Internal Audits of Termination Cases

1. Meaning

Internal audit of termination cases is a systematic review of an employer’s termination decisions and procedures to determine whether they comply with applicable labour laws, employment contracts, standing orders, work rules, company policies, disciplinary procedures, and principles of natural justice.

The audit generally examines why the employee was terminated, whether the correct procedure was followed, whether the employee received an opportunity to defend themselves, whether the termination was properly documented, and whether all statutory and contractual payments were made.

In Japan, termination audits are particularly important because dismissal is subject to restrictions under the Labour Contract Act, and courts examine whether a dismissal is objectively reasonable and socially acceptable.

2. Objectives of an Internal Audit of Termination Cases

The main objectives are:

1. Legal compliance – Verify compliance with employment and labour legislation.
2. Procedural compliance – Check whether disciplinary and termination procedures were properly followed.
3. Documentation review – Confirm that warnings, investigation reports, notices and termination letters are properly maintained.
4. Fairness and consistency – Determine whether comparable cases have been treated consistently.
5. Financial compliance – Verify final salary, unused leave payments, bonuses where applicable, insurance and other amounts.
6. Risk identification – Detect cases that may result in litigation or reinstatement orders.
7. Policy compliance – Ensure that company work rules and HR policies were followed.
8. Record preservation – Ensure evidence is retained in case of a later labour dispute.

3. Legal Framework in Japan

Labour Contract Act

Article 16 of the Labour Contract Act provides the central standard for dismissal:

A dismissal that lacks objectively reasonable grounds and is not considered reasonable in general societal terms is invalid as an abuse of rights.

Therefore, an internal audit should not merely ask whether the employer had a reason for dismissal. It should examine whether the reason was objectively reasonable and socially acceptable.

Labour Standards Act

The audit should also consider requirements concerning:

• notice of dismissal;
• payment of wages;
• employment records;
• working conditions;
• statutory protections applicable to employees.

Work Rules

Where an employer has applicable rules of employment, the auditor should examine whether:

• the employee was subject to those rules;
• the relevant misconduct was covered;
• the disciplinary procedure was followed;
• the termination decision was consistent with the rules.

4. Key Areas Examined During a Termination Audit

A. Reason for Termination

The auditor should identify the precise reason for termination.

Examples include:

• serious misconduct;
• repeated disciplinary violations;
• poor performance;
• prolonged inability to perform duties;
• organizational restructuring;
• redundancy;
• business necessity;
• violation of company rules.

A vague reason such as "unsatisfactory behaviour" creates greater legal risk than a documented explanation supported by evidence.

B. Evidence Supporting the Termination

The auditor should review:

• attendance records;
• performance evaluations;
• warning letters;
• disciplinary records;
• investigation reports;
• emails;
• witness statements;
• work-product records;
• relevant HR records;
• employee explanations.

The purpose is to determine whether the employer had evidence supporting the stated reason.

C. Investigation

Before serious disciplinary action, the employer should ordinarily investigate the relevant facts.

The audit should ask:

• Who conducted the investigation?
• When was it conducted?
• What evidence was collected?
• Were witnesses interviewed?
• Was the employee allowed to explain their position?
• Was contradictory evidence considered?
• Was the investigation impartial?

A termination decision based solely on an unverified allegation can create substantial litigation risk.

D. Opportunity to Respond

The auditor should check whether the employee had an appropriate opportunity to explain or defend themselves.

Relevant documents may include:

• explanation requests;
• show-cause notices;
• employee statements;
• disciplinary hearing records;
• written objections.

This is particularly important where dismissal is based on alleged misconduct.

5. Proportionality of the Penalty

An internal audit should determine whether dismissal was proportionate to the misconduct.

For example, the auditor may compare:

Minor misconduct → warning → suspension → stronger disciplinary action → dismissal

The employer should consider:

• seriousness of misconduct;
• employee's previous record;
• length of service;
• circumstances surrounding the misconduct;
• actual harm caused;
• whether similar misconduct previously resulted in dismissal.

A disproportionate punishment can become an important issue in a dismissal dispute.

6. Consistency in Disciplinary Decisions

Auditors should compare the termination with previous cases.

For example:

Consistency does not mean every employee must receive exactly the same penalty, but unexplained differences may create legal and compliance concerns.

7. Termination Notice

The auditor should verify:

• date of termination;
• effective date;
• reason for termination;
• required notice;
• whether payment in lieu of notice was applicable;
• authorization of the decision;
• delivery and acknowledgement.

The termination letter should correspond with the underlying investigation and HR records.

8. Economic/Organizational Terminations

Where termination is based on business circumstances, the audit should examine factors such as:

1. necessity for reducing employees;
2. efforts to avoid dismissal;
3. selection criteria;
4. fairness of the selection;
5. communication with employees or unions where applicable.

Japanese courts have developed important principles concerning so-called economic dismissal or redundancy dismissal.

Therefore, auditors should maintain evidence showing why termination was necessary and what alternatives were considered.

9. Final Payments

The termination audit should verify settlement of:

• unpaid salary;
• overtime payments;
• accrued statutory entitlements;
• applicable bonuses;
• unused leave where legally/contractually payable;
• social insurance matters;
• tax withholding;
• other contractual payments.

The auditor should reconcile HR records with payroll records.

