Employers’ Options after the Declaration of State of Emergency in Japan

On April 7, Japan declared a state of emergency covering the seven prefectures of Tokyo, Kanagawa, Saitama, Chiba, Osaka, Hyogo and Fukuoka, effective immediately and lasting through May 6. Subsequently, the governors of such prefectures, based on their own criteria, each issued emergency measure requests such as refraining from going outside, reduction of work hours or suspension of operations, and closure of schools[1]. Such requests, however, do not constitute a lockdown and do not carry the force of enforceability, and are dependent on voluntary compliance. Further, for instance, with respect to compensation for businesses that do comply and suspend operations, the handling by the prefectures depend in part on their financial capacity, and is not uniform.

The Japan national government, prior to issuing the declaration of state of emergency, announced various measures to support companies and business owners nationwide and indicated that more measures will be announced. In addition, the prefectures subject to such declaration announced that they will implement their own supportive measures in addition to the national measures. On April 16, the declaration of state of emergency was expanded beyond the original seven prefectures. As of the time of writing, details regarding such expansion are pending, and the prefectures other than the seven covered under the April 7 declaration have not yet made announcement regarding their own measures in response to such expansion of declaration.

This overview provides practical advice relevant to employers to develop their COVID-19 virus strategy in Japan based on the announcements made on or before April 16.

No System of Temporary Layoffs

There is no system of temporary layoffs in Japan, and so an employer desiring to reduce its workforce, even if intended to be temporary, must treat it as a permanent layoff under the law and must satisfy the substantive and procedural requirements thereof in order to conduct such layoff. Such requirements are stringent—even if an employer is suffering financial distress, to be able to lay off employees by reason of financial distress, such employer must demonstrate that the financial distress it is under is severe, that the employer used sufficient efforts to avoid having to lay off employees (such as by soliciting voluntary resignations), that selection of targeted employees is reasonable and that it engaged in sufficient discussions with the employees subject to layoff. In the event that a layoff dismissal is disputed in court, if an employer does not satisfy any of the foregoing requirements in laying off an employee, such dismissal will be determined to have been ineffective and such employee would be reinstated with back pay.

Accordingly, if employers desire to reduce their workforce when their financial conditions have not yet critically deteriorated, it is advisable to aim to achieve mutually agreed separation on payment of reasonable severance. Here, employees that agree to mutually agreed separation are, upon separation, immediately eligible to collect unemployment insurance in the same manner as employees that are dismissed, if such mutually agreed separation was upon employer solicitation[2]. Thus, even in cases of such mutually agreed separation, certain mitigation of financial hardship on the separated employees is available.

It should be noted with respect to cases of separation (whether dismissal or mutually agreed upon encouragement by employers) that, if the separation is on the understanding that the separated employee will be rehired after, e.g., market recovery after COVID-19 recedes (intending, for example, so that separated employees can collect unemployment insurance in the meantime), employees separated on such understanding may be deemed to not be searching for jobs and therefore not be eligible to collect unemployment insurance.

Another option, alternative to separation, would be to suspend employees and utilize the employment adjustment subsidy (EAS) (discussed below) to partially alleviate the cost of such suspension.

Suspension Allowance Obligations

Some businesses are implementing whole or partial suspension of operations in compliance with prefectural requests or in response to factors such as reduced demand or supply chain delays. Such businesses may attempt to maintain employment of their employees in the face of suspended operations by implementing employment adjustments such as furloughs or reduced workdays or work hours.

Under Article 26 of the Japan Labor Standards Law, if an employer suspends operations for reasons attributable to the employer, then such employer is obligated to pay to affected employees amounts corresponding to at least 60% of such employees’ average wages as suspension allowance (kyuu-gyou teate). On the other hand, if an employer suspends operations due to force majeure, then such employer is not obligated to pay suspension allowance (or any portion of the affected employees’ wages).

The requirements described in the above paragraph are minimum requirements under the Labor Standards Law; an employer is of course free to voluntarily pay a higher amount of suspension allowance than required, such as paying any amount (whether at, below or higher than 60% of average wage) in the case of suspension due to force majeure. The eligibility to receive EAS is not contingent on the suspension allowance paid out being legally required; EAS is available for voluntarily paid out suspension allowance as well.  It should be noted, however, that eligibility of EAS is limited to those businesses that have actually paid suspension allowance to affected employees in amounts at or above 60% of such employees’ average wages. In other words, a business that, for example, has paid only 50% of such amount under force majeure operation suspension (and so is not under obligation to pay even any amount of suspension allowance), would not be eligible for any EAS.

