Vol.41-No.01 January 1, 2002
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Many companies in Japan are finding it difficult to secure long-term employment for their employees, an indication that the lifetime employment practice, a pillar of the employment system, is gradually collapsing. In fact, in October 2001, the unemployment rate reached 5.4 percent, the highest since World War II, and it is expected to climb even higher. Needless to say, this situation has its origins in the deep recession that the Japanese economy is in, which has not recovered since the bursting of the bubble economy. Currently, it is difficult to imagine that the situation will improve quickly, and it has become necessary to revise the present employment system which was created in an era of robust economic growth.
Already many companies have revised their employment practices. That is to say, more and more enterprises are doing away with long-term employment. For example, the seniority-based wage system, another pillar of the employment system, is being replaced by performance-based wage systems, and the retirement allowance — the amount of which increases according to the length of service, thereby providing employees with an incentive to stay with the same company for a long period — is undergoing change or, in some cases, has been abolished. What is of greater importance is that many employees, even if employed by large companies, have been dismissed before reaching the mandatory retirement age, or they are leaving their company by consensual termination, which may often be a pretext to evade legal restrictions governing dismissal.
It is likely that such changes will affect the Japanese labor law which is closely related to the employment system. To what extent dismissals or other measures to shed redundant personnel are lawful is a subject that needs immediate resolution. This is not only a legal matter that needs to be tackled by labor law scholars, but also a matter of social concern.
1.0 The Legal Framework regarding Dismissals
From a comparative viewpoint, Japanese dismissal regulations have a unique characteristic. However, if viewed only from the perspective of the Civil Code, this appears not to be the case. In European countries with a tradition of civil law, such as France, Germany and Italy, the Civil Code provides that either party to an employment contract may terminate the contract at any moment with or without advance notice. This reflects the legal thinking of the 19th century and the first half of the 20th century, which was dominated by the liberal concept of freedom of contract. According to this principle, in theory both employers and employees are free to end an employment contract; in other words the employer’s freedom to dismiss and the employee’s freedom to resign are guaranteed on an equal basis. In Japan also, Article 627, Paragraph 1 of the Civil Code states, “If the parties don’t define the period of employment, either party may request to terminate the contract at any moment. In this event, the contract will be extinguished two weeks after the request is made.”
The Japanese dismissal law, however, has remained at this level, while many European countries have developed a special protective law against dismissals, moving away from the Civil Code principle. Of course, in Japan there exist particular legal provisions regarding dismissals: the Labour Standards Law (LSL) restricts dismissals during maternity leave and while an employee is receiving medical treatment for work-related injuries (Art.19). It also requires employers to give 30 days advance notice of a dismissal (Art.20). Needless to say, the LSL’s prohibition of discriminatory treatment (Art.3) and provisions in the Equal Employment Opportunity Law prohibiting discriminatory dismissals of female employees also play a significant role in restricting dismissals. Moreover under the Trade Union Law it is considered an unfair labor practice to dismiss workers because they are union members, because they were engaged in proper union activities, or for similar reasons (Art.7). These dismissals are interpreted as invalid by the Supreme Court(1). There are other regulations limiting dismissals based on particular reasons, such as requests for parental or family care leaves. But Japan has no legal provision which explicitly requires that dismissals must be justified, while such a provision is common among the main European countries(2).
However, employers in Japan cannot dismiss their employees without reason. The court has ruled that the employer’s right to dismiss shall be null and void as an abuse of the right to dismiss if the dismissal is not based upon objectively reasonable grounds and thus cannot be socially approved as an appropriate act(3). This rule is called “the doctrine of the abusive exercise of the right of dismissal” (hereafter referred to as “the doctrine of abusive dismissal”). The legal basis for this rule can be found in the Civil Code (Art. 1, Par. 3) which prohibits any kind of abuse of the right.
Due to this doctrine, the employer’s freedom to dismiss has been considerably restricted. An analysis of accumulated cases in which judges applied this doctrine shows that there are four reasons which can justify dismissals: first, where there is a union-shop agreement; second, incompetence or lack of the skills or qualifications required to perform a job; third, violation of disciplinary rules; fourth, business necessity. The last type of dismissal, that is, dismissal for business necessity, is called “adjustment dismissal.” In this case, the judge has ruled that, to justify this kind of dismissal under the doctrine of abusive dismissal, it is necessary to satisfy the following four requirements: a need to reduce the number of employees, a need to resort to adjustment dismissals, an appropriate selection of employees to be dismissed, and appropriate procedures such as consultation with the employees’ representative. This rule is called the “four requirements of adjustment dismissals” rule.
