Severance Pay Calculation under Company Rules — Japan

In Japan, severance pay (退職金・退職手当) is generally not a statutory payment that every employer must provide merely because an employee leaves employment. Where a company has established a retirement/severance allowance system through its work rules (就業規則), retirement allowance regulations (退職金規程), employment contract, collective agreement, or an established practice, the rules governing eligibility and calculation can become legally important.

The central principle is: the amount should normally be calculated according to the applicable company rules in force at the relevant time, but a rule or amendment that substantially reduces an employee's accrued or expected retirement benefit can be legally challenged depending on the circumstances.

1. Typical structure of a Japanese severance calculation

A company rule may use a formula such as:

Severance Pay = Calculation Base × Service-Year Multiplier × Retirement-Reason Factor + Applicable Additions − Applicable Deductions

For example:

The company therefore cannot simply calculate severance using an informal formula that differs from the applicable retirement allowance rules.

2. Company rules are particularly important

Japanese employers commonly have a 退職金規程 (retirement allowance regulation) that supplements the work rules.

The regulation may specify:

• who qualifies;
• minimum service required;
• calculation base;
• service-year calculation;
• multiplier tables;
• voluntary resignation versus company-initiated retirement;
• retirement at mandatory age;
• dismissal;
• disciplinary dismissal;
• death;
• disability;
• treatment of transferred employees;
• treatment following mergers;
• pension versus lump-sum options;
• deductions;
• forfeiture or reduction provisions; and
• payment date.

A Japanese tax authority case concerning a corporate retirement-benefit system illustrates the typical structure: the company's rules calculated the basic retirement allowance by multiplying the monthly basic salary at retirement by a service-period coefficient, while separate rules dealt with pension or lump-sum benefits.

Thus, the first question in a severance dispute is usually not "what is the normal severance amount?" but "what rule governs this employee's severance entitlement?"

3. When does the company rule become binding?

Japanese law gives considerable significance to properly established work rules.

The Supreme Court's major Shuhō? — Supreme Court, 25 December 1968 doctrine established that work rules can have normative effect where they prescribe reasonable working conditions, subject to the legal requirements governing work rules.

The principle is particularly important for severance because retirement benefits can constitute an important employment condition.

The relevant doctrine has subsequently been applied to retirement allowance regulations as well. A retirement-pension regulation may form part of the framework governing employees' retirement benefits even where the detailed payment mechanism is contained in a separate regulation.

Practical consequence

If the company has a properly established and communicated retirement allowance regulation, HR should normally calculate the employee's benefit by applying that regulation rather than exercising unrestricted discretion.

4. Calculation base must be identified correctly

One of the most important disputes concerns what salary figure is used as the calculation base.

For example, a rule might provide:

Severance = retirement-date basic salary × applicable service coefficient.

But another rule may provide:

Severance = prescribed standard salary × service coefficient.

These formulas can produce substantially different results.

Example

Suppose:

• retirement-date basic salary = ¥500,000;
• service period = 20 years;
• applicable multiplier = 20.

Then:

¥500,000 × 20 = ¥10,000,000

If the applicable regulation instead defines the calculation base as 50% of basic salary:

¥250,000 × 20 = ¥5,000,000

The difference is ¥5 million.

Therefore, HR should not assume that "final salary" automatically means the employee's entire monthly remuneration.

5. Allowances do not automatically form part of the severance base

The company regulation should be examined to determine whether the calculation base includes:

• basic salary;
• position allowance;
• qualification allowance;
• housing allowance;
• family allowance;
• commuting allowance;
• overtime;
• bonuses;
• fixed allowances.

For example, if the regulation expressly defines basic salary (基本給) as the calculation base, commuting and overtime payments ordinarily cannot simply be added to the base because they are paid regularly.

Conversely, if the regulation defines the base as monthly remuneration, the result may be different.

The exact contractual and regulatory wording therefore matters.

6. Service period calculation

A second major component is length of service.

The regulation may prescribe:

• calendar-year calculation;
• completed-year calculation;
• months and days;
• rounding partial years upward;
• rounding partial years downward;
• treatment of unpaid leave;
• treatment of secondment;
• treatment of maternity/childcare leave;
• treatment of transfers;
• treatment after corporate mergers.

