There has been increasing awareness in Japan of the health implications and unproductivity caused by excessive overtime work. As part of recent government economic reforms, there has been a heated debate over the increased restrictions on eligibility for overtime pay. This newsletter examines the issues arising from the proposed legislation and a recent change to the law aimed at tackling deaths caused by overwork.

Overtime pay system

Employees who work over eight hours a day on any given day are required to be compensated for their overtime work. The formula for calculating this compensation is rigid and complex – different premiums apply for general overtime, overtime performed during late-night hours and overtime performed on a holiday. Where there is any overlap (for example, overtime performed during late night-hours on a holiday), the premiums are increased accordingly.

While the vast majority of employees in Japan are subject to these overtime rules, there are also exceptions. Employees who belong to the narrowly-defined categories of supervisor/manager and executive secretary are partially exempted, meaning that they are not entitled to payment for general overtime and overtime performed on a holiday, but they are still entitled to overtime pay for work performed during late-night hours. In addition, employees who belong to 19 specific professions and who perform work within the ambit of those professions are also partially exempted in a similar manner. These professions include certified accountants, attorneys, patent attorneys, tax attorneys, researchers, software developers, journalists and small and medium enterprise management consultants.

However, given that employees who fall within the above exceptions are in the minority, this has led to an overtime working culture in many companies where work efficiency is not necessarily incentivised. For many employees, overtime pay constitutes a substantial portion of their monthly income and during Japan's "bubble" era it was not uncommon for overtime pay to exceed an employee's basic salary.

Given that the overtime rules are complicated and strict compliance requires employers to closely monitor each employee's daily working hours (including whether any overtime claimed falls within late-night hours or on a holiday), employers in Japan often run into compliance problems. As a result, litigation by disgruntled employees over unpaid overtime work is not uncommon. Companies that overwork their employees without properly compensating them have come to be known as "black companies".

In an attempt to change this kind of working culture, the Government has recently proposed amendments to the Labour Standards Act, which, if passed, would extend the categories of employees who are not entitled to overtime pay. It is hoped that this will promote more efficient working habits amongst employees, which could translate into overall cost savings for employers. It is also hoped that simplifying the overtime pay system will encourage compliance by employers.

The details of the bill are still being debated, but it is being suggested that white collar workers in finance, foreign exchange dealing and IT industries with an annual salary above 10 million yen be exempted from overtime pay. This has come to be known as the "white collar exemption", and unlike the partial exemption system to date, it is being proposed that employees who qualify for this exemption be totally exempted, meaning that they would not receive overtime pay even for work performed during late-night hours.

However, it has been argued that this is a very narrowly defined category of employees with a high income threshold, and many employees who fall within this category are likely to be of supervisor/manager grade and therefore already partially exempted from the overtime payment system. As such, if the proposed bill proceeds in this manner, some have commented that there will be relatively little impact on the vast majority of employees in Japan, who will continue to be subject to the traditional overtime pay system. Although there have been attempts by the Government to propose a more standardised no-overtime pay system for all employees, these attempts have been met with opposition by employees and trade unions.

It has been announced that the Government is aiming to have a bill drawn up and passed in 2015, with the law coming into effect in the spring of 2016. Amendments to the existing law are expected to be welcomed by employers, particularly foreign companies.

Prevention of death from overwork

In the meantime, the Government enacted legislation promoting measures to prevent karoushi, meaning death due to overwork. There are generally two types of karoushi – death caused by health problems, and suicide as a result of stress.

The Act on the Promotion of Measures to Prevent Karoushi came into force on 1 November 2014. This legislation was enacted after strong lobbying by the bereaved family members whose loved ones died from karoushi. It enshrines the Government's responsibility to conduct research on karoushi, provides for the establishment of a committee for the promotion of measures to prevent karoushi, and sets out the principle that the relevant parties (i.e. the state, local government and businesses etc) should collaborate closely to prevent such deaths.

These and other labour law reforms are an important part of "Abenomics" and are designed to increase Japan's competitiveness in the global market.