Consequently, “the doctrine of abusive dismissal” established by the court compensates for insufficient positive legal provisions regulating the employer’s right to dismiss.
It may be worth noting in passing that restrictions on the right of dismissal impact both business and legal theory. Regarding the business aspect, prohibiting arbitrary dismissals can give employees the incentive to participate positively in the occupational training organized by their employers. It can raise employees motivation to work and their loyalty toward their employers.
As for the theoretical impact, it is important to reference a very unique court ruling concerning modification of working conditions. According to this ruling, a unilateral disadvantageous modification of work rules is binding if it is rational. This ruling has been justified by the existence of the doctrine of abusive dismissal. For example, according to Sugeno, the contract theory originally acknowledged the dismissal of workers who do not approve of changes in the working conditions. “There are strong doubts, however, about whether such dismissals are valid under the legal principles governing abuse of the right of dismissal which strictly controls the employer’s right to dismiss. Éôhe framework of the judicial decision, while protecting the workers’ interests, also pays attention to the needs of the enterprise.”(4) According to a comparative analysis by Araki(5), in the United States, which has the principle of “employment at will,” there exists external-flexibility, but no internal-flexibility. On the other hand, in Japan there exists internal-flexibility — mainly connected with the unilateral and rational modification of work rules doctrine — but no external-flexibility connected with the doctrine of abusive dismissal.
2.0 Change in the Economic Situation(6)
However, as noted earlier, the economic situation surrounding Japanese companies is undergoing significant change, and as a result the employment system is being transformed. This has resulted in a growing tendency to revise the present legal system regarding dismissals.
First, there are those who argue that the doctrine of abusive dismissal will be difficult to maintain if the practice of lifetime employment collapses, as the two are integrally linked(7).
Secondly, Japanese enterprises are facing stiffer competition on the international level as the economy continues to globalize. Not only do they have to compete against U.S. companies — where the employer’s freedom to dismiss is widely guaranteed separate from anti-discriminatory regulations — but also against companies in China where labor costs are remarkably low. In addition, evaluations by the financial market often greatly influence the fate of a company; now, to maximize stockholders’ interests, managers must concentrate on improving profit in the short-term. Such a situation makes it difficult for companies to continue to employ a low productive labor force. Therefore, the dismissal regulation has become a heavy fetter on Japanese companies.
Thirdly, one economist’s opinion — to reduce unemployment it is necessary to ease dismissal regulations which will, in turn, provide incentives for companies to increase hiring — has been gaining in popularity.
3.0 Surprising Decisions by the Tokyo District Court
According to research conducted by Fumio Otake, a specialist in labor economy at the Osaka University Institute of Social and Economic Research, in the latter half of the 1990s judges ruled that dismissals were unjustified in 80 percent of the cases that were brought before them(8).
However, since November 1999, the Tokyo District Court has continuously ruled against employees in adjustment dismissal cases. It is safe to state that Tokyo District Court judges are very sensitive to the economic predicament of Japanese companies, however, labor law scholars severely criticized these judicial decisions arguing that the judges did not correctly apply the doctrine of abusive dismissal. Obviously these judges did not randomly apply the doctrine of abusive dismissal. In theory, the doctrine of abusive dismissal is only one part of the general principle regarding prohibition of abusive exercise of the right as laid down in the Civil Code. According to an original way of applying this principle, application of the doctrine of abusive dismissal should be left to the discretion of the judge. Furthermore, the “four requirements for adjustment dismissals” rule has not been clearly supported by the Supreme Court, and thus lower court judges can apply this doctrine somewhat freely in accordance with the characteristics of a particular case.
Ironically, a series of decisions by the Tokyo District Court have revealed some legal problems concerning the doctrine of abusive dismissal, prompting labor law scholars to delve deeper into a theoretical analysis of dismissal regulations. Above all, the question of burden of proof is heatedly argued.
First, based on the fact that the doctrine of abusive dismissal is substantially a law requiring just cause for dismissal, some academics argue that an employer must prove the existence of factors that justify dismissal. These scholars believe that the doctrine of abusive dismissal fills the void created by the lack of a law explicitly requiring just cause for dismissal. However, recent decisions by Tokyo District Court judges(8) state that the burden of proof should be assumed by the employee, who will have to prove that the dismissal was an abusive exercise of the right.
