Termination of an Employment Contract in Japan
An employment contract in Japan may be terminated in four different ways i) by agreement between the employee and the employer, ii) by unilateral termination notice by the employee to the employer, iii) by unilateral termination notice by the employer to the employee, and iv) without any action by either party, such as expiration of the limited and fixed period of employment or the death of the employee. As for the unilateral termination notice by the employee, the employee has to give notice of at least 14 days in advance pursuant to Article 627 of the Civil Code, and this period of 14 days may be extended by the rules of employment to some extent. On the other hand, it is very difficult to terminate the employment contract by the employer giving unilateral termination notice.
In Japan, there are two types of employment contracts concerning the period of employment; an employment contract with a limited and fixed period (“fixed period employment contract”), and that with an unlimited and non-fixed period (“non-fixed period employment contract”). Non-fixed period employment contract is the basic type of employment contract in Japan.
Generally it is not very difficult to terminate a fixed period employment contract when the fixed period expires. However, if the fixed period employment contract is renewed several times, it gets difficult for the employer to decline the renewal of such a contract under case law. Under the new law enacted on August 10, 2012, if a fixed period employment contract is renewed for the period of more than 5 years, the employee may be entitled to have the right to change his or her fixed period employment contract to a non-fixed employment contract. The period of 5 years is counted from the date of commencement of the employment contract which starts on or after 2013, April 1st.
On the other hand, it is difficult to terminate an non-fixed period employment contract by employer’s unilateral notice, because “a dismissal shall, if it lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, be treated as an abuse of right and shall be invalid” as per the Article 16 of the Labor Contract Act of Japan.
As for the “objectively reasonable grounds,” the Supreme Court precedents have referred to the following three cases as qualifying as objectively reasonable grounds:
(i) Employee’s physical or mental disability or extremely poor performance;
(ii) Employee’s infringement of the internal disciplinary rules;
(iii) Company’s business reasons.
However, to be “appropriate in general societal terms”, employers have to fulfill very difficult requirements. Especially as for the termination because of the company’s business reason of restructuring its business, it is extremely difficult for the Japanese courts to find that the termination was appropriate in general societal terms. Japanese courts will judge based on the following four factors:
i) Necessity of decreasing the number of workers;
ii) Necessity of adopting the method of “unilateral termination of employment contract” as a means for employment adjustment, because an employer has the duty to make best efforts to avoid terminating the employment contract;
iii) Adequate selection of the workers whose employment contracts are to be terminated;
iv) Adequacy for the termination procedure, especially sincere talks with workers and /or labor unions.
These four factors had been considered to be four requirements for dismissing an employee, each of which the employer should satisfy, but currently, the courts tend to make a judgment by putting these four factors together. However, it is still extremely difficult for an employer to terminate the employment contract based on a company’s business reason.