For example:

15 years 8 months

could be treated as:

• 15 years;
• 15.67 years; or
• 16 years,

depending on the applicable company rule.

A published Japanese retirement allowance regulation illustrates this type of drafting by expressly specifying how service begins and ends and how fractional amounts are rounded.

7. Retirement reason can affect the calculation

Company rules frequently distinguish between:

A. Mandatory retirement

Often attracts the normal retirement coefficient.

B. Company-initiated retirement

May receive a different or more favourable coefficient.

C. Voluntary resignation

May receive a lower coefficient.

D. Disciplinary dismissal

May trigger reduction or forfeiture if the rules contain a valid provision.

E. Death or disability

May be governed by special rules.

Such distinctions are not automatically unlawful. Japanese administrative guidance concerning retirement-benefit schemes recognises that different benefit rates according to retirement reason, occupation or position can exist, provided the differentiation is socially reasonable and the rules clearly establish the categories.

8. Severance rules cannot always be changed immediately before retirement

This is one of the most important issues in severance-pay calculations.

Suppose:

• employee has worked for 25 years;
• old rule would produce ¥15 million;
• employer changes the rule;
• new rule produces ¥8 million;
• employee retires shortly afterwards.

The company cannot automatically assume that the new calculation is legally effective merely because it formally amended the work rules.

Japanese case law applies the doctrine concerning unfavourable changes to work rules (就業規則の不利益変更).

Where the change substantially affects important employment conditions such as wages or retirement benefits, courts examine the necessity and reasonableness of the change.

9. Case Law 1 — Daiyon Bank Case

Supreme Court, 28 February 1997

Fourth Bank Case (第四銀行事件)

This is a leading authority on the reasonableness of changes to work rules.

The Supreme Court explained that the reasonableness of a work-rule amendment requires comprehensive consideration of matters including:

• degree of disadvantage suffered by employees;
• necessity for the employer;
• content of the amended rule;
• compensating measures;
• improvements to other employment conditions;
• negotiations with the union;
• responses of other employees; and
• general social circumstances.

Relevance to severance

Where an employer changes a retirement allowance formula, HR should therefore document:

1. why the change was necessary;
2. how much employees lose;
3. whether transitional protection exists;
4. whether alternative benefits are provided;
5. whether employee representatives were consulted; and
6. whether the new system is objectively reasonable.

10. Case Law 2 — Mikuni Hire Case

Supreme Court, 15 July 1983

御國ハイヤー事件

This case directly concerned a retirement allowance regulation.

The employer abolished the previous method under which service after a particular date contributed to the retirement allowance calculation. The employee consequently lost retirement-benefit accumulation for the later period.

The Supreme Court upheld the conclusion that the change was not reasonable because:

• it imposed a disadvantage on employees;
• no compensating employment condition was provided; and
• there were no special circumstances sufficient to justify the disadvantage.

The Ministry of Health, Labour and Welfare identifies this case as an example where an unfavourable unilateral change to a retirement allowance regulation was held ineffective.

Principle

A company cannot simply eliminate future severance accumulation without considering the legal requirements for changing an employment condition.

11. Case Law 3 — Ōmagari Agricultural Cooperative Case

Supreme Court, 25 November 1983

大曲市農業協同組合事件

The Supreme Court emphasised that where work-rule changes adversely affect important employment conditions such as wages or retirement benefits, particularly strong necessity and reasonable content are required.

The case is important because retirement benefits are treated as an important employment condition rather than an ordinary discretionary company benefit.

Application

If an employer changes:

salary × service coefficient

to:

50% salary × reduced service coefficient,

the company should expect close scrutiny if employees suffer a substantial reduction.

12. Case Law 4 — Asahi Fire & Marine Insurance Case

Supreme Court, 31 January 1994

朝日火災海上保険事件

This case concerned the basis used for calculating retirement benefits and the relationship between employee agreements, collective arrangements and retirement-benefit rules.

The dispute concerned whether particular salary increases should be included in the retirement-benefit calculation base.

The Supreme Court required examination of whether an agreement concerning the retirement-benefit calculation had actually become binding upon the employee.

Principle

A company cannot necessarily rely on an alleged informal understanding to reduce an employee's retirement-benefit calculation.