The Ministry of Health, Labor and Welfare (MHLW) has indicated in a Q&A[3] that, in order to declare force majeure as a basis to suspend business operations, (i) the circumstance cited as the basis of such declaration must be an event external to the business, and (ii) such event must have been unavoidable notwithstanding the business operator having exercised maximum care as a typical business operator.

The declaration of state of emergency and the prefectural requests that were issued in this instance in relation to COVID-19 are indicated as events satisfying the requirement in (i) above. With respect to the requirement in (ii) above, the MHLW has indicated that factors that will be taken into consideration in determining whether such requirement is satisfied include whether the business operator has sufficiently evaluated, and, where practicable, implemented measures such as telework to allow employees to continue performing work, or shifting employees to perform other work functions to avoid having to suspend operations.

The scenario where a business suspends operations not because it is in response to prefectural request but because of the effects of COVID-19 more generally is ambiguous. The MHLW Q&A only sets forth that “for instance, if a business suspends operations due to its overseas business counterparties suspending their operations from the effects of the novel coronavirus, a totality of the circumstances determination is necessary, taking into account factors such as the degree of dependency on such overseas counterparties, availability of substitutes or replacements of such counterparties, the period of time such counterparties have suspended their business, and the specific efforts that the business has used to avoid having to suspend its operations”, which guidance leaves various aspects open to interpretation and is ultimately subject to determination by the courts in the event of dispute.

In contrast to the ambiguity that has remained in the above, the MHLW has implemented more user-friendly parameters under the EAS regime, as further described below, to assist businesses affected by COVID-19 with the aspect of their suspension allowance payment obligations. On this point, EAS is only available to subsidize suspension allowance actually paid out during the eligibility period, and so in cases where it is not clear that an employer has no obligation to pay any suspension allowance, on balance it may be a more prudent course of action to choose to pay suspension allowance and seek EAS relief.

Also, in order to apply for EAS, a labor-management agreement (roushi kyoutei) providing for terms such as the duration of suspension must have been entered into, and so discussions with employees regarding such agreement is necessary. Regardless of whether EAS will be sought, however, it is generally expected that, in the event an employer will suspend operations and suspend its employees, such employer will have discussions with its employees in good faith regarding the terms of suspension such as suspension allowance and duration and scope of suspension, and will use efforts to limit adversity to employees.

Special Parameters for Employment Adjustment Subsidy

The employment adjustment subsidy (EAS) is a regime where the government partially subsidizes the suspension allowances paid by businesses that are financially forced to reduce or suspend business operations but in the course of doing so attempt to maintain employment of their employees by implementing temporary employment adjustment measures. In relation to the present COVID-19 outbreak, the MHLW implemented special parameters with respect to operation suspensions occurring between April 1 and June 30 (the “Special Parameters Period”) [4].  Eligibility for EAS during the Special Parameters Period is nationwide.

Certain general terms of the EAS and the differences under the special parameters are set forth below.

Key eligibility requirements to receive EAS:

– The business must have been forced to reduce operations for financial reasons resulting from changes in market or industrial conditions (during the Special Parameters Period, all businesses affected by COVID-19 are included in eligibility).

– The business’s suspension of operation must be in accordance with labor-management agreement (no change to this requirement during the Special Parameters Period).

– The business’s production or revenue in the three-month period then ended must have decreased by 10% or more compared to the same period last year (during the Special Parameters Period, relaxed to a threshold of decrease by 5% or more over a one month period then ended compared to the same period last year).

– The business’s scope of suspension of operation must be, with respect to the number of work days of the affected employees in the aggregate: for large businesses, reduction of 1/15 or greater; and for small and midsized businesses[5], reduction of 1/20 or greater (during the Special Parameters Period, relaxed with respect to large businesses to a threshold of 1/30 or greater, and with respect to small and midsized businesses to a threshold of 1/40 or greater).

– The business must have been in operations for one year or more (during the Special Parameters Period, this requirement is removed and new businesses are not precluded from eligibility).

– The business must not have increased its number of employees or dispatch workers above certain metrics over the three month period then ended (for large businesses, more than 5% and six or more individuals; for small and midsized businesses, more than 10% and four or more individuals) (during the Special Parameters Period, this requirement is removed).

