Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Labour & Employment volume featuring discussion and analysis of legal developments, the enforcement of restrictive covenants and political debates about employment within key jurisdictions worldwide.

1 What are the most important new developments in your jurisdiction over the past year in employment law?

The most important new developments in Japan over the past year are the implementation of parts of the work-style reform laws – a set of major amendments to Japanese employment laws.

The work-style reform laws were passed in June 2018 and amended different key employment laws. The changes are meant to make Japanese employment laws more flexible while also providing a better work–life balance to employees. Some of the changes became effective from 1 April 2019 while others will come into effect over the next few years. Small and medium-sized companies have been given a grace period of a year – or more, with respect to some of the changes that became effective for larger companies from this year.

Some of the most important changes deal with overtime issues. In Japan, in order to have any employees work overtime or on holidays, a labour–management agreement needs to be executed regardless of the number of employees. The agreement is often referred to as a ‘36 Agreement’ as the requirement is set out in article 36 of the Labor Standards Act. The 36 Agreement sets out, among other things, which employees can be required to work overtime or on holidays and the maximum number of overtime hours per day, month and year the company can require the employees to work. The default basic maximum number of overtime hours that an employer can require an employee to work are for most employers set at 45 hours during any given month and 360 hours in total per year. However, employers could include a special clause in the 36 Agreement to substantially increase these hours for ‘extraordinary’ circumstances for up to six months in a year. In fact, there had been no statutory cap for the number of overtime hours that could be set for extraordinary circumstances. Under the new amendments, the basic maximum number of overtime hours remains 45 hours per month and 360 hours per year, but the 36 Agreement can no longer set unlimited hours.

Now, even if an employer includes an extraordinary circumstances clause in the 36 Agreement, the employer cannot require employees to work in excess of:

  • 100 hours of overtime or holiday work in a given month;
  • more than 80 hours or more of overtime or holiday work on average for any two-to-six months period; or
  • more than 720 hours of overtime work in a year

Violations of these requirements are punishable by imprisonment for up to six months or a fine of ¥300,000 or less. The government and labour authorities have started to more actively and closely look into employers’ overtime-related practices.

An issue related to overtime that many employers have struggled with for years is exempted employee classifications. Japan has the concept of ‘exempt managers’. These are management-level employees who do not receive overtime allowances or holiday work allowances (although they do receive the late night work allowance for work done between 10pm and 5am). The exempt manager classification in Japan is very fact-driven and has been construed strictly in Japan. Generally speaking, exempt managers should:

  • have significant decision-making duties, responsibilities and authority with respect to the business and personnel management (eg, business strategies, budgeting and hiring and firing of team members);
  • have discretion with setting their own working hours because their duties and obligations would not fit well with a rigid set working time; and
  • be paid more than non-exempted managers, including when overtime allowances are figured into the non-managers’ salaries.

It would also be common, while not required, for an exempt manager to have direct reports on their team.

Many multinational employers in Japan have very highly paid employees who work relatively independently but who do not necessarily fall under the definition of an exempt manager. While there are some other potential classifications for systems functionary or consequently similar to exemptions that could apply, like discretionary workers for certain experts whose working hours are deemed as a certain fixed hours regardless of their actual working hours, these categories are also fact-driven, often grey and not easily applied to some white-collar employees. The work-style reform laws created a new ‘highly skilled professional’ category of exempt employee, under which subject employees will be exempted from all of overtime, holiday and late night work allowances.

While this new category of worker sounds good, its efficacy and usefulness for employers is as of now questionable, as this new exemption now has multiple requirements unfriendly to employers due to political discussions in the National Diet when the law was deliberated. First, there are many requirements that must be met, such as creating a labour–management committee, which must pass a resolution on the matter, and the employee must be paid at least ¥10,750,000 per year and informed consent to classification is required. Further, the employee must also be free to withdraw the consent at any time. The scope of jobs that can fall under this category is very limited to a few types of professionals (eg, certain consultants, fund managers, R&D employees) at the moment. Management of employees’ working hours efficiently taking into account all available treatment and arrangements under the law and maintenance of appropriate employee classifications become much more critical for employers.

2 What upcoming legislation or regulation do you anticipate will have a significant impact on employment law in your jurisdiction?

Legal protections to independent contractors in Japan have been deliberated by the Japanese government since 2017. On 28 June 2019, the Ministry of Health, Labor and Welfare issued an interim report regarding the discussion (the Interim Report). While the discussion is still ongoing, there will likely be some new regulations or guidelines with respect to independent contractors in the near future, though at this moment it is difficult to predict when such new regulations or guidelines will be created, become effective and what contents thereof will be.

