Reducing Headcount in Corporate Japan
Langley Esquire President & CEO Timothy Langley was featured in the July 2019 issue of the ACCJ Journal in a publication focused on reducing headcount in Corporate Japan. Foreign companies frequently run afoul of best-practices in Japan, often resulting in irreparable brand damage and negative PR. In the worst case, it may lead to costly labor disputes and diminish your bottom line. As an advisor to companies on HR management issues, Langley provides his expert advice and insights into common pitfalls and how to avoid them.
Read the ACCJ Journal Article here or the extended interview and addendum below.
Q. What are some reasons that companies in Japan look to reduce headcount? Does this differ between Japanese-owned and foreign-owned companies?
The reasons why companies in Japan need to reduce headcount is the same for any other company in the world: it’s all driven by economics. However, there is a big difference here in Japan, as opposed to, for example, the United States, in reducing headcount because of the philosophy and culture (not codified in law) of lifelong employment.
This is a vestige of the recent past, but is deeply felt by employees. In other words, when an individual finishes college and joins a company, they do it with the intention of this being a one-time deal: joining a great company and remaining there for life.
Part of this foundation is based on the logistics of finding a job in Japan. In the United States, you don’t have Shukatsu. Shukatsu is a when soon-to-be graduating students go through a year-long process of visiting companies (dressing-up, wearing a blue suit, getting a briefcase that is not carrying anything but their résumé) to fish for the best possible job.
Companies are also looking for the best candidates that they can hire, and for some companies this is a huge deal because they might hire several hundred employees every year throughout the country. So, this is a big deal: it’s in the newspapers, magazines, it’s on people’s calendars, parents are looking forward to it, and when you make that important decision you have the intention to be there for the rest of your life.
When headcount is reduced after employees go through this process, it really is a social shock! People get damaged by this psychologically; their career and résumé gets damaged and as a consequence a lot of people say “This is not the gig we signed-up for.”
The situation is different for foreign companies because many foreign companies don’t go the Shukatsu route; they hire laterally, they pick-up employees from other companies who are doing other jobs, they hire recruiting firms and they pack their staff with people that are pretty good at what they do. Frequently, they will also send a representative from overseas.
The difference is in that foreign companies tend to move faster than Japanese companies when it comes to the decision-making process to reduce headcount.
Q. What are the biggest issues for business owners accustomed to operating overseas?
The most difficult problem for U.S. companies (with a branch or fully owned subsidiary) in Japan is the challenge of letting staff go when you don’t have a justified cause.
There are basically two types of employees in this country: one is a Keiyakushain (contractor) and the other is a Seishain (full-time employee).
Keiyakushain(契約社員) - Contract Employee
On one hand, you can hire a contractor on an ongoing, year-to-year contract with the expectation that it could be extended, but it is not necessarily guaranteed. Also, the terms and conditions of the contract fully describe their role. Finally, don’t forget that cutting contractors is determined by Contract Law, not the Labor Standard Act, as it is for full-time Employees.
Seishain (正社員) - Full-time Employee
The Seishain, on the other hand, is a kind of guaranteed employee where their status in the company will not drastically change, unless they screw up or are fired-for-cause. They are not necessarily employed under the terms and conditions that specifically define their job; as a permanent employee, they do whatever you tell them to do, and what they’re trained to do.
The biggest problem is if you have Seishain and you need to reduce headcount, you need to have cause or go through a voluntary resignation process.
There are generally 3 ways justifiable “cause” is created:
- A blatant violation of conduct, such as sexual harassment or embezzlement of company funds.
- Repeated incidences of inadequate performance. Usually, this takes more time and can sometimes requires a PIP (performance improvement plan) be put in place with ample notice and opportunities for measured improvement.
There are generally 2 ways to go about voluntary resignation:
- Universally offer employees a severance package, hoping that only the people you need to cut will take the Offer. The problem is that it is always the good people who take that Offer and leave to find another job. In this scenario, you may be left with a collection of the worst performers.
- Negotiate out.
The other complexity here is that when you are hiring laterally, people won’t leave the safety/security of a Seishain position for a Contractor position: all things being equal, it’s just not a good deal. Generally speaking, you have to offer the same terms and conditions of full-term employment at a higher pay-scale situation when you contract with them.
It can be an expensive operation to cut heads—employees will expect at least a couple months of severance and maybe some garden leave. Ideally, you can ease employees out and give them an opportunity to find another job. In situations where expediency is prioritized and large cuts need to be made, HR must be wary of critical missteps that can result in a lawsuit.
