Table of Contents

1. Background
2. Summary of Regulations
3. Notice Period
4. Prohibition of Dismissal under Specific Circumstances
5. Dismissal Rules under “Rules of Employment” and “Collective Employment Agreement”
6. Doctrine of “Abuse of Right to Dismiss”
– a) General
– b) Lack of Ability to Work
– c) Breach of Discipline
– d) Redundancy
7. Legal Effect Where the Dismissal is Invalidated
8. Employee’s Consent to Retire and Permissibility of Solicitation
9. Choice of Law and Jurisdiction Provisions under Employment Contract

1. Background

In Japan, the dismissal of permanent employees is strictly restricted, and it is essential for international businesses operating in Japan to understand these restrictions correctly. Japan’s dismissal regulations are closely tied to its unique post-WWII employment practices, often referred to as “membership-type employment.” During the country’s period of high economic growth following the war, Japanese companies were primarily composed of full-time, permanent employees hired immediately after graduation from school (junior high school, high school, or university), and retained until reaching the retirement age. Employers were generally granted broad discretion in reassigning and relocating employees. While the nature and location of an employee’s work could change throughout their career, it was rare for employees to change jobs—i.e., resigning from one company and joining another—because mid-career hiring was uncommon. In this context, employees who left or were dismissed by their employer faced considerable difficulty finding new employment and suffered significant economic and social disadvantages.

Reflecting this background, Japanese lower courts have routinely invalidated dismissals unless there were reasonable grounds. In 1975, the Japanese Supreme Court held that the employer’s exercise of the right to dismiss shall be deemed an abuse of right—and therefore invalid—if it lacks objective reasonableness and cannot be justified in light of societal norms. This judicial doctrine was later codified in Article 16 of the Labor Contract Act, enacted in 2007.

As described above, Japanese law imposes strict restrictions on dismissal, rooted in traditional employment practices and the historically limited mobility in the labor market. In recent decades, however, Japan’s employment landscape has changed. Job mobility has become more common, and many companies—including traditional Japanese firms—now actively hire mid-career employees. The “job-type” employment model, which has been common among international businesses, is increasingly prevalent in Japan, particularly among emerging companies and start-ups. Nevertheless, the underlying legal framework concerning dismissal remains fundamentally unchanged. The statutory and case law restrictions continue to apply, and are fully enforceable in employment relationships governed by Japanese law, regardless of the employer’s background or structure.

This column outlines the key aspects of Japan’s dismissal regulations that international businesses operating in Japan should be aware of.

2. Summary of Regulations

First, in Section 3, we will explain the notice period required under the Japanese Civil Code and the Labor Standards Act, which employers must comply with. Please note that compliance with the notice period alone is not sufficient—dismissal must also meet additional requirements, including the doctrine of “abuse of the right to dismiss” discussed in Section 6. Nevertheless, understanding the notice period is a necessary first step.

Next, in Section 4, we will outline the exceptional circumstances in which dismissal is prohibited. Section 5 covers the employer’s obligation to comply with dismissal-related provisions in the Rules of Employment and, where applicable, in a Collective Employment Agreement.

In Section 6, we will examine the doctrine of “abuse of the right to dismiss,” which is a unique and central concept in Japanese labor law. This doctrine is often the most critical issue when evaluating the legality of a dismissal. We will explain how Japanese courts assess dismissals across three categories: lack of ability to work, breach of discipline, and redundancy. Section 7 explains the legal consequences when a court invalidates a dismissal through its judgment.

In Section 8, we will address employee consent to retire and employer-initiated solicitation of voluntary resignation. To reduce the risk of an invalid dismissal, employers often begin by encouraging employees to voluntarily retire. We will explain how Japanese courts evaluate the legality of such solicitation.

Finally, in Section 9, we will consider whether an employer may designate non-Japanese law (such as New York State law) as the governing law of an employment contract and choose a non-Japanese court as the forum for resolving employment disputes.

3. Notice Period

Employers dismissing employees must comply with the statutory notice period under Japanese law.

Article 20 of the Labor Standards Act requires that employers provide at least 30 days’ advance notice prior to the effective date of dismissal. Alternatively, if the employer wishes to shorten this notice period, it must pay the average wage corresponding to the number of days by which the notice is shortened.

There are exceptions to this requirement. The notice period does not apply in the following cases:
– When the continuation of business becomes impossible due to an act of God or other force majeure; or
– When the dismissal is for reasons attributable to the employee.

