Corporate GovernanceOther

【COVID-19】How Should Employers in Japan Deal with COVID-19?

Employers’ Obligations During COVID-19

Employers worldwide are navigating a painfully precarious, challenging dilemma to ensure the long-term survival of their businesses. With reportedly over 3,000 COVID-19 related redundancies made thus far, and an increased unemployment rate of 2.5% (compared with that of roughly 15% in the United States), the situation in Japan is significantly better than other countries. Yet, given the interconnected nature of the global economies, some companies in Japan may be forced to cut overheads, reduce headcount and downsize to protect their businesses.

Japanese employers will be reluctant to let go of workers, but for some it will be inevitable. This is especially true in hard-hit industries. Elsewhere, redundancies may be the by-product of existing inefficiencies and over-staffing. In any event, whether employees are asked to work remotely, take time off, or are made redundant will primarily depend on the nature of the industry.

But in the fascinatingly contradicting ‘high-tech-yet-analogue’ business landscape of Japan, this presents another challenge. Companies may go bust or be forced to downsize for lack of infrastructure, digital culture, and remote-working capabilities. SMEs, which make up 99.7% of companies in Japan and employ around 60% of the Japanese workforce, are less likely to be tech-savvy and may face a firewall. And whilst the cliché – that with great adversity comes great opportunity holds true to a degree – there is uncertainty as to which companies will survive their crash-course of digitalization.

In the short-term, for employers in hard-hit industries, or businesses where remote working is impossible, redundancies and restructuring is necessary. What then, are an employer’s general obligations, and what legal steps do they need to take to downsize or make employees take time off? If they choose to keep employees, what government subsidies are available?

1. General COVID-19 Related Obligations of Employers in Japan

  1. Health and Safety

    At a fundamental level, employers have a duty of maintaining the health and safety of employees. They can conduct temperature checks in the workplace and implement a handwashing and sanitization regime. They can also ask employees to work remotely.
  2. Alternatives to Redundancies

    If companies are forced to shut temporarily because of the government’s lockdown requests, or if they are experiencing a downturn in business, there are several alternatives to assess before making employees redundant.
    1. Time Off

      Under the Labour Standards Act, if an employer asks an employee to take time off work for ‘reasons attributable to the employer’, such employer must pay at least 60 percent of the employee’s average wage (“paid leave”). Unlike the ordinary interpretation of such phrase, the exception (i.e. the existence of a reason not attributable to the employer) is historically interpreted very narrowly by the courts, requiring an event that can be described or is close to a force majeure event. This creates a two-part test for assessing whether employers are exempt from paying employees. First, there must be a force majeure event or something alike, and second, the employer must have taken all measures possible to prevent employees from having to take time off.
      The COVID-19 outbreak instigated debates among pro-employee and pro-company legal minds. The Ministry of Health, Labour and Welfare (“MHLW”) clarified the legal position by reiterating the two-part test. First, the emergency declaration or a request by the government for businesses to shut down may satisfy the first element of force majeure. Second, even if a force majeure event or something alike has occurred, employers are not exempt from paying paid leave. In any event, it would depend on whether the employer did everything within its power to prevent the employee from having to take time off – e.g., implementing remote working measures and/or looking for alternative tasks for employees.
      Thus, the issue for most employers is whether they satisfy the second element – of whether an employer advanced its best effort to implement remote-working, or to transfer roles for the employee. Whether remote work is possible will be assessed objectively if a redundancy is contested. For example, company software security issues would be deemed 'attributable to the employer'. Thus, it needs to be in situations where remote work is objectively impossible to justify time-off without pay.
    2. Reduction in Working Days

      In principle, an employer cannot unilaterally reduce working days of an employee. However, if there’s employee consent, it may do so, as long as the employee is paid 60% on days where they are not required to work.
    3. Voluntary Redundancy Schemes

      Alternatively, companies can set up voluntary redundancy schemes and encourage employees to resign. As much as cashflow allows, they can make conditional payouts. Companies should take extra caution on how they handle this process, as companies that put undue pressure on employees to take this option may be held liable for improper practices.
    4. Reduced Wages