For HR purposes:

If a component of salary is excluded from the severance calculation, the exclusion should be clearly supported by the applicable regulation, agreement or other legally effective arrangement.

13. Case Law 5 — Sanko-sha Case

Supreme Court, 9 August 1977

三晃社事件

This is a leading case concerning reduction of retirement benefits following post-employment competition.

The company's retirement-benefit rules provided for reduced retirement benefits where an employee moved to a competing company contrary to the applicable restriction.

The Supreme Court accepted the validity of the reduction in the circumstances of the case, emphasising the mixed character of retirement benefits, including a reward-for-service element.

Principle

A retirement allowance rule can contain conditions affecting the amount payable, provided the condition is legally valid and sufficiently reasonable.

HR implication

If a company rule provides:

Normal retirement benefit = ¥10 million
Competitive-employment reduction = 50%

the company must examine whether the employee's circumstances fall within the actual wording of the rule and whether the reduction is legally permissible.

A company should not invent a reduction after the employee retires.

14. Case Law 6 — Credit Union Merger / Retirement Allowance Case

Supreme Court, 19 February 2016

退職金請求事件 — Supreme Court, Second Petty Bench

This case is particularly important for modern companies involved in M&A and restructuring.

Employees of one credit union were transferred to another credit union following a merger. The new organisation attempted to apply a new retirement-benefit standard.

The old system calculated retirement benefits using the employee's full basic salary, whereas the new system substantially altered the calculation base and capped the applicable multiplier.

The Supreme Court held that the lower court had not adequately assessed whether employees had actually consented to the disadvantageous change and remanded the case.

Principle

A signature on a document concerning changed employment conditions does not necessarily end the legal inquiry.

The circumstances surrounding the employee's alleged consent must be examined.

Relevance

This is especially important where:

• companies merge;
• employees transfer to another entity;
• old retirement rules are replaced;
• employees sign new employment documents;
• retirement benefits are recalculated under a group-wide policy.

15. Case Law 7 — 25 December 1968 Supreme Court Work-Rules Doctrine

Although not exclusively a severance case, the Supreme Court's 25 December 1968 Grand Bench judgment is fundamental to understanding why company retirement rules can have binding effect.

The doctrine recognises the normative effect of reasonable work rules governing employment conditions. Later authorities have repeatedly relied upon this principle in disputes involving retirement benefits and retirement-pension regulations.

Importance

A retirement allowance regulation should therefore be treated as a serious employment-condition document, not merely as an internal HR guideline.

16. How HR should calculate severance

A compliant calculation should follow this sequence.

Step 1 — Identify the governing document

Check:

1. employment contract;
2. work rules;
3. retirement allowance regulation;
4. collective agreement;
5. retirement pension regulation;
6. applicable individual agreement;
7. merger/transfer agreement, if applicable.

Step 2 — Determine eligibility

Confirm:

• employment status;
• minimum service;
• retirement reason;
• exclusion provisions;
• pension participation;
• special categories.

Step 3 — Determine the calculation date

Usually this will be linked to the employee's retirement/termination date, but the regulation controls.

Step 4 — Determine the calculation base

For example:

Basic salary at retirement = ¥600,000.

Step 5 — Determine service period

For example:

18 years 7 months.

Apply the company's prescribed rounding rule.

Step 6 — Determine the multiplier

Assume the applicable coefficient is:

18.5.

Step 7 — Calculate

¥600,000 × 18.5 = ¥11,100,000

Step 8 — Apply legitimate additions/deductions

For example:

• long-service addition;
• pension offset;
• legally applicable deduction;
• valid disciplinary reduction.

Step 9 — Check transitional provisions

If the company changed its retirement system during the employee's service, determine whether:

• old service is protected;
• new rules apply prospectively;
• transitional formula applies;
• employee consent was obtained;
• the work-rule amendment satisfies the reasonableness requirements.

Step 10 — Document the calculation

HR should retain:

• employee's service history;
• salary history;
• applicable rule version;
• retirement reason;
• coefficient table;
• calculation worksheet;
• transitional provisions;
• approvals;
• payment record.

17. Example calculation

Assume the company rule states:

Retirement benefit = Basic salary × service coefficient.

