Layoffs in the takeover of Japanese companies

In takeovers of Japanese companies, particularly where the rationale behind the takeover is to obtain technology for use in the PRC market, significant job losses are often involved in order to reduce labour costs. Japanese labour laws contain stringent provisions concerning the dismissal of employees and any change in working conditions that is unfavourable to employees.

Voluntary redundancy or retirement

Soliciting voluntary redundancies or early retirement is a reasonable and practical method for a company to reduce its workforce. Employees who opt to take early retirement are typically paid a generous severance package. After announcing the deadline for applications and target number of personnel to be cut, the company will mobilize the managers of every department to ensure that the targets are met, and handle related matters. As this method is based on individual agreements and the persuasion of the target personnel to resign, it seldom results in disputes.

Whenever voluntary resignations are solicited, there will usually be personnel whom the company wishes to retain and personnel whom it wishes to see resign. It is therefore necessary for the company, while specifying general criteria such as the age and length of service of those whose retirement it is seeking, expressly to state that the favourable conditions for redundancy or retirement apply solely at the discretion of the company.

Efforts to persuade staff to retire could, if they exceed those deemed appropriate by the public, also result in legal problems.

Compulsory dismissals

Compulsory dismissals are another means of reducing the workforce. As Japan places very stringent limitations on dismissal, such dismissals are a last resort. If a company wishes to cut its personnel costs, it must first do so through such means as limiting overtime, halting and reducing transfers and secondments, halting the employment of non-regular employees or suspending operations. It should also seek to cut by means of voluntary redundancies and retirement, as outlined above. However, if, after taking the foregoing measures, it still needs to cut personnel, then layoffs can take place.

Japanese precedents show that to be valid, compulsory dismissals must satisfy the following four conditions: they must be necessary for the operations; real efforts must have been made to avoid the layoffs; the selection of the personnel to be laid off must have been based on reasonable criteria; and real efforts must have been made to consult with, and give an explanation to, the union and the employees.

Layoffs that fail to satisfy the foregoing conditions risk being deemed inappropriate and invalid.

Changes in working conditions

The working conditions of employees in Japan are determined by both the employment contract and the internal rules of employment formulated by the company. For union members, working conditions may also be specified in a collective agreement signed between the company and the union. In Japan, laws, regulations and collective agreements take priority over a company’s internal rules of employment. Furthermore, if the working conditions specified in an employment contract are less favourable than those specified in the rules of employment, the provisions of the employment contract will be held invalid and the provisions of the rules of employment will apply.

Amending collective agreements

A collective agreement is a written agreement between the union and the employer signed and sealed by the representatives of both parties that specifies working conditions and other matters. A collective agreement needs not to be submitted to or filed with an administrative authority.

In principle, a collective agreement applies only to union members. However, if a collective agreement applies to at least three-quarters of the employees in the same job, the effect of such agreement will also extend to the other employees. If, at the time of a takeover, agreement is reached to amend the collective agreement and if such amendment is unfavourable to union members, the working conditions can be modified without amending the rules of employment. However, if a collective agreement is executed with the aim of being particularly unfavourable to specific union members or if it exceeds the scope of the objectives for which the union was established, the binding force of the agreement on the union members will be negated.

Amending rules of employment

When formulating internal rules of employment, an employer may seek the opinions of workers’ representatives and others, but does not require their consent. Such rules of employment apply equally to employees who object to the rules. If the arbitrary modification of employees’ working conditions in a direction unfavourable to them were to be permitted, this would run counter to employees’ interests. Accordingly, based on precedents, a test of reasonableness is applied to any such modification.

Simply filing the rules with the Labour Standards Office, as required, does not automatically make the rules of employment binding on the workers.

Amending the rules of employment solely on the grounds that a takeover has changed the shareholders and business policies of the employer, or solely to “enhance the enterprise’s efficiency” and “improve the personnel system” will be deemed to lack reasonableness. For example, in the Ark Securities incident in 2000, the reasonableness of introducing a remuneration system linked to individual ability and performance through the amendment of the rules of employment was denied.

The reason was that, although as a general system its reasonableness cannot be denied, no measures were taken to compensate the employees and the new remuneration system was deemed unnecessary, i.e. the continued existence of the enterprise did not hinge on the introduction of the new wage system.

In numerous judgments in other cases involving amendments made to rules of employment in a direction that is unfavourable to employees, Japanese judges have rendered judgments of invalidity. Consequently, this must be kept in mind when conducting the takeover and subsequent reorganization of a Japanese company.

Hiroshige Nakagawa is a partner at Anderson Mori and Tomotsune and chief representative of its Beijing Office