However, it is important to note that the second exception—dismissal for reasons attributable to the employee—is interpreted very narrowly. It is applicable only where the employee has engaged in serious and malicious misconduct or illegal acts. Common grounds for ordinary dismissal, such as poor performance or disciplinary violations, typically do not satisfy this requirement. Employers often attempt to rely on this exemption in cases of disciplinary dismissal. In addition, if an employer intends to dismiss an employee immediately based on one of these exceptions, it must obtain certification from the competent Labor Standards Office.

It is also important to consider that if the employer adopts an annual salary system, the notice period may be extended to three months. Article 627, Paragraph 3 of the Civil Code requires a three-month notice period for employment contracts with a compensation term of six months or longer. If an annual salary system is adopted—where compensation is fixed over a 12-month period—this provision may apply. However, even under an annual salary system, employers are still required to pay salaries monthly (Article 24, Paragraph 2 of the Labor Standards Act). Based on this, some argue that Article 627, Paragraph 3 of the Civil Code does not apply. As a result, it remains unclear whether the applicable notice period under an annual salary system is 30 days or three months.

4. Prohibition of Dismissal under Specific Circumstances

Under Article 19 of the Labor Standards Act, an employer is prohibited from dismissing an employee in the following situations:
(i) During, and within 30 days after, a leave of absence for a work-related injury or illness; and
(ii) During, and within 30 days after, maternity leave.
These dismissals are prohibited because employees are considered particularly vulnerable and may face difficulty finding alternative employment during such periods.

As exceptions to (i) above, an employer may dismiss the employee if either of the following conditions is met:
– The employee has not recovered within three years and the employer pays a lump-sum indemnity equivalent to 1,200 days’ worth of the employee’s average wage as set forth in Article 81 of Labor Standard Act; or
– The continuation of business becomes impossible due to an act of God or other force majeure, and the employer obtains certification from the competent Labor Standards Office.

5. Dismissal Rules under “Rules of Employment” and “Collective Employment Agreement”

Employers must comply with dismissal-related rules set forth in both the Rules of Employment (shūgyō kisoku) and any applicable Collective Employment Agreement (rōdō kyōyaku). The Rules of Employment are a set of internal regulations that govern the employment relationship, established by the employer in accordance with the Labor Standards Act. If an office (jigyōsho) has ten or more employees, the employer is required to prepare these Rules of Employment, follow prescribed procedures for their implementation, and submit them to the competent Labor Standards Office (Articles 89 and 90 of the Labor Standards Act).

Under Article 89, Item 3 of the Labor Standards Act, the Rules of Employment must include provisions concerning retirement, including the grounds for dismissal. In practice, the Rules of Employment typically specify the permissible reasons for dismissal. As a general rule, employers are not permitted to dismiss employees based on grounds that are not included in these rules.

A Collective Employment Agreement is a written agreement concluded between an employer and a labor union, as provided under Article 14 of the Labor Union Act. If such an agreement is in effect and includes provisions relating to dismissal—such as requirements for prior consultation or consent—the employer must also comply with those terms.

6. Doctrine of “Abuse of Right to Dismiss”

a) General

As explained above, Japanese courts have imposed strict limitations on dismissal, reflecting Japan’s conventional “membership-type” employment practices. In 2007, the Labor Contract Act was enacted, and Article 16 of the Act codifies the prevailing case law as follows:

“A dismissal shall be invalid as an abuse of right if it lacks reasonable grounds from an objective perspective and cannot be deemed appropriate in light of social norms.”

Dismissals are generally categorized into three types:
– Lack of ability to work
– Breach of discipline
– Redundancy

Below, we explain how Japanese courts assess dismissals in each of these categories.

b) Lack of Ability to Work

1) Disability due to Illness or Injury

In principle, if an employee loses the ability to work due to illness or injury, this may constitute a reasonable ground for dismissal. However, employers are expected to consider the possibility of recovery and to take measures to avoid dismissal wherever possible—for example, granting sick leave or reducing the employee’s workload.

In addition, if the illness or injury is work-related, dismissal is generally prohibited, except under the specific exceptions explained in Section 4. Even when the illness or injury is not attributable to work, employers should still consider using available leave options before pursuing dismissal.

Further, if the employee qualifies as a person with a disability, the employer is obligated to take reasonable measures to ensure equal treatment and to accommodate the employee’s ability to perform duties. This is required under Article 36-3 of the Act on the Promotion of Employment for Persons with Disabilities (Act No. 123 of 1960, as amended). If the employee’s ability to work can be maintained through such accommodations, dismissal on the ground of disability would not be permitted.