Independent contractors are not classified as employees and are unable to enjoy any protections under Japanese employment law. For example, they are not subject to salary and overtime regulations, holiday and leave regulations, employment termination regulations, governmental social insurance schemes in which employees can participate, and other protections and benefits applicable to employees in Japan. Since it is extremely difficult to justify unilateral terminations of employment relationships in Japan, whether an employee or independent contractor is fundamentally different both for employers and employees compared to the situations in some other jurisdictions. Because of the situation where the number of independent contractors are increasing and the fact that independent contractors are not protected by employee-friendly Japanese employment law, the government treats the matter of how to regulate and protect independent contractors as a very important and urgent task.

As per the Interim Report, the government does not plan to change the definition of ‘employee’, at least for now, by expanding the same to cover independent contractors for the purpose of Japanese employment law protections. However, the Interim Report suggests that, especially with respect to independent contractors whose working style is similar to employees while appropriately classified as independent contractors under the Japanese employment law (eg, working full-time, working almost exclusively for one client company), the following matters should be addressed as matters of urgency.

  • Clarifying rules regarding execution of, amendments to and termination of independent contractor agreements.
  • Requirement to specify some terms and conditions of independent contractor agreements.
  • Ensuring that payments of fees are made and appropriateness of fee amounts.
  • Working conditions.
  • Consultation services to independent contractors when a dispute happens.
  • Treatment of harassment against independent contractors from client companies.
  • Support to work-related injuries or accidents.

These potential new regulations or guidelines, when implemented, could be burdensome and we should keep in mind that independent contractors would likely be not ‘regulations free’ in the near future when creating personnel planning. It is necessary to continue to monitor the discussion regarding protections to independent contractors. Furthermore, this discussion could make employee classification issues more active when the potential regulations or guidelines are created. The classification of whether an employee or independent contractor is very fact-driven in Japan and more complicated than at least some other jurisdictions. A company that is currently using or plans to use an independent contractor in Japan should review and reconfirm that their classification of an independent contractor is appropriate to mitigate associated legal and reputational risks before the independent contractor protection becomes more in the spotlight.

3 How has the #MeToo movement impacted the investigation or settlement of harassment or discrimination claims in your jurisdiction?

The #MeToo movement has been somewhat slow to develop in Japan and is not a big social movement yet. There has been some reporting of the movement in the mass media, but not as much as in some other countries.

That being said, we are seeing employees becoming more proactive in asserting their rights over the past several years, including with respect to raising sexual harassment claims. In the past, some offices had cultures that looked the other way when sexual harassment occurred or a sexual harassment complaint was made. That has changed over the past couple of years in Japan. Employers are now taking claims of sexual harassment more seriously. Now when sexual harassment claims are made, investigations tend to be rigorous. Disciplinary action has also increased with respect to severity, especially with respect to foreign employers.

Taking detrimental action against employees in Japan can be difficult due to how protective the laws and courts are with respect to employees. However, the #MeToo movement in the United States and other countries has caused some employers who are subsidiaries of foreign companies to take a much stricter view of harassment. They are much more likely to consider terminating an employee and take the risk of a claim than they were in the past.

The victims of sexual harassment obviously need to see corrective steps taken. If the harasser is not terminated, the victim could circulate emails to the Japan management team or headquarters as taking legal action against the company. The difficulty in Japan is that while foreign-headquartered companies’ policies and practices have become much stricter and, generally speaking, victims’ mindsets have also changed, the law and courts have not yet caught up with these changes. Foreign companies could endeavour to persuade harassers to leave the company and negotiate severance with them rather than unilaterally terminating, as the termination may not be justifiable if they want to avoid legal disputes with harassers. Further, companies would need to be very careful with victims in managing their resentment and expectations with the company’s remedial steps.

To justify the company’s remedial actions and to protect the company from victims, and even from harassers, the criticalness of harassment investigations has been increasing. Carefully and sufficiently interviewing relevant employees and creating appropriate records of the interviews is key. It is recommended to prepare appropriate summaries of interviews and ask interviewees to sign. While giving up terminating a harasser, companies should take appropriate steps to address a victim’s concerns, which could include taking a disciplinary action against the harasser, physically moving the harasser from the victim in the office and changing reporting lines in order to limit the contact between the harasser and the victim. In most instances, the complaints are settled through these types of measures by the company. It is not common for an employer to pay compensation to a victim of harassment outside of a court case being brought.

