An increasingly competitive and cost oriented business environment often requires employers to review and restructure their human resources. Such process may include anything from the revision of salary schemes and compensation conditions to redundancy proceedings or even dismissals. This newsletter highlights some of the legal aspects to be observed when restructuring employment relations, in particular with regard to the adjustment of salary and working hours and the reduction of the company’s workforce.

I. Adjusting Salary and Working Hours

1. Salary Reduction
Companies aiming to reduce the monetary benefits of its employees usually face the legal obstacle that, in principle, no unilateral amendment of employment conditions can be made to the detriment of the employees, provided that this does not always apply to allowances that had been specifically linked to the former position of the employee in situations where such position has been changed.
As a result, most companies try to agree on the proposed changes with the individual or group of employees concerned. Instead of obtaining the consent of each of the employees concerned, companies may also conclude a labor agreement with the labor union that applies to at least three-quarters (3/4) of all employees regularly working at the respective workplace. In such case, the labor agreement will be binding on all employees belonging to the employee categories (e.g. factory workers, sales staff, etc.) falling under the scope of application of the labor agreement (Article 17 of the Labor Union Act). In addition, the law provides for certain cost-cutting measures through a reduction of working hours, in particular by introducing flexible working hours to reduce overtime and by shortening regular working hours.

2. Working Hours Reduction
Because the Japanese Labor Standard Act (“LSA”) provides for mandatory allowances depending on the number and time of working hours, a reduction of a company’s overall salary payments can be achieved by an adjustment of the working hour system of the company.

a) Mandatory Allowances
The following minimum allowances are mandatory and must be paid in addition to the regular salary, with failure to comply with this obligation resulting in penalty or criminal charges. However, with the exception of late-night allowance, these allowances do not need to be paid to employees in a managerial or supervisory position.

• Overtime allowance: 25% of the employees’ hourly salary for every working hours exceeding 8 hours per day or 40 hours per week;
• Rest-day allowance: 35% of the employee’s hourly salary for every working hour rendered on a statutory rest-day (which the employer is required to grant once per week or four times in four weeks);
• Late-night allowance: 25% of the employee’s hourly salary for every working hour rendered between 10 p.m. and 5 a.m.