Usually, companies will force employees into a voluntary resignation. If negotiations go awry, intimidation tactics are frequently used. It is important for both employers and employees to know what they can and can’t do in these situations.
Q. What is not allowed in Japan that would be seen as normal in the U.S.?
In the US, pink slips are very common. In most jurisdictions in the United States, there is an ability for companies to cut staff at the drop of a hat: these are known as “at-will jurisdictions.” “At-will” means that you work for the company at their sole discretion and they can let you off for no reason with 30 days’ notice. This is usually delivered in the form of a “pink slip” when you walk into work on some Friday. This is not only viewed poorly from the Japanese perspective, but it is an illegal tactic here in Japan. Even with cause, pink-slipping is not the way to achieve that objective.
Q. How can foreign-owned companies deal with these differences in a manner that is, of course, legal and positive in terms of public and employee perception?
There are a couple of challenges that the foreign-owned companies are going to deal with in this regard. The reason why the foreign capital companies are here in Japan is to establish a presence quickly and begin to generate revenue. When they establish their presence in Japan, they usually have a very short time frame where they are expected to generate not only their own overhead, but also a profit. This window of opportunity is usually very short, so companies are typically faced with the dilemma of following the proper rules or taking shortcuts. In many cases, I see foreign companies opting for the latter and making critical errors in judgement that are detrimental in the long-run and can even backfire to cause significant delays and added costs.
Comparing Japanese companies to foreign ones is kind of unfair because their timing, revenue, access to capital, availability of suitable candidates for labor, and expectations are completely different. There is also admittedly usually a pejorative bias against foreign companies because any mistakes you make can be painted as a national characteristic of how the owners of the company were raised, and these perceptions stick for a long time. You can make a couple of bad mistakes and never recover from that kind of impression. Competitors can make sure the market doesn’t forget.
The key is having someone on your side who knows what they are doing and can guide you to the appropriate solutions to meet Japanese standards of conduct.
Q. What are the biggest pitfalls that managers must look out for?
The truth is, the list is endless, but:
If I had to narrow it down, it would be have to be this: as many companies are quick to boast, “people are our most important asset.” It is in fact a solid truism.
If this is accurate, then inescapably the biggest pitfall is in hiring, grooming, and training people for and within the organization. The first critical issue is finding and hiring the right kind of individual. If you are a foreign company, then generally speaking, the straight-edge Japanese kid that went to school and college is not going to be a good fit. They haven’t been trained, and don’t know what the business culture demands of them, so their utility is marginal. These employees may struggle with autonomy and need direction on specific tasks. On the other hand, they may have great utility based off the level of discipline and regimented training they are accustomed to. With the appropriate guidance and direction, they can also be an invaluable asset. The real rub is in tapping into this potential and integrating both work-styles into an efficient operation. Cross-cultural management capabilities need to be developed to prevent internal friction or struggles within the company. The internal challenges are those that hurt the most (and consume the most time!)
Q. What are the consequences of mishandling reductions in headcount in Japan?
There are many famous stories of foreign companies mishandling reductions in headcount. Their names are familiar to most people and to people who have been here long enough.
Reducing headcount and not doing it properly can collapse the company and destroy reputation. For example, if your analysts forecast that your revenue is going to take a dip and you don’t have enough to pay your overhead within the next 3 quarters, then you need to act fast and come up with an action plan.
There are justified reasons when you’re losing money to reduce headcount in a way that accommodates Japanese labor laws, but it is difficult and requires finesse. Even with competent legal oversight, it will take time and money. While shortcuts may appear to achieve the same objective, one critical misstep can cost YOU your job and livelihood. It is extremely easy for employees to sue employers based on a claim of power-harassment or lack of cause in light of a squeeze to reduce headcount. The amount of money spent on legal fees and employee payouts may far exceed what was initially hoped for.
Done right, a reduction in headcount can be done with confidence, seamlessly and expediently. Even for seasoned professionals, this is no easy task. Sometimes, all it takes is the right advice and counsel to guide you through difficult times.
Timothy Langley is the founder of Langley Esquire K.K. with over 30 years of experience in HR management and public affairs in Japan. Langley combines a comprehensive understanding of international & Japanese law with a unique perspective gained from working in and with the Japanese Government. Sitting on the board and acting as Representative Director to several multinational companies in Japan, he is frequently called upon to address crisis management and HR-related issues.
Read Timothy’s full bio here.