Contrary to the above-mentioned academic opinion, judges at the Tokyo District Court took as a premise for their argumentation the principle of freedom of dismissal as prescribed by the Civil Code. But if this conclusion is accepted as is, it will surely become difficult for employees to obtain a winning judgment.
Secondly, Article 89, No.3 of LSL prescribes that matters pertaining to retirement, including dismissal reasons, should be indicated in work rules. Since this provision applies to employers who continuously employ 10 or more workers, reasons for dismissal must be indicated in work rules in all enterprises, excluding some small enterprises. One interpretation problem is whether or not an employer can dismiss an employee if it has omitted reasons for dismissal. Some academics have argued that, in this case, an employer cannot dismiss because indicating reasons for dismissal in work rules is an important duty imposed by the law to protect the interest of workers.
According to this opinion, however, an employer would have to indicate in the work rules every possible reason for dismissal. Of course, since an employer may insert a general clause in work rules such as “for reasons similar to those indicated above,” the above mentioned interpretation will not necessarily bring about much disadvantage to an employer. But, for example, if a careless employer neglects to indicate in work rules an economic reason as cause for dismissal, what will happen? One ruling from the Tokyo District Court in such a case stated that listing reasons for dismissal in work rules should not be interpreted as limiting the scope of the right of dismissal, and an employer cannot be deprived of the possibility of carrying out a dismissal because the reason is not included in work rules(9).
Furthermore, regarding the rule concerning the “four requirements for adjustment dismissals,” there has been debate as to whether it is necessary to meet each requirement to carry out a dismissal, or if the requirements should only be viewed as factors to be taken into consideration. Recent decisions by the Tokyo District Court tend to accept the latter interpretation, that is, adjustment dismissals that do not meet all of the requirements will not necessarily be ruled as null and void. In these cases, moreover, deciding which factor is more important in justifying dismissals has become a controversial issue.
First, the majority opinion holds that it is not appropriate for judges to rule on the need to reduce the number of employees, as this should be considered a management issue, a field in which judges usually do not have expertise. Secondly, while there is an overwhelming consensus that judges can examine the appropriateness of measures an employer adopted to avoid dismissals (often referred to as the “duty to endeavor to avoid dismissals”), the extent to which an employer must endeavor to avoid dismissals is controversial. One Tokyo District Court ruling stated that the “duty to endeavor to avoid dismissals” did not apply to non-regular employees because the duty is linked with the lifetime employment practice, which covers only regular employees(10). In addition, it is left to individual judges to decide whether an employer must attempt to modify the types of job or work locations before dismissing an employee, or whether an employer must always invite a voluntary resignation before dismissal. Consequently, even a general framework on which to base rulings has not yet been established.
Finally, considering there are no legal provisions requiring a clear statement explaining the reason for a dismissal, consultation with the employee or his/her representative should play a significant role in informing the employee of the reason he/she is being let go. Nevertheless, some decisions from the Tokyo District Court denied the importance of such a procedural requirement(11).
4.0 The Need for Various Remedies
Another legal issue regarding adjustment dismissal is whether the question of financial compensation can be introduced. The problem may be divided into two categories. The first category is whether an employer’s voluntary offer of an increase in retirement allowance or payment of compensation can be considered an advantage to the employer in cases concerning abuse of dismissal.
In one case, a firm proposed that its female assistant manager be demoted to the position of clerk, because her previous position as assistant manager had been eliminated due to changes in managerial strategy. Because the employee refused the demotion, she was dismissed. The Tokyo District Court ruled that the dismissal was effective, noting that the company had fully negotiated with the employee and that it had offered financial compensation(12).
Some economists argue that to accomplish a suitable distribution of limited human resources in the labor market, it is necessary to enact a law which permits employers to dismiss unnecessary labor force whenever they carry out appropriate compensation.
The second category concerns remedy of an unjustified dismissal. In Japan, according to case law, an unjustified dismissal is null and void and the relationship between employer and employee is considered never to have been severed. In these cases, the judge must order reinstatement and back pay covering the period from dismissal to judicial decision. Thus in Japan, an employee does not have the option of choosing compensation in lieu of reinstatement, unlike some European countries such as Italy where a worker can choose between reinstatement and indemnity equivalent to five months’ salary, and sole indemnity equivalent to 15 months’ salary. The Japanese process of redress is not necessarily suitable to resolving dismissal disputes, as the relationship of trust between employer and employee has been lost. The judicial order to reinstate cannot recover a relationship of trust even if it can recover a legal relationship. Considering this, it may be more desirable to give the employee a choice for compensation in lieu of reinstatement.
