Is this legitimate? One-sided wage reduction because of my poor performance.

Q. I’m working for a pharmaceutical company in Japan, as assistant manager of the marketing division.

My labor contract is a one-year fixed-term contract but has been renewed 3 times. The annual basic salary in this year’s contract is executed at 10M yen.

Three months ago, my line supervisor told me to take the so-called PIP (Performance Improve Program) by setting up the goal which I mandatorily had to achieve within three months as I did not measure up to the company’s expected performance level this year. He also warned me that unless I would not be able to achieve that goal, they will have to impose some penalties on me.

Yesterday, I was told by him that the company had made a decision of 20 % cuts of my basic annual salary in the next year’s contract, and if I would not agree to that offer, they would not renew the contract next year.

Is such a one-sided salary cut legitimate and legally allowable? How should I address such an unreasonable one-sided decision?

A.  In Principle: Agreement is not changeable without mutual consent.

An employment contract is literally a contract, meaning a right-and-duty relationship that has legal binding based on mutual agreement. Once enter into an agreement, both parties shall abide by this agreement and are imposed on a legal obligation to implement each duty. As for the employment agreement, an employer has an obligation to pay an agreed amount of salary and an employee has an obligation to offer services of labor expected in the contract. In principle, either of the parties does not allow to change terms and conditions unilaterally without the other party’s consent. Therefore, once the annual salary is fixed and concluded based on mutual agreement, an employer cannot reduce and cut the salary without an employee’s consent in the middle of the contracted period with exceptions such as disciplinary actions conducted in accordance with the company’s regulation.

Article 6, Labor Contract Law stipulates as follows.

Establishment of a Labor Contract(1)

Article 6  A labor contract is established by agreement between a Worker and an Employer on the basis that the Worker will work by being employed by the Employer and the Employer will pay wages for such work.

Article 8, Labor Contract Law stipulates as follows.

Change to the Contents of a Labor Contract

Article 8  A Worker and an Employer may, by agreement, change any working conditions that constitute the contents of a labor contract.

Meanwhile, some companies take one-sided wage cut measures regarding the next annual salary when they consider an employee does not implement to provide service and labor worth to agreed wage, or poor performance. Is such unilateral treatment without the worker’s consent legal or illegal?

Company’s rationale for wage cut treatment

Let’s take a look at the case of wage cuts based on the evaluation of workers’ performance and ability. Generally, the amount of annual salary is decided in accordance with an individual employee’s performance and ability. When a company evaluates the worker’s performance does not measure up to the company’s expectation, they reduce the salary for reason that a worker does not implement his/her duty of providing labor/service commensurating to an agreed level of salary.

Requirements justifying one-sided wage cut

However, as mentioned above, as the employment contract is established based on mutual agreement between employer and employee, an employer cannot change employment conditions including salary without the employee’s consent or its equivalent. In other words, employers must meet the following two requirements in order to take wage-cut treatment legitimately.

(1) Criteria and process of performance-achievement evaluation and wage determination should be institutionalized and published by ‘rules of employment’ (就業規則。しゅうぎょうきそく) to be integrated as parts of the employment contract.

(2) Performance evaluation and wage-decision must not be conducted against the mandatory provision of laws such as discriminatory treatment and abusing the power or the right.

Article 7, Labor Contract Law

Well, let us check requirement (1) related law.

Article 7, Labor Contract Law stipulates as follows.

Establishment of a Labor Contract(2)

Article 7  If a Worker and an Employer conclude a labor contract, and the Employer has informed the Worker of the rules of employment that provide for reasonable working conditions, the contents of the labor contract are to be based on the working conditions provided by such rules of employment; provided, however, that this does not apply to any portion of the labor contract in which the Worker and the Employer have agreed on working conditions that are different from the contents of the rules of employment, except in cases that fall under Article 12.

In short, it is required that transparency of wage decision criteria and the process is assured by being institutionalized and clarified by drawing up ‘ rule of employment ‘ including wage table in conjunction with each level of performance and performance evaluation standard and process and furthermore, process and criteria shall be fair and equitable.

Prohibition of abuse of rights and discriminatory treatment

Next, take a look at requirement (2) related laws and provisions

As you might know, Labor Standard Law and Labor Contract Law are both mandatory laws so that any other laws, regulations, and contracts which are against these laws shall be null and void. Especially, Labor Standard Law is positioned as Constitution in the labor and employment law field. Abusing rights and power and discriminatory treatments are absolutely against these mandatory laws and ineffective, namely void.

Equal Treatment

Article 3, Labor Standard Law

An employer must not use a worker’s nationality, creed, or social status as a basis for differential treatment with respect to wages, working hours, or other working conditions.

The Principle of Equal Wages for Men and Women

Article 4 Labor Standard Law

An employer must not use the fact that a worker is a woman as a basis for differential treatment in comparison to men with respect to wages.

Prohibition of abuse of rights

Article 3, item (5), Labor Contract Law

When exercising their rights under a labor contract, a Worker and an Employer must not abuse such rights.

What you should do when facing an unacceptable one-sided wage cut.

So, if you are told a one-sided salary cut decision from your company, what should you do?

Firstly, convey your objection and disagreement clearly to your company if you would not agree to wage reduction. You may think this advice to clarify your disapproval or disagreement of wage cuts to the company should be taken for granted. But in reality, many workers feel hesitation to make an objection against company’s decision even if it is obviously irrational. If you receive a reduced salary, your passive attitude might be considered as a tacit agreement of wage cut.

Secondly, ask your company to explain the objective and official criteria and process of performance evaluation and wage decision along with disclosure of rule of employment and wage-table which is said company’s rational of disadvantageous treatment for the worker. The company’s answer is desired to do in writing, but if they refuse it, you had better keep voice recording of their verbal explanation. You do not need to ask their permission for recording. An employer cannot refuse to answer and respond to questions or inquiries from an employee about employment terms and conditions. Documentation is a must for addressing the company’s unfair and unreasonable and discriminatory treatment and harassment. If your company tries to force you to sign the contract by threatening you, saying we would not renew the contract with you next year unless you agree to wage reduction, that’s the very abuse of rights which is illegal.

Promotion of Understanding of the Contents of a Labor Contract

Article 4 (1), Labor Contract Law

An Employer is to ensure that a Worker gains an in-depth understanding of the working conditions and the contents of the labor contract presented to the Worker.

(2) A Worker and an Employer are to confirm the contents of the labor contract (including matters concerning a fixed-term labor contract), whenever possible in writing.

Knowing law means protecting your rights.

That’s it. I would be happy if this blog could be helpful for you. Hasta luego!

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