Employee:

• Basic salary: ¥550,000
• Service: 22 years
• Coefficient: 22.5
• Special long-service addition: ¥500,000

Calculation:

¥550,000 × 22.5 = ¥12,375,000

Add:

¥500,000

Total:

¥12,875,000

If the employee participates in a retirement pension scheme and the regulation requires an appropriate offset, the final lump-sum amount may be lower.

18. What happens when the company changes the formula?

Consider:

Old rule

¥600,000 × 25 = ¥15 million

New rule

¥300,000 × 20 = ¥6 million

The employee's potential benefit falls from ¥15 million to ¥6 million.

That is a 60% reduction.

Such a change raises substantially more serious legal issues than a minor administrative modification.

The relevant Japanese case law indicates that changes affecting retirement benefits must be assessed by considering the employee's disadvantage, employer necessity, reasonableness of the new system, compensatory measures, negotiations and surrounding circumstances.

19. Accrued benefit versus future benefit

A useful HR distinction is between:

A. Benefit already accrued

An employee may argue that a benefit accumulated under the previous rules has already become a protected entitlement.

B. Future accumulation

The employer may have greater scope to redesign future retirement benefits, but a substantial adverse change to employment conditions can still require examination under the work-rule change doctrine.

This distinction becomes particularly important when a company introduces:

• defined-contribution pensions;
• new retirement allowance schemes;
• salary-linked schemes;
• point-based systems;
• grade-based schemes;
• cash-balance plans.

20. M&A and employee transfers

Where an employee moves as part of:

• merger;
• acquisition;
• business transfer;
• corporate restructuring;
• group-company transfer,

HR should identify which entity's retirement-benefit rules apply.

The 2016 Supreme Court credit-union case demonstrates why this matters: the dispute involved employees whose retirement-benefit calculation changed following a merger, including changes to the calculation base and multiplier.

A transfer document should therefore clearly address:

• recognition of previous service;
• retirement-benefit service period;
• preservation of accrued benefits;
• applicable retirement regulation;
• pension assets;
• calculation basis;
• treatment upon eventual retirement.

21. Can severance be forfeited completely?

A company rule may contain provisions for reduction or non-payment in cases such as serious misconduct.

However, automatic 100% forfeiture should not be treated as a routine HR consequence.

The legal question can involve:

• wording of the retirement-benefit regulation;
• nature and seriousness of misconduct;
• employee's service history;
• relationship between misconduct and retirement benefit;
• whether the employee's conduct justifies reduction;
• whether the employer followed its own rules.

The Japanese case law concerning retirement benefits recognises that the benefit can have both a deferred-wage aspect and a service-reward aspect.

22. Key compliance rules for employers

For Japanese companies, HR should follow these principles:

1. Maintain a written retirement-benefit regulation.
2. Clearly define the calculation base.
3. Clearly define service-period calculation.
4. Define different retirement reasons.
5. Specify coefficients or calculation tables.
6. State treatment of partial years.
7. State pension/lump-sum interaction.
8. Clearly define any reduction or forfeiture provision.
9. Keep historical versions of the regulation.
10. Do not retrospectively manipulate the calculation.
11. Properly communicate amendments to employees.
12. Examine the reasonableness of substantial adverse amendments.
13. Preserve accrued/transitional benefits where required.
14. Obtain and document genuine employee agreement where relevant.
15. Apply the same formula consistently to similarly situated employees.
16. Maintain an auditable calculation record.

Conclusion

Under Japanese employment law, severance pay is primarily a rule-driven contractual/employment benefit rather than a universally fixed statutory amount. Where a company has a retirement allowance system, the calculation should begin with the applicable 退職金規程 and related work rules, followed by identification of the employee's salary base, service period, retirement reason and applicable multiplier.

The major cases show three particularly important principles:

• the company's retirement rules can have binding legal effect;
• substantial adverse changes to retirement-benefit rules require careful examination of necessity and reasonableness; and
• the employer must apply the applicable calculation provisions rather than exercise arbitrary discretion.

The Mikuni Hire, Ōmagari Agricultural Cooperative, Fourth Bank, Asahi Fire & Marine, Sanko-sha, and 2016 Credit Union Merger cases are especially useful when analysing disputes concerning calculation, reduction or alteration of severance benefits.

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