Unfair Dismissal – A court case to determine if the dismissal of a department head with an annual salary of 42 million yen unfair – please consider reviewing your Company’s employment regulations!

This is an explanation of the ruling by the Tokyo District Court at the end of last year.
At the end of last year, I saw this eye-catching title of an article  in the social pages of some newspapers, and I was finally able to obtain the full text of the ruling, so I will explain it based on this article.
The case is about a former senior employee, of the Japanese subsidiary of Barclays Securities, a British foreign financial institution, who demanded the invalidation of his dismissal and payment of unpaid wages on the grounds that his dismissal due to the deterioration of the company’s business was unjustified.

On December 13, 2021, the Tokyo District Court ruled that the dismissal was not socially acceptable, even for a foreign financial institution, and demanded invalidation of the dismissal and payment of unpaid wages, stating that “the necessity of personnel reduction and the rationality of the selection (of such dismissed employees) would not be recognized.

1. Background

This executive employee was a Managing Director (“MD”), one of the top 25 or so among approximately 400 employees at the time, and the head of the Syndication Division, with an annual salary of 42 million yen.
Around the end of 2017, the company began to recommend that the man resign, citing the sluggish performance of the group as a whole and the lackluster earnings of the headquarters where he was the General Manager.
When the man refused, the company dismissed him in June 2018, claiming that the dismissal fell under “unavoidable circumstances in the operations of the company” per the Company’s  employment regulations, which is a valid dismissal reason in Corporate Restructuring.
At that time, the company also added former executive’s poor performance as a reason for dismissal.

2.The Court’s Opinion

Regarding the four requirements for dismissal during corporate restructuring the court ruled:

• requirement (1) was not considered necessary because the former executive posted record profits the year before the dismissal and the syndication headquarters also generated a minimum level of earnings.
• requirement (2), the company did not consider demoting or reducing the wages of the former executives, and with regards to
• requirement (3), the company did not solicit voluntary retirement or order the reassignment of other employees,

and thus, the dismissal was deemed invalid because no reasonable personnel selection criteria had been established.
Regarding the former executive’s performance, the Court noted the company had not pointed out any particular poor performance, based on his performance evaluations for the most recent two years (third on a five-point scale, second from the top).

Considering both the Company had not followed the four requirements for Corporate Restructuring that have been established over the years and the individual’s performance evaluation results, which is the premise for terminating a poor performing employee, PMP agrees with the Court.

Given the clearly established requirements for Corporate Restructuring, it would be impossible for the Company to dispute the court’s ruling that this could be considered a dismissal for Corporate Restructuring and neither could it be deemed an ordinary dismissal of an employee with poor performance.

Even a salaried employee with a high salary of 42 million yen per year is still a worker, and both a dismissal for Corporate Restructuring and an ordinary dismissal for poor performance of an employee require the worker to go through a process such that the dismissal is unavoidable.

3. The Company’s claim:

What I would like to further evoke in this case is the Company’s claim that if the dismissal is invalid, the international company will withdraw from Japan. In fact, the background to this case is that the entire group organization was originally reviewed and the entire division to which the former executive employee belonged was downsized, resulting in the elimination of the former executive employee’s MD Position.

It is not uncommon for Western companies to review existing business divisions and downsize or close some of them in order to continue or further develop their business. In a sense, I am personally more concerned about Japanese companies that continue to hold on to unprofitable divisions indefinitely, a move that could be described as slow (apologies if that seems rude). If the Japanese judiciary does not recognize the position elimination of a higher level position, Japanese employment practices are out of line with international common sense, and if the dismissal is invalid, international companies may re consider their Japanese operations.

However, the court found that the Company’s employment regulations (personnel transfers) “may order an employee to change his/her place of employment, duties, or even position due to business reasons and the employee may not refuse this order without just cause, and hence before terminating the employee the courts noted the Company made no attempt to reassign the employee.

PMP also has many clients who are Japanese subsidiaries of foreign companies, and in fact, it is not uncommon to find similar descriptions in the “Personnel Transfers” section of the employment regulations of foreign-affiliated companies.

A long time ago, I discussed with a long-experienced lawyer of a major foreign law firm with an office in Marunouchi, Tokyo, about personnel transfers (in this case, it was called “reassignment”) in the employment regulations of a foreign company. I proposed to re-write his “personnel transfer” language to a more job-based approach allowing the Company to not have to reassign employees in the case of position elimination. This is based on the assumption the Company in Japan hires staff by the job and position as in the case of the foreign headquarters. AT this time this idea was dismissed as unnecessary.

Despite this, PMP has been proposing the above to newly-arrived foreign companies in Japan to change the “Personnel Transfers” section of the employment regulations and appropriate sections of the employment contract, and some of our suggestions have been adopted.  PMP has been trying to incorporate job-based employment into employment contracts.

Recently, we proposed similar innovations for specific duties to Japanese companies seeking to adopt a job-based employment systems. In many cases, the contract employee work rules for professional positions have been adopted with relatively few hurdles.

Finally, here is an example of a model description of the employment regulations of the Ministry of Health, Labor and Welfare.

(Personnel Changes)
1  The Company may order a worker to change his/her place of employment and the duties he/she is engaged in when the Company deems it necessary in the course of business.
2  The Company may transfer a worker to an affiliated company while the worker is still employed, if the Company deems it necessary in the course of business.
3  In the case of the two preceding paragraphs, the worker may not refuse without just cause.