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

Updated: Dec 8, 2021

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?


■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 S