Significant Changes to Japan's Labor Laws Will Take Effect in April 2019: Are You Prepared?

Japan is known as a country that prizes and exemplifies hard work.  While there are significant benefits to this worth ethic, excessive work habits create problems for the country as well.  Media attention to KAROSHI (death because of too much work) has helped to bring some of these challenges to the forefront of social and political discussion.  Furthermore, Japan is currently the most rapidly aging country in the world, resulting in critical shortages in the workforce necessary to maintain the economy, currently the third largest in the world.

In order to provide a solution to these challenges, Japan has shifted gears to reform its work habits and to reduce working hours so that everyone—including the elderly and others who were not able to work because of the lengthy hours expectations—can enter or remain in the workforce.    

The new “Work Style Reform Legislation” was passed in 2018 and makes significant revisions to Japan's labor laws.  Most of the amendments take effect in April 2019. Employers that have operations in Japan need to take immediate action to comply with the new requirements. 

Maximum Limit of Overtime Work

Currently, there is an administrative guideline that sets a limit on overtime hours.  Under the new law, however, there will be an express and mandatory maximum limits to overtime hours unless the job falls into one of the few exempt positions.1 This limit on overtime will become effective for large employers starting in April 2019, and for small employers starting in April 2020.2  Although the determination of what is a large and small employer is based on a number of factors, generally employers with 50 employees or fewer will be considered small employers.  The penalty for non-compliance with the new overtime rules may include imprisonment for up to six months or fines of up to 300,000 Yen. In fact, these penalties can be applied not only against the employer, but also against the person who is responsible for the business (e.g., country manager or HR manager who is responsible for the employees' working hours).

There are basically two separate rules on this point:

  1. Basic Limit Rule. Overtime work hours, which are working hours exceeding 8 hours per day or 40 hours per week, cannot exceed 45 hours per month and 360 hours per year (“Basic Limit”).
  1. Extended Limit Rule. When there are special circumstances, such as unexpected volume of customer complaints or sudden change of product specifications, the employer is allowed to extend the Basic Limit (“Extended Limit”). The total number of overtime work and work on statutory holidays (e.g., Sundays), however, cannot exceed 100 hours per month, and the average overtime hours cannot exceed 80 hours per month in the applicable second through sixth months after the rule takes effect3 for each employee, including both overtime work and work on statutory holidays. The number of months when the employee works over the Basic Limit cannot exceed six months in a year.  The yearly maximum Extended Limit hours for overtime work will be 720 hours.

These rules will be applied to non-exempt employees in Japan.  Importantly, the exempt category in Japan is very different from that in the United States and is generally a much narrower exemption.  Employers that misclassify non-exempt employees as exempt and require (or let) them work long hours without overtime will still be considered in violation of the new law, subjecting the company (and individual responsible for decision making) to potential penalties and fines.

Increased Overtime Rate for Small Employers

In April 2010, Japan’s wage laws were revised to increase the premium for overtime that exceeded 60 hours per month from 1.25 times the regular rate to 1.5 times the regular rate.  Small employers, however, were exempt from this amendment and could maintain a 1.25-times-the-regular-rate premium no matter how many overtime hours their employees worked. This exemption will be abolished and all employers—including small employers—will be required to pay a 1.5-times-the-regular-rate premium if the employee’s overtime exceeds 60 hours in a month. This change will become effective in April 2023.

Requirement to Take Annual Leave

Japan has a mandatory annual leave system.  Full-time employees are generally entitled to annual leave ranging from 10 to 20 days depending on the length of service with the employer. There is no mandatory sick leave, so employees will usually take annual leave when they get sick.

The challenge is that the rate of the annual leave taken is 51.1%; therefore, the new law will require employees to take at least five days of annual leave if they have more than 10 days of unused annual leave. In other words, if the employee has not taken five days of annual leave in a year, the employer needs to specify the days for annual leave so that the employee will actually take those days off. This requirement will become effective in April 2019.

Highly Skilled Professional Exemption

The most commonly used overtime exemption in Japan is the “manager” exemption.  The threshold to qualify as a manager is high, and managers are still entitled to receive the late-night allowance (i.e., premium pay for any work performed from 10 p.m. through 5 a.m.). In light of the tightened working hour laws, the new amendments created a new exemption:  highly-skilled professional. The advantage to this exemption, among other things, is that individuals who fall within this category are not only exempt from overtime but also from the late-night allowance.  This exemption was created as a compromise to address the business need to ensure that certain positions remain flexible in terms of hours and pay especially for highly compensated employees.  This exception faced significant pushback in the legislation process from groups opposed to such unfettered work, so the process required to prove that an individual falls within this exemption ended up quite complicated.

