Limits on Disciplinary Fines under Japanese Labour Law

In Japan, an employer cannot freely impose monetary penalties on an employee for misconduct. The principal statutory restriction is Article 91 of the Labour Standards Act (LSA), supplemented by the rules governing disciplinary action under Article 15 of the Labour Contract Act.

1. Meaning of disciplinary fine / wage reduction

A disciplinary fine generally means a reduction of wages as a disciplinary sanction for an employee's breach of workplace rules—for example, repeated unauthorized absence, serious misconduct, or violation of company rules.

Article 91 LSA specifically regulates this type of disciplinary wage reduction. The employer must also have an appropriate disciplinary provision in the applicable work rules.

2. Statutory monetary limits

Article 91 imposes two important ceilings:

A. Limit for one disciplinary incident

For one disciplinary matter, the deduction cannot exceed one-half of the employee's average daily wage.

Example:
If the employee's average daily wage is ¥12,000:

• Maximum deduction for one disciplinary matter = ¥6,000.

B. Overall limit during one wage-payment period

Even if there are several disciplinary matters during the same wage-payment period, the total disciplinary wage reduction cannot exceed 10% of the total wages payable for that period.

Thus, an employer cannot simply impose a 20% or 30% salary cut as a disciplinary punishment merely because the employment contract or company policy says so.

3. The 10% ceiling does not mean salary can always be cut by 10%

The statutory ceiling is a maximum, not an automatic entitlement.

The employer must first establish:

• a valid disciplinary ground;
• an applicable work-rule provision;
• conduct falling within that provision;
• a reasonable disciplinary response; and
• compliance with procedural requirements.

Under Article 15 of the Labour Contract Act, disciplinary action can be invalid where it lacks an objectively reasonable basis or is not socially acceptable in light of the employee's conduct and the surrounding circumstances.

4. Disciplinary reduction is different from ordinary wage adjustment

Article 91 applies to a sanction-based reduction of wages.

Therefore, an employer should distinguish between:

• disciplinary wage reduction;
• reduction because an employee did not work the relevant hours;
• lawful changes in remuneration under employment rules;
• performance-related pay decisions; and
• recovery of an employee's genuine debt or loss.

Calling something a "fine" or "salary adjustment" does not automatically avoid the statutory restrictions if its substance is a disciplinary wage penalty.

5. A contractual agreement cannot simply defeat Article 91

A particularly important Japanese labour-law decision held that Article 91 can apply even where the wage reduction was agreed in an individual employment contract, rather than being imposed through the work rules.

The court reasoned that allowing an employer to escape Article 91 merely by obtaining an agreement from an individual employee would undermine the protective purpose of the legislation. The portion exceeding 10% of wages for the relevant wage-payment period was held invalid.

Important Case Laws

1. Sanden Kotsu Case — Yamaguchi District Court, Shimonoseki Branch, 18 April 1983

The employee, a bus driver, was subjected to a wage reduction for alleged violation of workplace rules concerning possession/use of personal money during working hours.

The court examined the factual basis of the misconduct and the disciplinary procedure and ultimately rejected the employee's claim.

Principle: A disciplinary wage reduction must be connected to an established violation of an applicable workplace rule and must be examined in light of the surrounding facts.

2. Shin-Nippon Steel Muroran Works Case — Muroran Branch, Sapporo District Court, 14 March 1975

Employees were subjected to disciplinary measures following disruptive conduct at a company-sponsored event. The case concerned the effect of disciplinary action on wages and benefits.

The court explained that where an employee has already earned wages for work performed, withholding those wages as a disciplinary sanction can fall within the concept of a "wage reduction" under Article 91, depending on its substance.

Principle: An employer cannot necessarily avoid Article 91 simply by describing a disciplinary loss of wages as a different type of payment arrangement.

3. Manac Case — Hiroshima District Court, Fukuyama Branch, 9 December 1998

This case directly addressed the interpretation of the phrase "one time" under Article 91.

The court treated the statutory limit as applying to the disciplinary matter as a whole, rather than allowing an employer to multiply the maximum deduction by separately counting individual reasons within the same disciplinary proceeding.

Principle: The Article 91 ceiling cannot be circumvented by artificially dividing one disciplinary case into several deductions.

4. Shuto Expressway Public Corporation Case — Tokyo District Court, 22 May 1997

This is another case classified under Article 91 concerning disciplinary action and wage reduction.

It illustrates that courts examine not merely the employer's description of a disciplinary measure but its actual economic effect and legal character when determining whether Article 91 applies.

5. Fuji Kosan Case — Supreme Court, 10 October 2003

The Supreme Court considered disciplinary dismissal based on employment rules that had not properly been made known to the employee.

The Court held that:

• disciplinary categories and grounds must be established beforehand in work rules; and
• for work rules to have binding normative effect, procedures must have been taken to make them known to the workers concerned.

Relevance to disciplinary fines: Before imposing a monetary disciplinary sanction, an employer needs a valid and applicable disciplinary rule; an undisclosed rule cannot simply be used retrospectively to punish an employee.

6. National Railway Sapporo Branch Case — Supreme Court, 30 October 1979

This line of Supreme Court authority establishes the requirement that disciplinary categories and grounds must be established in advance in the applicable work rules.

It forms part of the legal foundation later reaffirmed in Fuji Kosan.

Principle: An employer's disciplinary power is not unlimited; the disciplinary basis must have an appropriate foundation in the employment rules.

7. Supreme Court disciplinary-proportionality jurisprudence

Japanese Supreme Court jurisprudence also applies a broader proportionality/abuse-of-disciplinary-power principle: disciplinary action can be unlawful when it lacks an objectively reasonable basis or is extremely unreasonable in light of generally accepted social standards.

This principle is particularly important where an employer imposes a severe financial penalty. Recent Supreme Court decisions continue to assess disciplinary sanctions by examining the nature, seriousness, repetition and circumstances of the misconduct.

6. Practical limits on employers

The Ministry of Health, Labour and Welfare itself explains Article 91 as limiting a disciplinary wage reduction to 50% of average daily wages for one occasion and 10% of total wages for one wage-payment period.

Conclusion

Under Japanese labour law, disciplinary fines through wage deductions are strictly controlled. The key numerical limits under Article 91 of the Labour Standards Act are:

One disciplinary matter → maximum ½ of average daily wage.

Multiple disciplinary matters in one pay period → aggregate reduction cannot exceed 10% of wages for that pay period.

In addition, the employer needs a proper disciplinary basis in the applicable work rules, must make those rules known to employees, and must ensure that the punishment is objectively reasonable and socially appropriate. The courts look at the substance of the deduction, so an employer cannot necessarily avoid Article 91 merely by giving the deduction another name.