Japan Business Law: Discretionary Labor System

The discretionary labor system is a way of working in which method, and time of the work performed is largely left up to the employee.
In Japan this system is often implemented in industries such as media, IT, and in R&D fields that require long periods of work.
However, there are various hurdles to setting up and operating a discretionary labor system in accordance with the law.
Let’s take a look at precautions to take when setting up this labor system, and the benefits that such a system has when properly implemented.

Benefits and Drawbacks of the Discretionary Labor System

Compared to regular working hour systems, the discretionary labor system does not calculate actual hours worked. Rather, it comprises a set number of hours agreed upon between the employer and the employee.

One benefit of this system is that the employees can work in a way that suits their lifestyle.
Salary is paid via the calculated de facto working hours, and it will not decrease even if the employee goes home early after finishing the required amount of work.
Furthermore, one significant benefit for the employer is a reduction in personnel costs and supervision, since there is no need to pay overtime if the two parties agree to working hours within eight hours a day.

In terms of drawbacks, one issue is that work hours are often unclear, leading to problems with overwork. For example, employers may impose long working hours without any concern for overtime, and may be unable to grasp the actual amount of hours worked.
Furthermore, since salary is paid according to de facto work hours, employers are not required to pay overtime even if the employee works more hours than were agreed upon.

Two Types of Discretionary Labor Systems

The discretionary labor system is only permitted for designated types of work, and is divided into two types: professional work and management-related work.
Professional work is limited to the 19 categories below.

(1) R&D for New Products/Technologies, Research in the Humanities and Natural Sciences
(2) Analysis and Design of Information Systems
(3) Media Coverage/Editing
(4) Design Work
(5) Production/Direction
(6) Copywriting
(7) System Consulting
(8) Interior Design
(9) Software Game Creation
(10) Stock Analysis
(11) Development of Financial Products Used in Financial Engineering
(12) Professorial Research at Universities
(13) Public Accounting Work
(14) Practicing Law
(15) First/Second Class Registered Architecture, Registered Architecture of Wooden Structures
(16) Real Estate Appraisal
(17) Patent Law
(18) Tax Accounting
(19) SME Consulting

To set up this system, a labor-management agreement outlining each work task and the required de facto work hours per day must be signed by the company and labor union (or a representative of the employee), and submitted to the Labor Standards Inspection Office.

On the other hand, management-related work comprises planning, design, surveys, and analysis. This includes important tasks such as drawing up plans and overseeing large company projects.
When introducing this system, a labor-management committee comprised of representatives from both parties will be established. This committee is required to submit their decisions to the Labor Standards Inspection Office.
Also note that, unlike the professional work type agreement, individual consent is required.

Overtime pay can still arise under the discretionary labor system

Even once the discretionary labor system has been set up, there are still instances when overtime pay may arise.
If the de facto work hours in the labor-management agreement are set at eight hours, additional time worked will incur overtime pay.
If the de facto work hours are set at 9 hours per day, extra wages will need to be paid for additional hours worked (more than 9 hours).
If 10 hours were worked under the 9-hour agreement, overtime will be paid for one hour.

In addition, if work took place overnight (10 p.m. to 5 a.m.), increased overnight pay (125% of hourly pay) must be paid, regardless of the discretionary labor system.
If employees are made to work on legal holidays, the employer is required to pay an increased holiday wage (135% of hourly pay).

While discretionary labor systems have been set up by numerous companies, there are likely many cases where its setup and implementation is not in accordance with the law.
To avoid unnecessary disputes with employees and protect the company’s image, follow appropriate, legally sound procedures when setting up this system.
After implementation, work to maintain proper operation of the system while periodically consulting with specialists.

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