2) Poor Performance

Poor performance may also constitute a reasonable ground for dismissal. However, Japanese courts require that employers make sufficient efforts to avoid dismissal before proceeding. The following measures are typically expected:

Reassignment and demotion:

Under standard Japanese employment contracts, employers have broad discretion to reassign and relocate employees. Accordingly, courts expect employers to consider reassignment and relocation, and demotion as well, given the significant consequences dismissal entails.

In contrast, in cases involving mid-career hires or senior-level employees where specific duties and positions are agreed in the employment contract, reassignment or demotion may not be possible without the employee’s consent. In such cases, courts may uphold dismissal even without reassignment, although it is generally advisable for employers to propose reassignment or demotion first. If the employee refuses such alternatives, the employer’s justification for dismissal is strengthened.

Degree of underperformance:

Japanese courts require a substantial and demonstrable lack of performance to justify dismissal. For example, the Tokyo District Court decision of October 15, 1999 invalidated the dismissal of employees who had simply fallen into the lowest 10% of performance rankings.

Opportunity to improve:

Courts also expect employers to give employees a clear opportunity to improve their performance. For instance, in a Tokyo District Court judgment dated March 28, 2016, the dismissal was ruled invalid because the employer failed to give the employee sufficient notice of underperformance or an opportunity to improve after warning that dismissal might follow.

Case Examples:

Dismissal upheld: In the Tokyo District Court judgment of April 26, 2000, the court upheld the dismissal of a consultant who had consistently failed to demonstrate the required skills and aptitude over a period of 1.5 years. The court noted that there was little likelihood of improvement, based on the employee’s self-assessment. The employer had also proposed a transfer to another position, which the employee refused.

Dismissal invalidated: In contrast, the Tokyo High Court judgment of April 24, 2013 concerned the dismissal of a press employee by a media organization. The court found the employee’s performance was not poor enough to make continued employment unreasonable, and the employee had demonstrated a willingness to improve in response to the employer’s guidance.

Some Practical Tips:

When hiring employees for specific roles, it is advisable to clearly set forth in the employment contract to that effect and role’s purpose, responsibilities, required expertise, and performance.

A probationary period can help identify potential mismatches early and provide both parties the opportunity to evaluate suitability. While employers cannot refuse to confirm employment at the end of probationary period freely, employers have more discretion compared to a regular dismissal.

c) Breach of Discipline

Misconduct—such as repeated tardiness, unauthorized absences, poor work attitude, or violation of workplace rules—can constitute a reasonable ground for dismissal. However, it is important to assess whether dismissal would be disproportionately severe, taking into account the specific facts and any mitigating circumstances that may explain the employee’s behavior. In practice, employers may also consider disciplinary dismissal (a sort of disciplinary actions) in cases involving serious misconduct, in addition to the ordinary dismissal procedures discussed in this column.

d) Redundancy

Redundancy is not attributable to any fault of the employee. While dismissal for redundancy is legally permissible in Japan, case law imposes a high threshold for justifying such dismissals. In principle, all of the following four requirements must be satisfied for a redundancy-based dismissal to be considered valid:

(i) Necessity for Redundancy

Japanese courts generally respect an employer’s business judgment, recognizing that they do not have expertise in corporate management. However, the court may reject the necessity of redundancy if, for example:
– The employer is operating profitably;
– The employer refuses to submit financial statements or other evidence supporting the need for redundancy; or
– The employer is simultaneously hiring new employees while conducting layoffs.

Therefore, it is difficult in Japan to justify workforce reduction based solely on efforts to increase profitability while the company remains in the black.

For international businesses, foreign headquarters may impose global headcount reduction targets that include Japanese branches or subsidiaries. In such cases:
– If the Japan operation is a subsidiary, Japanese courts will assess the necessity of redundancy based on the financial and other conditions of the subsidiary alone. The need for global downsizing is generally insufficient.
– If the Japan operation is a branch of a foreign company, courts may review the necessity on a consolidated basis, but they may still consider the financial and other conditions of the Japanese branch independently.

(ii) Effort to Avoid Redundancy

Japanese courts require that employers exhaust other possible measures before proceeding with redundancy. This principle originates from business practices developed during Japan’s 1970s economic recession, when lifetime employment was prevalent and job changes were rare. At that time, Japanese companies sought to avoid layoffs by:
– Reducing overtime work,
– Freezing new hires,
– Reassigning or seconding employees,
– Choosing not to renew fixed-term contracts,
– Offering voluntary retirement programs, and
– Cutting executive compensation.