– There is a cooling period where a business that has received EAS is not eligible to receive it again for a period of one year (during the Special Parameters Period, this limitation is removed and there is no cooling period).

– Only employees that are eligible for unemployment insurance are eligible to be counted (during the Special Parameters Period, expanded to include employees ineligible for unemployment insurance (employees whose work hours are less than 20 hours/week)).

– Employees that have been employed for less than 6 months are excluded from eligibility to be counted (during the Special Parameters Period, this limitation is removed and there is no minimum employment period requirement).

– With respect to short term suspension, limited to cases where all workers in a workplace are suspended all at once (during the Special Parameters Period, relaxed to a threshold of all workers in a certain extent of a unit, such as in a department in a workplace or in a store or other facility).

Amount of EAS provided:

– For large businesses, 1/2 of suspension allowances paid; for small and midsized businesses, 2/3 of suspension allowances paid (subject in each case to a cap of JPY 8,330 of EAS per employee per day) (during the Special Parameters Period, the proportions increased to: for large businesses, 2/3 (if no employees are terminated, then 3/4); and for small and midsized businesses, 4/5 (if no employees are terminated, then 9/10), in each case with the JPY 8,330 cap remaining unchanged).

– Subject to a cap of 100 days within one year and 150 days within three years (the days of suspension of operation during the Special Parameters Period are excluded from counting toward such caps).

Certain notes on application procedure and payment:

– Operation suspension plans may be submitted post-hoc until June 30. Following post-hoc submission of operation suspension plan, EAS application for such suspension must be made during the period between the day after such submission and two months thereafter.

– The MHLW has announced that they will endeavor for payments of EAS to be made within 1 month after application, accelerated from 2 months previously.

Sustainability Benefit

The Ministry of Economy, Trade and Industry (METI) announced on April 13 that a cash benefit will be provided to small and midsized businesses and independent contractors that suffered an acute decrease in revenue due to COVID-19, to support sustainability of such businesses. The maximum amount of such sustainability benefit provided is JPY 2 million for small and midsized businesses and JPY 1 million for independent contractors, provided in each case capped at the actual decrease in revenue over the past year.

Businesses eligible to receive such sustainability benefit are small and midsized businesses and independent contractors that suffered a decrease of 50% or more in revenue in any given month compared to the same month last year[6].

Payout of such benefit is aimed to commence May 7 at the earliest, and application procedures will be announced pending finalization (targeted to be by the last week of April).

Work Style Reform Promotion Subsidy (for Telework)[7]

For small and midsize businesses that will newly implement telework in response to COVID-19, a subsidy will be provided covering 50% (subject to a cap of JPY 1 million) of the costs incurred by such businesses for such implementation, including costs for purchasing and integrating/operating hardware (including thin client computers but excluding other computers as well as tablets and smart phones), costs to amend the business’s work rules, etc.

Businesses eligible for this subsidy are those that have newly implemented telework between February 17, 2020 and May 31, 2020, and the implementation plan may be submitted post-hoc. The application deadline for this subsidy is May 29.

[1] For example, in Tokyo and Kanagawa prefectures, the emergency measure requests included, commencing April 11, for restaurants to limit their opening hours to 8pm, and to limit serving of alcoholic beverages to 7pm, but such measure requests were not made in Chiba and Saitama prefectures.

[2] If separation is purely at an employee’s convenience, then there is a three month waiting period before such employee is eligible to collect unemployment insurance, and the period such employee may collect unemployment insurance is also shorter compared to the period for an employee that was terminated.

[3] https://www.mhlw.go.jp/stf/seisakunitsuite/bunya/kenkou_iryou/dengue_fever_qa_00007.html

[4] https://www.mhlw.go.jp/stf/seisakunitsuite/bunya/koyou_roudou/koyou/kyufukin/pageL07.html

https://www.mhlw.go.jp/content/000621561.pdf

[5] For purposes herein, a business falls under the “small and midsized” category: in the services sector if it has no more than JPY 50 million in paid-in capital and 100 or fewer employees; in the retail sector if it has no more than JPY 50 million yen in paid-in capital and 50 or fewer employees; in the wholesale sector if it has no more than JPY 100 million in paid-in capital and 100 or fewer employees; and other sectors if it has no more than JPY 300 million in paid-in capital and 300 or fewer employees.

[6] The business may designate the applicable month during the period from January to December of 2020 compared to the same month in 2019.

[7] https://www.mhlw.go.jp/content/11909000/000621227.pdf