Though the scope of the test in detail is beyond this article, in short the tests to qualify as a highly-skilled professional include:

  • the position must require a high degree of expertise and the result of his/her work must not directly relate to the hours spent working on the product or service (e.g., developer of a financial instrument, financial dealer, analyst, consultant, R&D);
  • the job description should clearly identify the scope of work and the employee must specifically consent to the job description; and
  • the annual salary must be more than triple the average employee’s salary in Japan.  Currently, the threshold for exempt status is JYP 10,750,000/year (appx USD 98,000/year).

In order to roll out the new exemption, the employer needs to create a labor-management committee if it does not already have one.  The committee must pass a resolution for the exemption and register it at the labor office.  Each employee needs to consent to being classified as a highly-skilled professional and such consent can be withdrawn any time. This new rule takes effect on April 1, 2019.

Time Tracking Requirement for All Employees

Employers are currently required to track the working time of all non-exempt employees in Japan. With the new law, however, employers will be required to track working hours for all employees including exempt employees in order to protect each employee's health. This new law takes effect on April 1, 2019.

Equal Pay for Equal Work

In Japan, “Equal Pay For Equal Work” focuses on equal pay for equal work between regular employees who have open-ended term employment relationships (this is the standard type of employment in Japan) and irregular employees (such as part-time employees, limited-term employees and dispatched workers).  It does not generally refer to equality between men and women.

The amendments to the law clarify the prohibition on unjustified differences in compensation and benefits for limited-term employees or part-time employees as compared to regular employees. Whether it is unjustified will be determined based on the job description, the possibility for job transfer and the work location, among other things.  Employers are required to explain the reasons for any differences upon an employee’s request. For dispatched workers (employees sent from a staffing agency), the staffing agency has a new requirement under the new law to provide a certain level of compensation to dispatched workers or to conclude any labor-management agreement covering the new statutory items.. Most of the provisions of this amendment will become effective on April 1, 2020, but the equal pay for equal work requirement for part-time employees and limited-term employees will become effective for small employers on April 1, 2021.  

Protect the Employees’ Health

Currently, employers with at least 50 employees are required to appoint a company industrial doctor with whom the employees can consult about their health. The amendments to the labor law require the employer to provide necessary information to the industrial doctor in order to protect the health of the employee (e.g., the name of the employees who work overtime more than 80 hours per month and their working hours) and also requires employers to implement whatever the doctor advises with regard to the employee’s health (e.g., report the advice to the applicable internal committee or store the records).  Further, employers must post a mandatory poster at the workplace to notify employees of the industrial doctor's role. 

Employers will be required to arrange for the employee to see the medical doctor when certain exempt employees work more than 100 hours overtime, and an employee works more than 80 hours overtime in a month and requests to see a doctor. These amendments will become effective on April 1, 2019.

New Visa Category to Have More Blue Collar Workers  

In an effort to support the aging workforce, an amendment to the Immigration Act creates a new visa category for “Designated Skills,” which will allow so-called blue collar workers to work in Japan in industries where a workforce shortage is critical. The applicable industries would include elder care, building cleaning, materials industry, industrial machinery manufacturing, electronics-related industries, construction, shipbuilding, vehicle maintenance, aviation, hotels, agriculture, fishery, food and beverage manufacturing, and food service. This law will become effective April 1, 2019.

Action Items for Employers

Employers with operations in Japan should consider taking the following actions:4 

  • review the company’s Article 36 Agreement, which is a unique employment document that allows the employer to have employees work overtime. This document must be registered with the labor office;
  • review the company’s Rules of Employment (i.e., a document similar to the U.S. employee handbook, which states basic employment terms);
  • conduct training for HR personnel about the new laws;
  • conduct training for employees about how to work efficiently with fewer working hours;
  • conduct an audit to find misclassification risks for exempt employees;
  • implement a new time-tracking system that tracks working hours of all employees, including exempt employees;
  • review compensation and benefits to identify risks of discrimination to part-time, limited-term employees or dispatched workers; and
  • review current visa categories and identify the possibility of hiring more employees from outside of Japan under the new visa category.

See Footnotes

1 Exemptions include: (i) research and development of new technology, product or service; (ii) construction works; (iii) automobile drivers; (iv) medical doctors; and (v) sugar manufactures in Kagoshima and Okinawa.

2 Whether an employer is a “small employer” is determined based on the (i) type of the business; (ii) whether there is a subsidiary set up in Japan; (iii) the amount of capital; and (iv) the number of employees. In most cases, employers with fewer than 50 employees in Japan are going to be considered “small employers.”

3 This rule will take effect in April 2019 for large employers; however, the employers are exempt from this rule during the term of their existing Article 36 Agreement term. For example, if Employer X has an existing Article 36 Agreement from October 1, 2018 through September 30, 2019, October 1, 2019,which is the start of the next term, is when this rule will take effect for Employer X.

4 Littler provides a service package to help with compliance of these new laws. Please feel free to contact Aki Tanaka, Of Counsel, at Littler, for details.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.