Reflecting this history, courts continue to require that employers take reasonable and proactive steps to avoid redundancy before resorting to dismissal. While employers are not required to take all of the above measures, they are expected to consider and implement multiple alternatives as far as reasonably possible.

As one of the measures to avoid redundancy, general offering of voluntary retirement is often used in Japan to reduce headcount. Some employers—particularly international companies—prefer targeted solicitation, where offers are made only to selected employees. This approach aims to avoid losing high-performing staff who may apply under a general call for volunteers. Although employers usually reserve the right to reject applications under a general scheme, in exceptional cases, refusal may be deemed a violation of the duty of good faith. Accordingly, targeted solicitation may be the safer option in certain situations.

(iii) Fair Selection

The criteria used to select employees for redundancy must be fair and objective. Commonly accepted criteria include:
– Job performance,
– Length of service,
– Degree of economic hardship resulting from dismissal (e.g., number of dependents).

Criteria that amount to unlawful discrimination—such as nationality, religion, social status, gender, marital status, pregnancy, or union membership—are prohibited. Likewise, vague and subjective standards (e.g., “cooperativeness” or “attitude”) are disfavored, as they may lead to arbitrary selection.

(iv) Due Process

Employers are expected to provide clear explanations to affected employees and, where applicable, labor unions. This includes sharing:
– The reasons for redundancy,
– The efforts made to avoid it,
– The number and timing of dismissals, and
– The selection criteria.

Employers should engage in sincere dialogue with employees and unions. Additionally, if the Rules of Employment or any applicable Collective Employment Agreement imposes consultation obligations, these procedures must be followed.

(v) Court Cases

To illustrate how these four requirements are applied in practice, we introduce two court cases—one where redundancy dismissal was upheld, and another where it was invalidated.

Upheld: Osaka District Court Judgment, June 23, 2000

The employer, a foreign financial institution, operated two branches in Japan—Tokyo and Osaka. The Osaka branch was closed, and the employee there was dismissed.
– Necessity for Redundancy: The court found the closure justified, given the branch’s lack of profitability.
– Effort to Avoid Redundancy: Although the employee argued for reassignment to the Tokyo branch, the court accepted the employer’s explanation that the Tokyo branch was also reducing headcount and could not accept transfers.
– Fair Selection: The dismissal was considered fair, as the employee belonged to the closed branch and relocation was impractical.
– Due Process: The court found the employer had properly negotiated with labor union which the employee belongs to and offered enhanced severance and outplacement support.

Invalidated: Tokyo District Court Judgment, March 18, 2011

The employee was dismissed following the company’s withdrawal from the business segment in which the employee worked.
– Necessity for Redundancy: While some need for downsizing existed, the court found it insufficiently compelling.
– Effort to Avoid Redundancy: The court found inadequate effort. Other employees received incentive bonuses prior to the dismissal, total compensation increased after the dismissal, and the company hired new employees during the same period.
– As the court found the employer failed to meet this requirement, it did not go on to assess selection or due process.

(vi) Practical Tips

Because redundancy is not the employee’s fault, employers must handle such dismissals with particular care. Recommended steps include:
– Creating a clear timeline and internal communication strategy,
– Consulting legal and HR professionals early,
– Collecting objective data to justify redundancy (e.g., financial statements, payroll trends, industry data),
– Implementing good-faith efforts to reduce personnel costs by other means, and
– Clearly explaining the rationale and selection criteria to employees.

By approaching redundancy with thorough planning and transparency, employers reduce the legal risks associated with dismissal and improve the likelihood of employee understanding and cooperation.

7. Legal Effect Where the Dismissal is Invalidated

If a dismissal is invalidated by a Japanese court, the employee is deemed to have remained continuously employed and is entitled to receive unpaid wages for the period between the dismissal and the court’s decision. The employer will be ordered to compensate the employee for lost wages during this period. However, the employee is not necessarily entitled to resume the same job duties or position held prior to the dismissal. Under Japanese labor law, employees do not have a general “right to work” in a specific role unless it is deemed to be granted under the employment contract.

In practice, many labor disputes are resolved through settlement before a final judgment is issued. This is often because the employer does not wish to reinstate the dismissed employee, and the employee may prefer to seek new employment rather than return to a company that dismissed them. In such settlements, it is common for the employer to pay a certain amount of severance compensation, and for the employee to agree to voluntarily retire.