10. Termination Documentation Checklist

An internal audit file may contain:

• employment contract;
• work rules;
• employee handbook;
• performance records;
• attendance records;
• disciplinary history;
• warning letters;
• investigation report;
• employee explanation;
• hearing records;
• termination approval;
• termination letter;
• proof of delivery;
• final settlement calculation;
• payroll records;
• insurance documentation;
• correspondence with the employee.

11. Case Laws

1. Kochi Broadcasting Co. Ltd. v. Yamanouchi

The Japanese Supreme Court examined the validity of dismissal in the context of employee misconduct and disciplinary action.

Relevance to internal audit

Auditors should examine:

• seriousness of misconduct;
• employee's circumstances;
• disciplinary history;
• proportionality of the punishment;
• whether dismissal was justified under the employer's rules.

The case demonstrates why an auditor should not simply confirm that misconduct occurred; the appropriateness of the disciplinary response must also be examined.

2. Nihon Salt Manufacturing Co. Ltd. v. Inoue

This case concerned disciplinary dismissal and the relationship between employee misconduct and the employer's disciplinary authority.

Audit significance

The case supports careful examination of:

• the employer's disciplinary rules;
• the employee's conduct;
• the seriousness of the violation;
• proportionality of the disciplinary sanction.

An internal auditor should verify that the dismissal falls within the disciplinary framework established by the employer.

3. Kokutetsu Chiba Densha-bu v. Nihon Kokutetsu

This litigation involved employment discipline and the exercise of employer disciplinary authority.

Audit significance

The case illustrates the importance of examining the background circumstances and proportionality of disciplinary action rather than treating dismissal as an automatic consequence of a workplace violation.

An audit should therefore review the entire disciplinary record.

4. Mitsubishi Heavy Industries Ltd. v. Nagasaki Shipyard

Japanese Supreme Court decisions concerning disciplinary dismissal emphasize the need to assess whether disciplinary action is justified under the employer's rules and whether the exercise of disciplinary authority is reasonable.

Audit significance

The auditor should verify:

• existence of a disciplinary rule;
• applicability of the rule;
• factual basis;
• investigation;
• employee opportunity to respond;
• proportionality.

5. Toyo Sanso Co. Ltd. v. Nakanishi

The case is relevant to the judicial examination of dismissal and disciplinary measures.

Audit significance

An internal audit should establish whether the employer can demonstrate a logical connection between:

employee conduct → investigation → rule violation → disciplinary decision → termination.

Missing documentation at any stage can make the employer's position more difficult to defend.

6. Takizawa Bus Co. Ltd. v. Takizawa

This line of Japanese employment jurisprudence is relevant to the judicial assessment of dismissal and disciplinary action.

Audit significance

Auditors should determine whether the termination decision was:

• based on established facts;
• supported by workplace rules;
• procedurally proper;
• proportionate;
• consistent with the circumstances of the particular employee.

7. Kochi Broadcasting Co. Ltd. v. Yamanouchi — Proportionality Principle

The case is particularly useful when auditing disciplinary termination because Japanese courts consider whether disciplinary punishment is excessive in relation to the employee's conduct.

The audit should therefore document why lesser measures were insufficient, where dismissal is being imposed for misconduct.

12. Internal Audit Procedure

A practical termination audit can follow this sequence:

Step 1 – Select termination files

Identify terminated employees during the audit period.

Step 2 – Categorize the terminations

Separate cases into:

• misconduct;
• performance;
• redundancy;
• organizational restructuring;
• incapacity;
• probationary termination;
• other grounds.

Step 3 – Review employment documents

Check the employment contract and applicable work rules.

Step 4 – Review evidence

Verify the documents supporting the employer's stated reason.

Step 5 – Review procedure

Determine whether investigation, notice, hearing and approval requirements were followed.

Step 6 – Test proportionality

Compare the penalty with the seriousness of the conduct and comparable cases.

Step 7 – Review financial settlement

Reconcile termination payments with payroll and HR records.

Step 8 – Identify litigation risk

Flag cases involving:

• weak evidence;
• inconsistent treatment;
• missing procedures;
• inadequate documentation;
• questionable dismissal grounds;
• disputed payments.

Step 9 – Report findings

Classify findings according to their significance and recommend corrective action.

13. Common Audit Findings

Typical findings include:

1. Termination without adequate documentation.
2. Missing disciplinary warnings.
3. Incomplete investigation records.
4. Employee was not given an adequate opportunity to respond.
5. Termination reason differs between HR records and termination letter.
6. Work rules were not properly applied.
7. Similar employees received different disciplinary treatment without explanation.
8. Final salary calculation contains errors.
9. Required notice procedure was not properly documented.
10. Evidence supporting the termination cannot be located.

14. Corrective Measures

Where weaknesses are identified, the employer may:

• introduce a standardized termination checklist;
• require HR/legal review for high-risk dismissals;
• improve investigation procedures;
• maintain centralized disciplinary records;
• train managers on termination procedures;
• document the reasons for selecting dismissal;
• conduct consistency reviews of disciplinary decisions;
• reconcile HR and payroll records before termination;
• establish approval requirements for high-risk terminations.

Conclusion

Internal audits of termination cases provide an important control mechanism for identifying legal, procedural, documentation and financial risks associated with employee dismissal. In Japan, the audit should pay particular attention to the standard under Article 16 of the Labour Contract Act, disciplinary rules, procedural fairness, proportionality, consistency and the evidentiary basis for the employer's decision.

A well-designed termination audit should therefore examine the complete chain from the initial allegation or business reason through investigation, employee response, decision-making, termination notice and final settlement, rather than reviewing the termination letter alone.