Hopefully, the #MeToo movement will have a positive impact in Japan and the legal environments will catch up with other jurisdictions where the movement is more developed.

4 What are the key factors for companies to consider regarding the enforcement of restrictive covenants against departing employees?

When we are talking about restrictive covenants in Japan, we are usually referring to non-compete obligations and non-solicitation (of employees and customers) obligations. Non-solicitation of customers is a variant of the non-compete.

The key factors that companies need to consider with respect to the enforcement of non-compete obligations in Japan is that limiting the restriction and making it as narrow as possible is important. Japanese employees have a constitutional right to choose their employment. Non-compete obligations squarely impact this right. When considering whether a non-complete provision is enforceable, courts in Japan consider issues that are considered in many other countries. Namely, whether the non-compete provision is narrowly tailored in duration, the geographic scope and the restricted positions and duties in a new employer so that it protects the company without being unreasonably onerous on the employee. Provisions that include a geographic scope as large as ‘in every country the company does business’ or similar language would likely be too broad to be enforceable. Likewise, a provision that is longer than a year runs the risk of being unreasonably long, although non-competes as long as two years can be upheld as enforceable in courts. While not required, compensating an employee for agreeing to the non-compete agreement will bolster its enforceability. If the non-compete obligation is critical to protect the company’s business, a company should consider providing compensation to the employee in recognition of the non-compete obligation to make it more likely to be enforced. This consideration could be a lump-sum payment or multiple instalments during the non-compete period. However, the amount of such compensation depends on the situation and there is no well-accepted practice in this regard.

Non-solicitation clauses are also not well upheld by courts in Japan. Courts are not very likely to enforce a non-solicitation provision unless the former employee has engaged in some sort of deceptive or unfair behaviour during the solicitation. For example, if a former employee told his or her former colleagues that there were rumours that the company they work for is going to be filing for bankruptcy so they should leave and join the employee at the new company, it could be found to be a violation of a non-solicitation provision.

An overarching concern that an employer needs to keep in mind when considering whether to try to enforce a restrictive covenant is that there is virtually no discovery in Japan. Finding evidence, especially with respect to non-solicitation issues, can be very difficult unless there is a cooperating witness that provides information to the company.

All that being said, restrictive covenants can be helpful in Japan for two reasons. First, employees tend to honour them even if they may not be enforced. Most employees in Japan take their employment contract seriously and do not want to be seen as breaching their agreement. In this light, it is useful to provide in the work rules and employment agreement that an employee will lose part or all of his or her retirement allowance if he or she breaches – although this is generally difficult to enforce. Second, many potential employers do not want the difficulties that come with threats from former employers, or their attorneys, related to hiring an employee, or bringing over teams after hiring an employee, if the new hire is subject to restrictive covenants in their employment agreement. The new employer knows that it is always possible that the former employer will come to find that they have hired the new employee. It is not unusual in such a case for the former employer to send a cease and desist letter to the new employer demanding that they not utilise the employee for the remainder of the restraint period. While these letters may often be toothless, they cannot be easily ignored and subsidiary companies may have to involve their headquarters to have the situation resolved, which a subsidiary entity in Japan would want to avoid.

5 In which industry sectors has employment law been a hot topic recently? Why?

Sectors that have seen a lot of issues over the past year are the tech industry and the service industry, though for very different reasons.

We are seeing tech companies try to provide very innovative benefits and working conditions for employees in order to try to attract the very best candidates, which may not work very well in Japan. Employers are rolling out extended paid leave benefits for new parents, offering ‘unlimited’ annual leave or very flexible working hours or indefinite working from home (or anywhere) rights. While all of these rights are intended to be beneficial and attractive to employees, they can lead to some difficulties for employers in Japan.

As was mentioned in previous questions, employees in Japan are very well protected so once these rights are granted, it may be very difficult to rescind or negatively modify them. Also, if the right is granted to an employee and they avail themselves to it, it may be difficult to discipline the employee if they are abusing the right or being less productive while utilising the right. For example, if an employer granted unlimited annual leave and an employee took it to the extreme by taking a month off, the employer could be hard-pressed to take disciplinary action or negative personnel action against the employee for failing to meet expectations during that month.

