Types of Disciplinary Action and How to Choose: Criteria for Pay Reduction, Suspension and Disciplinary Dismissal

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When employee misconduct such as fraudulent expense claims or taking confidential company information comes to light, the company bears the responsibility not only to prove that the misconduct occurred but also to explain the reasonable grounds for choosing the particular disciplinary action. This is because, even where the violation is established, if the company imposes a sanction that is excessive relative to the seriousness of the conduct, it runs the risk that the action itself will be held invalid as an abuse of rights.

The core of disciplinary decision-making lies in examining whether there is an express basis in the work rules that was established in advance and made known to employees, and whether the facts found in light of those rules are properly balanced against the severity of the action. The procedures and the opportunity to explain oneself set out in the rules are also checked one by one. Monetary limits on pay reductions and the dismissal notice procedure for disciplinary dismissal are positioned as specific rules for lawfully carrying out the chosen action. This article deals with the practice of exercising disciplinary authority over employees of private companies.

The Basis for Discipline in the Work Rules and the Principle of Prior Notice

For an employer to impose disciplinary sanctions on a worker, the essential legal premise is that the types of and grounds for discipline have been set out in the work rules in advance and made known to the employees to whom they apply. The status of employer alone does not confer an unrestricted power to sanction.

Article 89, Item 9 of the Labor Standards Act (Japanese) provides that where provisions on sanctions are established, the work rules must state their types and extent. Alongside this, Article 106, Paragraph 1 of the same Act imposes an obligation to make the work rules known by means such as posting them in a conspicuous place at the workplace, keeping them available, or delivering them in writing. Whether employees are in a position to check the content when needed is judged separately from whether all of them actually read it through.

Workplaces that regularly employ 10 or more workers are required to prepare and file work rules, but even at workplaces with fewer than 10 workers that have no filing obligation, the employer cannot freely impose disciplinary action without a basis in the rules. If the disciplinary system is to be operated effectively, both the clarity of the provisions and whether notice procedures have actually been carried out should be checked.

The legal basis for disciplinary action is the provisions that were validly in effect at the time of the misconduct. It is not permitted to put new grounds for discipline in place after a problem has surfaced and apply them retroactively to past conduct. Even where a catch-all provision such as "when the employee has caused damage to the company" exists, the company must carefully judge whether the conduct in question objectively and substantively falls under that ground. In Michio Tsuchida, Rodo Keiyaku Ho (Labor Contract Law), 2nd ed., pp. 474–475, too, whether conduct falls under a provision of the work rules and whether the action is appropriate are discussed separately as distinct legal requirements.

Review of the Appropriateness of Action under Article 15 of the Labor Contracts Act and Treatment of Disciplinary History

Article 15 of the Labor Contracts Act (Japanese) provides that, even where an employer may discipline a worker, if the discipline lacks objectively reasonable grounds and is not considered appropriate in light of socially accepted norms, in view of the nature and manner of the worker's conduct and other circumstances, it is invalid as an abuse of that right.

That a clause in the work rules lists disciplinary dismissal is distinct from the conclusion that choosing disciplinary dismissal is immediately justified in an individual case. Even if there was conduct that formally falls under a stated ground, the review substantively examines whether the chosen action can be considered appropriate under socially accepted norms, taking into account the maliciousness of the motive, the disruption to business operations, the scale of the damage, the employee's past disciplinary history and whether the employee has shown remorse. Circumstances in which deficiencies in the company's management system or inadequate guidance induced the misconduct also cannot be excluded from the factors considered.

Balance with the severity of past actions taken in similar cases within the company is also an important consideration. That said, a shared label for a violation does not mean the same action is always appropriate. If there are differences in repetition of the violation, the employee's responsibilities, the size of the damage, whether there was concealment and so on, be ready to explain how those differences were reflected in the severity of the action.

In exercising disciplinary authority, there is a principle that the same misconduct must not be punished twice. As a rule, it is not permitted to later redo an action that was formally taken against conduct and replace it with a heavier one. On the other hand, it is permitted to consider past disciplinary history as material for deciding the severity of action against a new violation. This distinction between the prohibition of double punishment and the consideration of past disciplinary history, as well as the balance of actions and procedural rules, is discussed in Rodo Keiyaku Ho, 2nd ed., cited above, pp. 504–507.

