How difficult is it to lay-off or dismiss workers for economic reasons?

Dismissal due to economic reasons also known as ‘redundancy’ is called ‘Seiri-Kaiko’ in Japan.

Colloquially, it is often referred as ‘Risutora’ (Short for restructuring). Companies can sometimes have a situation where plant closing, retreat from the market, or by other reasons, reducing workforce is really necessary.

In these cases, as in the ‘prohibition of non-rational dismissal’ mentioned in the previous post, Article 16 of Labor Contracts Act also applies. Recapping the provision of Article 16.
If a dismissal lacks objectively reasonable grounds and is not considered to be appropriate in general societal terms, it is treated as an abuse of rights and is invalid.
Since the latter half of 1970s, courts have formulated four factors (or elements) to be considered in deciding the appropriateness or lawfulness of such dismissal due to economic reasons.

The four factors are:

1. There are sufficient needs for reducing workforce.
The following matters can be helpful in determining the actual business situation.
(1) Whether there is a deficit on the balance sheet, degree of pressure on debt repayment, change in assets, etc.
(2) Amount and change of personnel expenses and executive remuneration
(3) Increase or decrease of employees such as new hires and temporary workers
(4) Change in business workload
(5) If there are stock dividends, if any, how much?

2. To what extent did the employer make efforts to avoid actual dismissal.
Companies are required to fulfil enough of the other measures they can take to avoid dismissal such as:
(1) Overtime reduction and shortening of working hours
(2) Transfer to another department
(3) Dispatch to affiliated companies
(4) Canceling new hires
(5) Recruitment of desired retirees
(6) Implementation of a temporary lay-offs
(7) Asset sale

3. Are the criteria of choosing employees to be dismissed fair?
The criteria to determine the target of dismissal must be reasonable and fair, and at the same time its procedure should be reasonable.
(1) Those who have low business performance and do not show improvement
(2) Those with relatively short service years (except those required for business and those with particularly high grades)
(3) A person who needs relocation but who has difficulty in properly relocating
(4) There are many absenteeism, lateness and early leaving

4. In what procedure and to what degree did the employer explained and discussed on dismissal with trade unions or employees to be dismissed?

If there is a clause that requires employers to consult with the labor union regarding labor reduction in the collective agreement, a dismissal conducted without sufficiently discussing the criteria for electing specific persons or their aptitude is invalid as a violation of the agreement. Even if there is no agreement, the employer must explain to the workers in good faith about the necessity and details (timing, size, method etc.) of the dismissal.

However, it is still rather opaque how judges should take into consideration among these four factors to reach conclusion on the validity of each dismissal case.

Therefore, it would be wise for employers at least take above facts well into consideration when planning dismissal due to economic reasons.