Eriko Ogata Yuichi Miyashita Misae Shimizu July 13 2022 Labour compliance considerations regarding human capital management practices Nagashima Ohno & Tsunematsu | Employment & Immigration - Japan Eriko Ogata, Yuichi Miyashita, Misae Shimizu Employment & Immigration IntroductionHuman capital managementRelationship between human capital management and capital markets/labour complianceCapital markets considerationsLabour compliance considerationsCommentIntroductionOn 13 May 2022, the Ito Review 2.0 on Human Capital (the report) was published by the Study Group towards Achieving Human Capital Management – an entity that the Ministry of Economy, Trade and Industry established in 2021. Against the background of the Kishida Cabinet's "new form of capitalism", the report is expected to spur the expansion of human capital management. Implementing human capital management requires the consideration of various perspectives, including the legal perspective.This article provides an overview of capital markets and labour compliance considerations regarding human capital management practices.Human capital management According to human capital management, human capital is considered a form of "capital" and, therefore, optimising its value can enhance corporate value in the medium and long term. When implementing such human capital management, a key issue is putting human capital strategies into practice so that they correspond with business management strategies. The recent report presents a framework of "three perspectives" and "five common factors" to devise human capital strategies. It also introduces key considerations, innovations and practical examples of companies that have introduced advanced human capital strategies.The three perspectives are as follows:Establish a link between business management strategies and human capital strategies.Carry out quantitative assessment of as-is and to-be gaps.Entrench these strategies in the corporation's culture.The five common factors are:dynamic human capital portfolios;diversity and inclusion of knowledge and experience;reskilling and relearning initiatives;employee engagement; andwork styles that are not constrained by time or place.Relationship between human capital management and capital markets/labour compliancePublic disclosure of human capital information to investors is crucial to facilitate human capital management. When disclosing human capital information, companies need to examine the legal risks associated with capital markets practice.In addition, where human capital management can cause a dynamic shift away from traditional labour management, the existing labour compliance procedures should be examined as a basis for devising new human capital strategies.Capital markets considerationsWith regard to the disclosure of human capital information, the below covers disclosure standards and the framework for disclosing such information to investors, as well as the importance of risk factor disclosure.Disclosure standards and frameworkIn preparing disclosure information for investors regarding human capital information, it is first necessary to understand the relevant disclosure standards and framework. Various disclosure standards and frameworks are currently being discussed and formulated at both domestic and international levels.On 13 June 2022, the Financial System Council's Disclosure Working Group (part of the Financial Services Agency) announced proposed revisions to the disclosure standards for annual securities reports under the Financial Instruments and Exchange Act to include, among other things, human capital and diversity-related information. Specifically, the report proposes that sustainability matters, including human capital and diversity-related information, should be disclosed under a framework that comprises:governance;strategies;risk management; andmetrics and targets.In addition, the Study Group on the Visualisation of Non-Financial Information, which was established by the Kishida Cabinet Secretariat, is formulating guidelines for non-financial information, particularly human capital information. More details are expected in the near future.Importance of disclosing risk factorsFrom the legal perspective of capital markets, it is important to enhance risk factor disclosure, particularly in relation to the specific disclosure of human capital strategies and metrics. Human capital management has the potential to drastically change the way companies have approached human capital to date, and it is expected that more companies will increasingly formulate and disclose advanced and creative human capital strategies. It is also expected that more companies will actively disclose future targets for key performance indicators and other metrics that are linked to human capital strategies.Envisaging human capital targets entails significant risks, as human capital strategies and targets are forward-looking information and companies that disclose such information may not be able to successfully implement such strategies or achieve their related targets. Therefore, it is important that the relevant challenges and uncertainties that may be faced while implementing these strategies are also disclosed as risk factors.The disclosure of risk factors to investors plays an essential role in protecting companies against liability to the investors if the companies do not successfully implement the strategies or achieve their targets. Disclosure in this regard enables companies to prove that they warned investors of the risks involved and that these were taken into consideration in the investment decision-making. Therefore, the enhancement of the disclosure of risk factors described above is also a key issue in disclosing human capital management.Labour compliance considerationsGiven the potential to revolutionise conventional human capital management, it is also crucial to examine labour compliance. Companies are expected to develop advanced and unique human capital strategies based on the characteristics of their business, corporate culture and vision of the future. In developing and implementing human capital strategies, however, it is vital to focus not only on the expected benefits of these measures but also to carefully consider whether the new human capital strategies will impose unexpected obligations or risks to the company in terms of labour compliance. Preparations, therefore, need to be made to implement the new strategies. Below is an overview of key considerations for labour compliance when implementing these strategies.Shift from membership-based employment to job-based employment"Dynamic human capital portfolios" is one of the five common factors that was presented in the report. It presents the following perspectives:considering a strategy on securing human capital that will lead to achieving business strategies;reviewing compensation and conducting performance evaluations