The Substantive Burden of Each Type of Action and Limits on Pay Reductions and Dismissal Notice

The disciplinary actions available and their content are set out in each company's work rules. The law does not prescribe a list of actions common to all companies. The actions widely used in practice and points to note are as follows.

Action	General content and points to check
Admonition / reprimand	An action that warns against future conduct and prompts reflection, such as by requiring a written apology. Whether a written apology is required varies with the rules
Pay reduction	An action that reduces wages as a sanction. Compliance with the monetary limits in Article 91 of the Labor Standards Act is essential
Suspension from work	An action that prohibits work for a certain period. Check the appropriateness of the suspension period and the basis for treating that period as unpaid
Demotion	An action that, as discipline, removes the employee from a position or lowers their job qualification or grade. Examine what is being lowered and the effect on wages
Advised resignation / advised dismissal	An action that recommends or urges the employee to submit a resignation. Provisions differ, including treatment if the employee does not follow the recommendation
Disciplinary dismissal	The heaviest action, unilaterally terminating the employment contract as a sanction. The dismissal notice procedure and treatment of retirement allowance are judged separately

The difference between admonition and reprimand also depends on the work rules. The fact that routine oral guidance on work was given does not by itself result in a legal disciplinary action. It is important to look past the formal label's apparent weight and confirm under which clause the action is taken and what disadvantage it imposes. When carrying out a personnel reassignment that removes only a managerial position, or a revision of skill-based pay based on performance evaluation, distinguish these so as not to confuse their basis and requirements with demotion as a disciplinary action, which is an exercise of the power to sanction.

When imposing a pay reduction as a sanction, the double cap in Article 91 of the Labor Standards Act must be satisfied. First, the reduction for a single incident must not exceed half of one day's average wage; second, even where multiple incidents are dealt with together, the total reduction in a single wage payment period is prohibited from exceeding one-tenth of the total wages for that period.

The average wage used as the benchmark here is the amount derived according to the calculation method in Article 12 of the Labor Standards Act; it is not calculated by simply dividing the monthly salary by the number of scheduled working days. Determine the calculation period and excluded periods based on the wage ledger and calculate the lawful limit for the reduction. It is also not permitted to evade the per-incident cap by splitting the reduction for the same incident over the following months. As the Ministry of Health, Labour and Welfare's Q&A for employers (Japanese) states, the limits of Article 91 of the Labor Standards Act also apply when bonuses are reduced as a disciplinary action. Ordinary performance assessment through personnel evaluation and pay reduction for the purpose of sanction should be clearly distinguished in practice.

Even where disciplinary dismissal is chosen, the rules on dismissal notice and payment in lieu of notice apply. Under Article 20 of the Labor Standards Act, 30 days' notice is required as a rule, and the notice period can be shortened by paying the average wage for each day of notice not given. To proceed with immediate dismissal without notice or payment in lieu of notice on grounds attributable to the worker, the employer must obtain in advance a certification of exemption from dismissal notice from the head of the competent Labor Standards Inspection Office. The Ministry of Health, Labour and Welfare's explanation (Japanese) also describes this certification procedure. Moreover, even if the exemption certification is obtained, the civil validity of the dismissal is judged separately, and the review of the appropriateness of the dismissal under Articles 15 and 16 of the Labor Contracts Act remains a civil issue.

As for non-payment of the entire retirement allowance, there is likewise no legal principle under which it is automatically valid. Whether a reduction or non-payment is permissible is decided by comprehensively weighing, in addition to whether there is a basis clause in the retirement allowance rules, the character of the retirement allowance as deferred wages, the employee's contributions over many years of service, and whether the misconduct in question involves a breach of trust so serious as to completely erase those past contributions. The Ministry of Health, Labour and Welfare's page "Non-payment of Retirement Allowance" (Japanese) also takes up court decisions that ordered payment of part of the retirement allowance even though the disciplinary dismissal itself was held valid. Issuing the notice of action and processing the calculation of wages and retirement allowance should each proceed after individually checking the basis in the relevant laws and rules.