8. Employee’s Consent to Retire and Permissibility of Solicitation

Employers may encourage voluntary resignation as an alternative to dismissal. This approach often involves offering enhanced severance packages to incentivize employees to retire voluntarily. However, to be legally valid, such resignations must be made freely, without coercion, undue pressure, or misleading explanations. Any attempt to compromise the employee’s autonomy may result in the resignation being deemed invalid. If undue pressure or material misunderstanding is proven, the employee may retract the resignation.

Below are some practical tips for conducting voluntary resignation solicitations:

– It is safer to clearly inform the employee that they are free to accept or reject the employer’s solicitation to resign.

– Employers should avoid applying coercive pressure, using misleading explanations, or causing undue emotional distress when explaining the reasons for staff reductions or why a particular employee has been selected.

– If the employer intends to dismiss the employee in the event the solicitation is rejected, this may be communicated. However, if a sufficient number of employees have already accepted voluntary retirement, the dismissal may no longer be legally necessary. Therefore, the appropriate explanation is that the employee “may” face dismissal if the offer is declined, rather than stating that dismissal is certain.

– Once an employee clearly declines the solicitation, the employer should refrain from repeating the request, unless the refusal was based on a misunderstanding or the employer presents a new, more favorable proposal that may reasonably alter the employee’s decision.

9. Choice of Law and Jurisdiction Provisions under Employment Contract

In Japan, the parties to an employment contract are generally free to choose the governing law.

For example, if a Japanese subsidiary of a U.S. company hires a Japanese local employee, the parties may agree that the employment contract will be governed by U.S. law—such as New York State law—or by Japanese law. If the employee accepts a contract governed by New York State law, that law will, in principle, apply to the employment relationship.

However, Japanese law provides a safeguard for employees. Under Article 12 of Act on General Rules for Application of Laws (Act No. 78 of 2006, as amended), even if the contract designates a foreign governing law, an employee may still invoke the “compulsory provisions” of the law of the country most closely connected to the employment relationship.

To illustrate, consider an employee hired by a Japanese subsidiary of a U.S. corporation under a contract governed by New York law. While the contract is legally valid and, in principle, governed by New York law, the employee may still challenge a dismissal under Japanese labor law if Japan is deemed the country most closely connected to the employment relationship. In such a case, Japanese dismissal restrictions may apply, overriding any conflicting contractual terms.

This leads to an important question: How is the “country most closely connected to the employment relationship” determined?

In general, it is the place where the employee is engaged to work, as stated in the employment contract, or if such place cannot be specified, the place where the employer’s office hiring the employee is located. So, if the contract designates Japan as the place of work, or if the place of work is not identifiable under the contract but the employee is hired by employer’s office in Japan, Japanese law will be considered the most closely connected.

Compulsory provisions are legal rules that cannot be waived by agreement, even if both parties agree to apply different terms. A typical example is Japan’s restriction on dismissal. For instance, a contractual clause that allows an employer to unilaterally terminate an employee with one month’s notice—without justification—would be invalid under Japanese law.

It is important to note that above-mentioned conflict of laws rules apply only when a dispute is brought before a Japanese court. If the case is filed in a foreign court, that jurisdiction’s conflict of law rules will apply, which may differ from Japan’s.

That said, if the place of work specified in the employment contract is in Japan—or, if not specified, the location of the office that hired the employee is in Japan—then the employee may file the dispute in a Japanese court (Article 3-4, Paragraph 2 of the Civil Procedure Act). Furthermore, under Article 3-7, Paragraph 7 of the same Act, an employee’s right to bring a claim in Japan cannot be waived, even if the employment contract specifies a foreign court as the exclusive forum.

Accordingly, an employee whose place of work is in Japan has the right to file a claim in Japan and may invoke Japanese compulsory provisions, including protections against unfair dismissal. In conclusion, employees can contest a dismissal under Japanese labor law even if their employment contract is governed by a foreign law, such as New York law. This reflects the fundamental policy of Japanese labor law to protect employees, who are typically in a weaker bargaining position.

By contrast, expatriate employees hired and working outside Japan—who are temporarily assigned to Japan and are expected to return to their home country—are generally not protected by Japanese dismissal rules, as Japan is not considered “the country most closely connected to” their employment. However, such employees may still be subject to regulations specific to business operations in Japan, such as working hours, health and safety standards, and similar public regulations.

Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.