      While the primary rule is that an employer cannot unilaterally reduce an employee’s salary, it can do so where consent is obtained. Voluntary redundancy schemes are generally easier to implement. It should also be noted that reducing wages will curtail a company’s right to obtain employment adjustment subsidies from the government (explained below).
  3. Terminating an Employment Relationship

    It is inevitable that there will be cases where employers need to consider making employees redundant. However, employee friendly labour laws in Japan make this complicated. To do so, employers must satisfy a four-factor test:
    1. A genuine economic necessity to downsize;
    2. An exhaustive effort to avoid making redundancies has been made by considering actions such as salary cuts, reduced hours, and other cost-saving measures;
    3. A reasonable and fair criteria for selecting employees to be made redundant has been set; and
    4. Objectively looking at the situation, it is reasonable and socially acceptable given the circumstances.
      In the COVID-19 context, there might be room to argue that some companies satisfy the first part of this test. However, it would still require a careful consideration of the financial situation of the company. This whole process is complicated in nature, and precedent proves it is difficult to satisfy all factors. Combined with the fact that companies will lose their right to claim for employment adjustment subsidies if they lay off staff (as explained below), it is advised to consider voluntary schemes, reduced hours, paid leave, and other alternative measures where possible.

2. What Government Assistance is Available?

The Japanese government’s economic response to COVID-19, estimated to be roughly to be 20% of the country’s GDP, is one of the most aggressive responses in the world. Out of the government funding of 39.5 trillion yen to contain the economic fallout from COVID-19, one of the main initiatives is to support the continued operation of small-to medium businesses (“SMEs”) and maintaining employment rates. Various government loans, credit guarantees, and grants are available, but the below two are most notable:

  1. Employment Adjustment Subsidies

    In encouraging businesses to retain employees instead of laying them off, if certain conditions are met, the government will support up to 100% of paid leave for SMEs.
    For businesses requested to shut down pursuant to the emergency declaration, but continue to employ staff, 100% salary support will be granted. For businesses not subject to the request, if they are paying paid leave (60%) plus an additional amount, such additional amount will be granted by the government. Both are conditional upon businesses seeing a reduction in sales of more than 5% compared with the same month of the previous year. (For businesses that have been operational for less than a year, in comparison with December 2019.) The maximum amount granted per employee per day is currently 8,330 Yen. However, there are discussions within the Japanese Diet to increase the amount further.
    The government is currently working on making the subsidy application process online.
  2. Remote-working Grant

    In line with government calls for companies to transition to remote-working, financial support for the transition is offered to SMEs. This includes adoption of IT solutions – both software and hardware- and measures to prepare your team for remote work. Up to 2/3 of the upgrade cost, with a cap of 450,000 YEN is available.

3. Looking Ahead

While pains will be felt in the immediate aftermath, we encourage businesses to partake of governmental support where possible, and look ahead to the future being conscious of the welfare of employees. The businesses that maintain an agile, tech-savvy team that can function at full capacity in the post-pandemic economy will be crucial to economic recovery in Japan. Employees are aware that these are uncertain times and adjustments need to be made. However, how businesses handle the COVID-19 crisis could significantly impact whether they retain top talent. No doubt companies with a team that is both satisfied and productive as a result of practices and cultures implemented during this pandemic, will post-pandemic be operational sooner and attract top talent, than companies that laid-off the majority of their staff.

Despite the inevitability that some businesses will let go of workers and shutdown, there is a case to be made for companies to see this as an opportunity for long-term growth. As much as cash-flow and COVID-19 related government support allows, this is a chance to train, invest, and build trust and strong relationships with employees. For companies that can transition a substantial portion of their employees to remote-working, this forced digital crash-course may be a welcome learning in a country that was so resistant to remote-working and digitalization. An optimistic view of the recovery will involve businesses doing away with paper, unnecessary meetings, fax machines and rigid corporate seal requirements; and appreciate that - despite resistance in the past - “telework is real work” - and thrive in the new norm.

(Written by: Koki YamadaTomo Greer)

*This Column is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.
For more information and questions regarding this Column, reach out to us.

Koki Yamada
Tel: 03-6273-3503(Direct)

Tomo Greer
Tel: 03-6273-3310(Direct)