Practical Steps from Fact-Finding through Hearing the Employee's Explanation to the Decision

In a case of suspected expense fraud, do not decide the action immediately based only on the amount claimed; match the expense claims against the receipts. Also examine the approval route logs and the accounting rules, and confirm whether the employee's explanation is consistent with the records. Even for the same amount of loss, the legal assessment changes greatly depending on whether it was a simple input error or an intentional fraudulent claim, whether it was repeated and continuous, and whether there was ambiguity in the company's notice of the rules or in its management practices. Even a first violation involving a small amount is not necessarily limited to a light action. The assessment includes the maliciousness of the conduct and the employee's authority in their duties.

In a case of taking company information, verify the degree of confidentiality of the data concerned, the purpose of taking it, where it was sent or taken, and whether it was actually disclosed to third parties or misused. Even if the company's security records show "sending to a personal address", it is difficult to regard that alone as proving a leak of confidential information to a competitor. Separate objective facts that can be established by objective evidence such as access logs from statements that need to be corroborated by interviews with the employee and others concerned.

During the investigation, it is important not to fix the severity of the action on the basis of preconceptions, to disclose to the employee concretely the facts the company intends to find, and to fully guarantee an opportunity to rebut and submit evidence. Where the work rules or a collective agreement provide for deliberation by a disciplinary committee or a consultation procedure with a labor union, the decision is made through that formal process. Courts vary from case to case on the validity of an action taken without giving an opportunity to explain, but an action taken without hearing the employee's side, on the formal ground that the rules do not expressly require it, carries the seeds of a dispute in terms of both the accuracy of the fact-finding and procedural fairness.

In responding to harassment cases, the company must achieve a high degree of balance between guaranteeing the accused person's right of defense and protecting the privacy and personal safety of the complainant and witnesses. While identifying and presenting the specific facts necessary for the employee's rebuttal, whether to disclose the original interview records as they are should be decided carefully according to the nature of the case. Interview records of those involved should be managed with access limited to the staff who need them for the investigation and decision.

When submitting a proposed action to the decision-making body, organize and present the following matters.

• The facts found, the objective evidence, and the reasons for accepting or rejecting the employee's explanation
• The basis clause in the work rules to be applied, the content of the provisions at the time of the misconduct, and the status of notice
• The substantive disadvantage of the chosen action, balance with past similar cases, and the reasons for judging that a lighter action would not suffice
• Minutes concerning the opportunity to explain and committee deliberations, the wording of the notice of action, and the basis for monetary calculations associated with pay reduction or dismissal procedures

At a company that has never taken disciplinary action before, there are no internal precedents for comparison. In such cases, contrast the specific disruption the misconduct caused to business operations with the blow the proposed action would deal to the worker, and carefully document that balance. There is no uniform restriction that disciplinary dismissal can be carried out only after progressing through admonition, pay reduction and suspension in stages, but whether an opportunity for improvement was given in advance for minor violations is given weight in judging whether a heavy action is appropriate under socially accepted norms. Also, where action has already been taken against past conduct, match the notice of that earlier action against the facts covered, and make sure to avoid the defect of double punishment where the new violation is substantively the same as the conduct already dealt with.

Announcing within the company that disciplinary action has been taken should be considered carefully as a legal issue separate from the validity of the action. Depending on the manner of announcement, there is a risk of tort liability for defamation or invasion of privacy under Article 709 of the Civil Code, so narrow down to the minimum the scope of announcement, the medium of disclosure and whether names need to be disclosed in order to achieve the purpose of preventing recurrence. Circulating or distributing the disciplinary committee's minutes or the investigation report as they are to the entire company is generally a practice to be avoided.

Support for Proper Operation of Disciplinary Action and Review of Rules

When considering disciplinary action, review the relevant clauses of the work rules together with the investigation materials. LegalAgent's Labor Management and HR practice advises on whether action is permissible and at what level, and on reviewing work rules.

For expense fraud or information leaks with complex facts, we also provide support through Crisis Management, Misconduct Response and Internal Investigations. If you would like to engage us on an ongoing basis for routine rule checks and responding to consultations from the HR department, please see Legal Outsourcing.