Employment Disputes in Japan: How are Unfair Dismissal and Unpaid Overtime Claims Handled Under Japanese Labor Law?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

The landscape of employment law in Japan is characterized by robust protections for workers, particularly concerning job security and working hours. For businesses operating in Japan, including foreign enterprises, a thorough understanding of how employment disputes, such as claims of unfair dismissal or demands for unpaid overtime, are handled under Japanese labor law is essential for effective human resource management and risk mitigation. This article explores the legal framework, common dispute types, procedural options, and key considerations in navigating these challenging issues.

Several key pieces of legislation underpin employment relationships in Japan:

  • Labor Standards Act (労働基準法 - Rōdō Kijun Hō): This Act sets forth the minimum standards for working conditions, including wages, working hours, rest periods, paid leave, and workplace safety. It also mandates overtime pay rates.
  • Labor Contract Act (労働契約法 - Rōdō Keiyaku Hō): Enacted to clarify the basic principles governing labor contracts, this Act codifies important judicial precedents related to dismissals, fixed-term contracts, and changes to working conditions.
  • Work Rules (就業規則 - Shūgyō Kisoku): Companies regularly employing ten or more workers are required to establish Work Rules, submit them to the Labor Standards Inspection Office, and make them known to employees. These rules detail working conditions, disciplinary procedures, and other employment-related matters. They form an integral part of the employment contract, provided they are reasonable and properly disseminated.
  • Labor Agreements (労働協約 - Rōdō Kyōyaku): These are collective bargaining agreements between a labor union and an employer, which can establish terms and conditions of employment that supersede individual contracts or Work Rules if more favorable to the employee.

II. Dismissal Claims (解雇 - Kaiko)

Dismissal of an employee in Japan is subject to stringent legal scrutiny. The concept of "employment at will" does not exist in the same way it does in some other jurisdictions.

A. General Principles of Dismissal: The Doctrine of Abusive Dismissal

Article 16 of the Labor Contract Act codifies the long-standing judicial principle known as the "doctrine of abusive dismissal" (解雇権濫用の法理 - kaikoken ran'yō no hōri). It states that a dismissal will be treated as an abuse of right and therefore null and void if it "lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms." This is a high bar for employers to meet.

B. Disciplinary Dismissal (懲戒解雇 - Chōkai Kaiko)

Disciplinary dismissal is the most severe form of disciplinary action, typically reserved for serious misconduct by an employee.

  1. Grounds and Requirements:
    • Clear Basis in Work Rules: The specific grounds for disciplinary dismissal must be explicitly stated in the Work Rules, and these rules must have been properly made known to the employees. The Supreme Court (Second Petty Bench, judgment of October 10, 2003, in the Fuji Kosan case) has affirmed the necessity of these conditions.
    • Existence of Justifiable Grounds: The employee's conduct must genuinely fall within one of the prescribed disciplinary grounds.
    • Proportionality: The dismissal must be a proportionate response to the misconduct. Even if grounds exist, dismissal may be deemed too harsh and therefore abusive if a lesser disciplinary measure would have been appropriate (Labor Contract Act, Article 15, which also addresses the reasonableness of disciplinary actions).
    • Procedural Fairness: While not always strictly mandated by statute for all disciplinary actions, providing the employee an opportunity to explain or defend themselves is generally considered important for ensuring fairness and can be a factor in assessing the overall appropriateness of the dismissal.
  2. Common Causes: Disciplinary dismissals often arise from acts such as embezzlement, serious harassment, significant and repeated violations of company policy, or criminal acts that directly impact the employment relationship. However, disputes often stem from interpersonal conflicts or perceived poor performance where the grounds for such a severe penalty are contested.
  3. Procedural Options for Employees Contesting Dismissal:
    • Ordinary Litigation (通常訴訟 - Tsūjō Soshō): The employee can file a lawsuit seeking a declaration of their continued employment status and payment of back wages from the date of dismissal. This route can exert significant pressure on employers, as a finding of unfair dismissal can lead to substantial financial liability for accumulated back pay plus statutory interest.
    • Provisional Disposition (仮処分 - Karishobun): An employee can seek a provisional court order for the temporary payment of wages or reinstatement pending the outcome of a full lawsuit. However, courts apply strict scrutiny to the "necessity" for such interim relief, considering the employee's financial situation, including that of their household.
    • Labor Tribunal (労働審判 - Rōdō Shinpan): This is a specialized court procedure designed for the relatively speedy resolution of individual labor disputes. It involves up to three sessions before a tribunal composed of one judge and two lay labor experts (one representing employers, one representing employees). The process emphasizes mediation, but if no settlement is reached, the tribunal issues a "judgment" (which is more akin to a recommendation). If either party objects to the tribunal's judgment within two weeks, the case automatically transitions to ordinary litigation. Statistics show a high rate of resolution through mediation or unobjected judgments within the Labor Tribunal system, often within about 70-90 days.
  4. Evidence to Collect (Employee's Perspective): Employment contract, Work Rules, dismissal notice, any written reasons for dismissal, pay slips, records of past performance evaluations, and any evidence refuting the employer's alleged grounds for dismissal.

