nunokawa
Seizaburo Taira* Mr. Kishida is licensed to practice law in Hawaii, New York andWashington, D.C. and is admitted in Japan as a Registered Foreign
Lawyer (gaikokuho jimu bengoshi). He provided editorial assistance forthis newsletter.

4Labor & Employment Law Newsletter© Kojima Law Offices 2015