Paid leave for caring for family members or to welcome a new child could be expensive for employers in Japan, more so than in some other countries, if the company implements a system created in other jurisdictions. In other countries, as we understand from what we see in the market, employers can basically top-up any amounts employees receive from insurance benefits so that the employee receives 100 per cent of their salary while on leave but allowing the employer to offset their cost by the amount the employee receives from insurance. In Japan, the insurance schemes will basically decrease what they pay to the employee by the amount the employee receives from the insurer. Therefore, the only practical way to ensure the employee receives 100 per cent of their salary is to simply pay the full salary while they are on leave.

The service industry has been also a hot topic because some very large employers are notable for trying to limit all benefits to the bare statutory minimums. Such employers tend to take very aggressive positions with respect to things like employee classifications, as exempt employees or other measures to try to avoid high employee costs. This has led to several cases over the past couple of years of employers agreeing to settlements for unpaid benefits (mostly overtime pay) that have been in the tens of millions of dollars.

6 What are the key political debates about employment currently playing out in your jurisdiction? What effects are they having?

Among other discussions taking place, one major recent key political employment­-related debate regards addressing power harassment. Previously, there had been no particular statute specifically providing power harassment in Japan and it had been treated as a tort under the Civil Code. A new law addressing power harassment is one consequence of such a political debate and as power harassment is one of the major employment-related matters as of now, there could be further developments in the near future.

In May 2019, the new law regulating power harassment passed the National Diet. The new law provides that the definition of power harassment, which is the first statutory definition of the power harassment, is essentially any behaviour where a person abuses his or her superior position in the workplace beyond the appropriate scope of business, to cause the deterioration of the work environment. The law also provides that employers are required to establish internal systems to address power harassment complaints and to take other personnel management measures necessary to address power harassment. Details will be provided in ministerial guidelines shortly. The new law will be effective from June 2020 (April 2022 for small to medium-sized companies).

According to the statistics of the Labor Bureaus, more than a quarter of all consultations from workers concerned power harassment in 2018 and the number of incidents of power harassment has been constantly increasing. Like sexual harassment discussed in question 3, recently employees have become more proactive in claiming power harassment. With possible increase of awareness of employees’ rights on this, we expect that the number of power harassment claims will further increase.

One possible consequence, which is also a cause of headaches for employers, is that low performers or problematic employees will further take advantage of power harassment claims. This trend has already started and it is one of the typical defences or allegations from difficult employees to claim power harassment when the company points out their performance issues, takes any negative actions to employees or does not accommodate what was requested by employees. This is because whether a subject action is power harassment or legitimate employers’ personnel management can be very fact-driven. For example, it may be legitimate to scold and coach harshly a poor performer depending on the situations. As with the case of sexual harassment, careful and appropriate investigations are very critical to determine whether the company is in the position to be able to take a firm stand toward power harassment claims. It is also important to train employees, especially manager-level employees, to correctly understand what constitutes power harassment (which would not be as clear as sexual harassment), how to differentiate power harassment from legitimate instructions and coaching and how to address such allegations.

The Inside Track What are the particular skills that clients are looking for in an effective labour and employment lawyer?

Having counsel that can explain the complicated issues that often arise in Japan in a way that is clear and understandable is what clients very much need in Japan. Further, effective labour and employment counsel in Japan need to be able to provide practical advice particularly taking into account clients’ culture, policy and practice that goes well beyond mechanically providing rules to clients and restating what labour authorities and courts have to say about an issue. Coming up with creative solutions to complex issues to achieve clients’ goals even under the Japanese labour and employment laws is what our clients expect from their labour and employment counsel in Japan.

What are the key considerations for clients and their lawyers when handling employment disputes?

An employer needs to keep in mind that employment disputes are life-changing events, especially in a country where lifetime employment was the norm not too long ago. Having empathy for an employee and understanding their needs can go a long way to making a difficult matter one that can be resolved amicably and on good terms for both sides. Sometimes, counsel should act as a bridge to eventually achieve the best interest of clients.

What are the most interesting and challenging cases you have dealt with in the past year?

In the past year, we had a case where a low-performing executive employee made false harassment and discrimination claims, making up multiple incidents with various threatening including committing suicide and reporting to the police, the immigration office and other authorities, which eventually we settled in a reasonable manner outside of a court. Figuring out a way to get to a resolution that works for both sides is challenging and requires a lot of patience, creativity, carefulness and sagacity as employment disputes treat employees’ lives and are often emotional. Resolving what may have started out as a contentious matter before our involvement in a way that is fair to the employer is difficult especially under the Japanese labour and employment laws, which are very protective to employees, but is important for employers in Japan.