C. Dismissal at the End of a Fixed-Term Contract (雇止め - Yatoidome)

"Yatoidome" refers to an employer's refusal to renew a fixed-term employment contract upon its expiration. While fixed-term contracts are intended to terminate automatically at the end of the term, Japanese law provides protections against arbitrary non-renewal in certain situations.

  1. Legal Status of Fixed-Term Employees (非正規労働者 - Hiseiki Rōdōsha):
    In principle, a fixed-term contract ends upon the expiry of its term, and the doctrine of abusive dismissal (Article 16 of the Labor Contract Act) does not directly apply to non-renewal.
  2. Doctrine of Abusive Non-Renewal:
    Article 19 of the Labor Contract Act codifies judicial precedents (such as the Supreme Court, First Petty Bench, judgment of July 22, 1974, in the Toshiba Yanagimachi Plant case, and the Supreme Court, First Petty Bench, judgment of December 4, 1986, in the Hitachi Medico case) providing that a non-renewal may be deemed null and void (and the contract treated as renewed on the same terms) if:
    • The fixed-term contract has been repeatedly renewed to such an extent that its non-renewal is socially equivalent to the dismissal of an employee under an indefinite-term contract; or
    • The employee had reasonable grounds to expect that the contract would be renewed upon its expiration.
      In such cases, the non-renewal will be void unless it is based on objectively reasonable grounds and is considered appropriate in general societal terms.
  3. Procedural Options and Evidence: Similar to disciplinary dismissal cases, though considerations for interim relief and settlement expectations might differ given the fixed-term nature of the original contract. Evidence of past renewals, statements by the employer suggesting future employment, the nature of the work, and the employer's reasons for non-renewal are critical.

If a dismissal (including an abusive non-renewal) is found to be null and void:

  • Declaratory Judgment: The court will declare that the employment relationship continues to exist.
  • Back Pay (バックペイ): The employee is entitled to wages from the date of dismissal until the resolution of the dispute (or reinstatement).
  • Solatium (慰謝料 - Isharyō): In cases of particularly egregious or malicious dismissal, damages for emotional distress might also be awarded.

III. Unpaid Overtime Claims (割増賃金請求 - Warimashi Chingin Seikyū / 残業代請求 - Zangyōdai Seikyū)

The Labor Standards Act mandates premium pay for work exceeding statutory hours, work on statutory rest days, and late-night work.

A. Statutory Basis for Overtime Pay

  • Standard Working Hours: 8 hours per day, 40 hours per week.
  • Premium Rates:
    • Overtime: At least 25% premium.
    • Work on Statutory Rest Days: At least 35% premium.
    • Late-Night Work (10 PM to 5 AM): At least 25% premium (these premiums can be cumulative).

B. Common Disputes and Employer Defenses

Disputes often center on:

  • Actual Hours Worked: Disagreements over whether the employee actually worked the claimed overtime hours.
  • "Fixed Overtime Pay" (固定残業代 - Kotei Zangyōdai): Employers sometimes argue that a fixed monthly allowance is intended to cover all overtime. Such arrangements are only valid under strict conditions, requiring clear differentiation between basic wages and the overtime allowance, and ensuring the allowance meets or exceeds the statutory overtime pay for actual hours worked.
  • "Annual Salary System" (年俸制 - Nenpōsei): An annual salary system does not, by itself, negate the obligation to pay overtime unless specific legal requirements for exemptions (like discretionary labor schemes) are met.
  • "Managerial/Supervisory Status" (管理監督者 - Kanri Kantokusha): Employees genuinely in managerial or supervisory positions (with significant authority over operations, personnel, and working hours, and treatment commensurate with such status) are exempt from statutory working hour and rest day regulations (but not late-night work premiums). However, employers often misclassify employees as "managers" to avoid overtime pay. Courts scrutinize the actual duties, responsibilities, authority, and compensation of the employee, not just their job title.

C. Procedural Options

  • Labor Tribunal: Initially thought unsuitable for complex overtime calculations, Labor Tribunals now handle many such cases. The tribunal often indicates its preliminary view on key disputed points (e.g., whether someone is a "manager," how to interpret working hours) and then encourages settlement based on a re-calculated (often approximated) amount.
  • Ordinary Litigation:
    • Interest on Late Payments: If wages (including overtime) are not paid by the prescribed date after an employee leaves employment, interest at a rate of 14.6% per annum can be claimed on the unpaid amount (Article 6, Paragraph 1 of the Act on Securing Payment of Wages).
    • Additional Payments (付加金 - Fukakin): Under Article 114 of the Labor Standards Act, a court can order an employer who has failed to pay overtime (and certain other allowances) to make an "additional payment" of the same amount as the unpaid wages, effectively a penalty. This is a potent tool in litigation but generally not available in Labor Tribunal proceedings unless the case moves to full litigation after an objection.

