Details of white-collar exemption finally revealed
The Japanese congress passed a “workstyle reform act” that amends a set of existing employment laws in July 2018. Primarily, this is to limit long working hours for employees and introduce more flexibility in their working styles. With this amendment, companies are expected to exercise more strict control in managing working hours and overtime pay.
One of the major pillars to achieve this goal is the so-called highly skilled professional system, which is introduced in the new legislation. This was originally intended to imitate the white-collar exemption in the US. Although it is true that employees who fall under this category are not eligible for overtime pay, the range of employees eligible for this exemption is very limited. Moreover, as the procedure to take advantage of this exemption is rather complicated, it is not entirely clear how much this will attract companies in managing their potential overtime payments. As the regulations providing details on this system was just promulgated on March 25, 2019, a week before this exemption actually becomes effective, we explain this based on the legislation and its relevant regulations.
Who is eligible for this exemption?
If an employee meets the following three criteria, s/he is eligible for this exemption. However, a company can adopt this only with his/her consent and cannot unilaterally apply the exemption to certain kind of employees who are likely to meet these criteria.
1. Job categories
Employees eligible for this exemption are those who have full discretion over their working hours (i.e., who do not receive instructions about working hours) and engage in any of the following:
development of financial products with knowledge of financial engineering
asset management with investment decisions, trading of financial instruments for that purpose or on its own account (i.e., fund managers, traders, dealers)
analysis, valuation or investment advisory services on stock market trends or stock valuations (i.e., financial analysts)
research or analysis on client business and advice on the business based on such (i.e., business consultants)
research and development on new technology, products or services
Presumably, employees who assist or partially undertake these jobs are likely not eligible for this exemption. Even if a company takes steps to apply this exemption for employees who do not fall under the categories above, it will not eliminate their overtime payments.
2. Job descriptions
The employees’ job descriptions and responsibilities and expected outputs and achievements must be clearly defined in writing and signed by and handed to these employees.
3. Annual salary
Employee pay must be at least ¥10,750,000 per year.
What is the process to implement this exemption?
1. Resolution by the labor-management committee
A company must organize a labor-management committee, which consists of representatives of the employer and employees, in each office and have it resolve the following by 80% or more of the committee members.
job categories subject to this exemption
type of employees who will engage in the said job categories; provided that the employees have to satisfy the job descriptions and annual salary requirements provided above
that the company shall implement measures to manage actual working hours of employees who engage in the job categories above (“Targeted Employees”) for health and safety purposes*
that the company shall give Targeted Employees 4 days or more of holidays in 4 weeks, and 104 days or more in a year*
that the company takes one of the following selective measures (“Selective Measures”)*:
ensure 11 hours of work breaks within 24 hours from the beginning of work hours and limit late night work to 4 times or fewer in a month
if actual working hours exceed 40 hours per week, constrain such additional working hours to within 100 hours in a month or 240 hours in three months
grant Targeted Employees two weeks of consecutive leave at least once a year
conduct health checks for Targeted Employees who work more than 40 hours per week and whose additional working hours are more than 80 hours in a month
that the company adopts one of the following health and welfare measures:
any of the preceding measures that has not been adopted as Selective Measures
conduct health counselling by doctors
grant compensatory leave or special leave
provide point of contact to consult on health issues
watch for health conditions in Targeted Employees and transfer them to a proper section if necessary
have Targeted Employees consult with company doctors
procedure for Targeted Employees to withdraw their consent to be subject to this exemption
a grievance procedure for Targeted Employees
that the company shall not retaliate against Targeted Employees who do not agree to be subject to this exemption
effective term of the resolution and that the resolution is not extended automatically
meeting schedule of the committee
that the company appoints a doctor for health and safety management if its office has less than 50 employees
that the company maintain records on each Targeted Employee and the appointment of the doctor as provided in the preceding clause during the effective term and for three years thereafter
2. Notification filing to the authority
The company must file the resolution of the committee to the competent authority in the form specified by the authority. After the filing, the company is subject to periodic reporting obligations to the authority on the status of managing actual working hours and certain measures mentioned above to prevent overwork every six months.
3. Consent from Targeted Employees
The company must obtain consent in writing from each Targeted Employee subject to this exemption. In that document, the company needs to provide that Targeted Employee will not be entitled to any overtime pay if s/he signs up, and specify the period subject to this exemption as well as the amount of expected salaries during that period.
What is the benefit to adopt this exemption?
Once this is properly in place, a company is exempted from paying any overtime payments to Targeted Employees. As Japan’s overtime rules have very limited exemptions, companies not properly managing working hours of their employees have been exposed to potential overtime claims which could go back for 2 years retroactively.
Although the scope and eligibility for this exemption is limited, it may be worth considering especially if you are in the financial industry or have highly paid engineers engaged in product or service development. When you consider adopting this, it may be noted that any improper resolutions on the requirements above or failure to comply with the resolutions with the asterisk above could nullify the validity of this exemption.