5.0 What Should be Covered in a Dismissal Law?
Now we must examine the necessity and possibility of enacting a dismissal law to resolve the various legal problems mentioned above. Recently, Chikara Sakaguchi, Minister of Health, Labour and Welfare, expressed his intention to enact a law which restricts dismissals, making it appear that such a law was imminent. However, it is important to remember that both labor and management have been lobbying for passage of such a law, with both sides advocating opposing goals. Labor would like to see legislation similar to, or stricter than, the present doctrine of abusive dismissal, while management desires a looser regulation. Therefore, even if a bill is submitted to the Diet, it would be difficult for both labor and management to approve it. In fact, both sides expressed disagreement with Mr. Sakaguchi’s aforementioned remark.
On the other hand, some academics point to the defects in the regulation regarding dismissal by case law. First, they assert that the reason why dismissal restrictions are not fully respected in small and medium-sized companies is because they find it difficult to access and understand the doctrine of abusive dismissal. In addition, since application of the doctrine of abusive dismissal is mostly left to the discretion of the judge, it is difficult for both employer and employee to know in advance whether a dismissal is effective or not. Some academics are afraid that such legal uncertainty may prevent rational activity by an enterprise and employee. Certainly it may be useful to codify the case law in order to resolve the above mentioned defects. Nevertheless, we should bear in mind the merits of case law: case law can adapt more elastically to socio-economic changes than statute law. Furthermore, the government is currently preparing a series of policies aimed at enhancing the mobility of the labor force. Since restrictions on dismissal are linked closely with the low degree of employee mobility, a policy toward a higher mobility might dispense with strict restrictions of dismissal. Anyway, from now, to cope with a increasing number of individual labor disputes it may be necessary to enact an employment contract law, which codifies various case law rules. If this is done, it may be not too late to try to decide concrete provisions for a regulation of dismissal within the framework of a new employment contract law.
Notes:
| (1) | The Shinkokai case, Supreme Court, April 9, 1968, Minshu vol.22, no.4, p.845. |
| (2) | See “genuine and serious cause” in the French law of 1973, “social justification” in the German law of 1951 and “justified reasons” in the Italian law of 1966. |
| (3) | See the Nihon Shokuen case, Supreme Court, April 25, 1975, Minshu vol.29, no.4, p.456. |
| (4) | See Sugeno, Kazuo, Japanese Labor Law, University of Washington Press and University of Tokyo Press, 1992, pp.99-100. |
| (5) | See Araki, Takashi, “Accommodating Terms and Conditions of Employment to Changing Circumstances: A Comparative Analysis of Quantitative and Qualitative Flexibility in the United States, Germany and Japan,” in C. Engels & M. Weiss (ed.), Labour Law and Industrial Relations at the Turn of the Century: Liber Amicorum in Honor of Roger Blainpain, Kluwer, 1998, pp. 509. |
| (6) | For further details, see Araki, Takashi, “Re-examination of Employment Security in Japan in Light of Socio-economic Structural Changes,” in New Trends of Labour Law in International Horizon: Liber Amicorum for Prof. Dr. Tadashi Hanami, Shinzansha, 2000, pp.193. |
| (7) | See, for example, the Kadokawa Bunka Shinko Zaidan case, Tokyo District Court, November 29, 1999, Rodo-Hanrei no.780, p.67. |
| (8) | See Otake, Fumio and Fujikawa, Keiko, “Nihon no Seirikaiko” (Japanese Adjustment Dismissals), in Inoki, Takenori and Otake, Fumio, Koyo-seisaku no Keizai-bunseki (Economic Analysis of the Employment Policy), University of Tokyo Press, 2001, p.14. |
| (9) | See the National Westminster case, Tokyo District Court, January 21, 2000, Rodo-Hanrei no.782, p.23. |
| (10) | See the Kadokawa Bunka Shinko Zaidan case, Tokyo District Court, November 29, 1999, Rodo-Hanrei no.780, p.67. |
| (11) | See the Kadokawa Bunka Shinko Zaidan case, Tokyo District Court, November 29, 1999, Rodo-Hanrei no.780, p.67; the Hirokawa Shoten case, Tokyo District Court, February 29, 2000, Rodo-Hanrei no.784, p.50. |
| (12) | See the National Westminster case, Tokyo District Court, January 21, 2000, Rodo-Hanrei no.782, p.23. |
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