D. Calculating Unpaid Overtime

  • Accurate Record of Working Hours: The burden of proof for actual hours worked generally lies with the employee. Accurate records are paramount.
    • Strong Evidence: Time cards (especially if verified by a supervisor), ID card entry/exit logs, PC login/logout records, security system logs, tachometer records (for drivers), and detailed daily work reports.
    • Weaker Evidence: Personal diaries or handwritten notes, while potentially supplementary, are generally considered less reliable on their own. "I worked about X hours of overtime every day" is usually insufficient without corroborating evidence.
  • Complexity of Calculation: Calculations can be intricate, especially with variable working hour schemes (変形労働時間制 - henkei rōdō jikan sei) or flextime systems. Spreadsheets are indispensable, but universal templates are rare due to case-specific variables.

E. Evidence to Collect (Employee's Perspective): Timekeeping records, employment contract, Work Rules, wage regulations, pay slips, and any documents that can help reconstruct actual working hours if official records are inaccurate or missing.

IV. Severance Pay Claims (退職金請求 - Taishokukin Seikyū)

Entitlement to severance pay (taishokukin) in Japan is not a universal statutory right but depends on contractual provisions or established practice.

A. Entitlement to Severance Pay

  • There is no general legal obligation for employers to pay severance unless it is stipulated in the Work Rules, a labor agreement, an individual employment contract, or if a consistent past practice of paying severance has been established.

B. Common Disputes

  • Validity of Non-Payment/Reduction Clauses: Work Rules often contain clauses for non-payment or reduction of severance pay in cases of disciplinary dismissal or if the employee joins a competitor shortly after leaving (the latter raising issues with the constitutional freedom to choose one's occupation).
  • Unfavorable Changes to Severance Pay Regulations: Disputes can arise if severance pay rules are amended to the disadvantage of employees during their tenure.
  • Reason for Termination: The amount of severance pay often differs depending on whether the termination was voluntary (employee-initiated) or involuntary (employer-initiated, e.g., company都合退職 - kaisha tsugō taishoku).

C. Procedural Options and Evidence: Ordinary litigation is common. Labor Tribunal proceedings are also an option for quicker resolution if settlement is anticipated. Evidence will focus on the employment contract, Work Rules, severance pay regulations, pay slips, and documents relating to the circumstances of termination.

V. Settlement and Mediation in Labor Disputes (和解・調停 - Wakai / Chōtei)

Many labor disputes in Japan are resolved through settlement, either via direct negotiation, court-annexed mediation, or mediation within Labor Tribunal proceedings.

A. Common Settlement Terms

  • Dismissal Cases: Often involve the employer withdrawing the dismissal, formally changing it to a mutually agreed resignation, and paying a settlement sum. The amount typically includes back pay owed up to the settlement date, plus an additional amount equivalent to several months' to a year's salary.
  • Overtime Cases: The settlement amount will factor in the assessed unpaid overtime, potential interest, and the risk of an additional payment order in litigation.

B. Important Clauses in Settlement Agreements

  • Tax and Social Insurance Treatment: The agreement should clearly specify how the settlement payment will be treated for income tax and social insurance withholding purposes, designating its nature (e.g., retirement income, miscellaneous income).
  • Confidentiality Clause: Employers usually insist on this to prevent the terms from being disclosed to other employees.
  • Waiver of Future Claims: Typically, a clause where the employee waives any further claims against the employer related to their employment.

VI. Special Considerations for Foreign Companies in Japan

Foreign companies employing staff in Japan must navigate these labor laws with care:

  • Cultural and Legal Differences: Employment practices and expectations can differ significantly from those in the company's home country.
  • Importance of Compliant Work Rules: Even for smaller operations, establishing Work Rules (shūgyō kisoku) that comply with Japanese labor law and are properly communicated to employees is crucial. These rules should be available in Japanese, and ideally also in a language understood by foreign employees.
  • Language Barriers: Ensuring accurate translation and understanding of all employment documents (contracts, Work Rules, policies) is vital to avoid misunderstandings.
  • Dismissal Challenges: Terminating employees in Japan is legally challenging and requires careful planning and adherence to strict legal standards regarding grounds and procedure. "At-will" employment is not a recognized concept.
  • Consultation with Experts: Engaging legal counsel specializing in Japanese labor law early on, especially when drafting employment contracts, Work Rules, or when contemplating dismissals or restructuring, is highly advisable.

Conclusion

Japanese labor law offers substantial protections to employees, and disputes concerning dismissal, working hours, and related payments are treated with significant scrutiny by courts and tribunals. The Labor Tribunal system provides a relatively swift avenue for resolving many individual labor disputes, often through mediated settlements. However, complex cases or those where principles are at stake may proceed to ordinary litigation, where the financial implications for employers can be considerable. For all businesses in Japan, proactive compliance with labor laws, clear and fair employment documentation, and a cautious approach to dispute resolution are essential for maintaining a stable and productive workforce.