to attract the best talent;disclosing student recruitment and selection strategies; andactively recruiting doctorate degree-holders and other specialists.Under membership-based employment, which is common for regular employees who are expected to be employed for a long period in Japan, employees are not hired to meet the specific requirements of a role, as they are expected to be exposed to a number of different functions and workplaces during that time. In contrast, in European countries and the United States, job-based employment, which involves hiring personnel with skills and experience suited to the job requirements, is more widespread. Recently, some Japanese companies have been considering shifting from membership-based employment to job-based employment in the hopes of attracting and acquiring highly specialised and skilled employees, as well as enhancing employee engagement.However, when considering such a shift, it is also necessary to take into account the characteristics of employment regulations under Japanese law. Compared with European countries and the United States, Japan tends to have stricter regulations on dismissal by employers. For example, a dismissal that lacks objectively reasonable grounds and is not considered appropriate under socially accepted norms is deemed to be null and void, as it is an abuse of the right to dismiss under article 16 of the Labour Contract Act. Job-based employment generally involves employing talent with a high level of relevant expertise and skill. Therefore, if it is found that the employee lacks the experience or skills required for employment, dismissal should be permissible more broadly, compared to membership-type employment, even under the doctrine of abuse of the right to dismiss. However, the courts still take a strict approach when reviewing dismissals.In addition, a certain degree of consideration is necessary in relation to the employer's right to order the transfer of employees (ie, authority to change the employee's job, duties or place of work). In Japan, while dismissal is restricted, an employer's right to order the transfer of employees is widely recognised. In general, the company's shugyoukisoku (work rules) and employment contracts contain provisions that provide that "a transfer may be ordered if there is a business necessity". Based on such provisions, the employer may order a transfer without individual consent from the employee, unless a limit to their duties or place of work has been agreed. Even in the case of job-based employment, an employer may have the right to order a job transfer and implement a transfer based on this right.Conversely, it is not uncommon in cases of job-based employment for an employee to demonstrate enthusiasm for engaging in the work as set out in the job description and, on that basis, arguing that they are protected by the limitations of their duties if their employer attempts to alter their role or position in the company.Job-based employment does not necessarily mean that the job or duties are limited to those set out in the job description. An employer's right to transfer employment depends on the provisions of their work rules and individual employment contracts. Given the risk of disputes or litigation that this entails, it is advisable for all companies to review the provisions of their work rules and employment contracts in order to avoid disputes and explain to employees that the employer has a right to order the transfer of employees even in cases of job-based employment at the time of hiring.Strengthening remote work regimesThe covid-19 pandemic has made remote work the new normal in Japan. Remote work has many benefits, such as alleviating the burdens associated with commuting and allowing employees to balance work and childcare and/or caregiving. Initiatives to promote work styles that are not constrained by time or place by individual companies are expected to strengthen the competitiveness of individual companies, including acquiring and retaining talent. Conversely, in the case of remote work, since employees are not in the office, or even physically close to their employers, companies will need to:monitor and manage working hours;issue work instructions;manage employee health; anddevise methods that are different from those used in the normal office setting.If an employer does not appropriately monitor and manage employees' working hours, employers may face unexpected claims for overtime allowances or claims that employees are suffering from mental illness due to long working hours. This could give rise to litigation and work-related illness or injury claims. Therefore, when introducing working styles that are not constrained by time or place of employees, companies need to check whether the relevant rules are in place and whether these are being appropriately implemented.Promoting employees' secondary job and dual employment provisionsAs an example of initiatives that can enhance employee engagement, the report also cites the "promotion of diverse working styles, such as secondary jobs and dual employment". Although strengthening these employment pathways is drawing attention as an initiative to enhance employee engagement, it should be noted that companies will need to observe certain obligations associated with allowing secondary jobs and dual employment.For example, when employees work at multiple places for different employers, an employer must manage their total number of working hours (article 38(1) of the Labour Standards Act). This means that an employer who has hired a worker who has a second job is, in principle, also required to manage their working hours at the other company, based on a report from the worker (ie, the working hours of the secondary job work and/or the dual employment also affect the calculation of overtime working hours). When promoting employees' secondary jobs and dual employment, employers must develop the necessary rules regarding such working styles in their work rules and implement systems that facilitate obtaining information on other employment, including the nature of such work and the working hours.CommentThe recent report on human capital is expected to accelerate the adoption of advanced human capital management strategies. In order to enhance corporate value over the medium to long term, companies should adopt human capital strategies that are linked to their business management strategies and devise ways to disclose them to investors. In formulating and implementing human capital strategies, it is also important to review and prepare them for labour compliance.For further information on this topic please contact Eriko Ogata, Yuichi Miyashita or Misae Shimizu at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or email ([email protected], y[email protected] or [email protected]). The Nagashima Ohno & Tsunematsu website can be accessed at www.noandt.com.