How Shall We Proceed with the Reform of Working Hours?

Although regulatory reforms of employment and labor have been discussed at the government's Council for Industrial Competitiveness and the Council for Regulatory Reform, discussions on working hours only began this fall at the Labour Policy Council of the Ministry of Health, Labour and Welfare (MHLW). RIETI's Reform of Labor Market Institutions Project, in which I serve as the project leader, compiled proposals for working hours reform about three years ago, and has published a book containing these proposals (Note 1). The proposals in this project still appear to be meaningful now. In this article, I will summarize the points for future discussions based on the proposals.

Why is a reform of working hours being discussed now? Although the partial revision to the Labor Standards Act in 2008 (Act No.89 of 2008, enforced on April 1, 2010) set a premium rate (minimum of 50%) for overtime work exceeding 60 hours a month, small and medium-sized companies were exempted from the application of this revision on the condition that it be reviewed in three years time. This grace period has expired and is triggering discussions on working hours reform. However, the government now has decided not just to discuss this issue, but also to conduct a comprehensive review of other working hours regulations. For example, the Regulatory Reforms Implementation Plan, which was approved in the Cabinet meeting on June 14, 2013, also stated that "we will thoroughly discuss the legal system for working hours as well as the discretionary work system for planning-type jobs and the flexible working hours system at the Labour Policy Council from the perspective of improving work-life balance (WLB) and labor productivity." This could be an excellent opportunity to examine fundamentally the legal system for working hours.

So, why is a reform of working hours necessary? There are two issues with which to be concerned. One is how to respond to long working hours. Japan is known for its higher percentage of long working hours compared to continental European countries. Although total working hours declined from 1,903 in fiscal 1994 to 1,794 in fiscal 2012, this was attributable to a higher percentage of part-time workers. Among regular workers excluding part-time workers, it is evident that their total working hours have remained almost unchanged, from 1,999 to 1,997 over the same period. Despite calls for WLB, almost no progress has been seen in terms of the long working hours situation.

In considering long working hours, it is important to distinguish between voluntary and involuntary types. The motivation involved in voluntary long working hours includes workaholism, monetary incentives such as overtime premiums, a better personnel evaluation and career advancement, the recouping of significant costs for education and the acquisition of qualifications, and a sense of professionalism as a specialist. On the other hand, the factors for involuntary long working hours include the underdevelopment of the external labor market, the significant cost of changing jobs, unclear job responsibilities and high workloads due to time-consuming internal coordination—which are characteristics of regular employees in Japan, the constant long working hours to avoid termination during a recession (the maintenance of a buffer for labor adjustment), and relationships with bosses who enjoy working overtime (a negative external effect of workers who voluntarily work long hours). If we classify the factors for long working hours into these two groups, how to correct involuntary long working hours becomes an even more important issue. To this end, a simple review of the legal system for working hours is not enough; innovative changes in other regulations and the way people work in Japan itself is required.

Meanwhile, although workers are working long hours voluntarily, that doesn't mean it's acceptable. Even if workers enjoy working long hours, maintaining their health will be insufficient in many respects. Therefore, from the perspective of dealing with long working hours, controlling working hours is particularly important for ensuring workers' health and safety.

The second point is to establish flexible working hours. The economic environment has begun to change increasingly rapidly due to intensified global competition and accelerated innovation, and we are seeing growing uncertainties. Under these circumstances, an obviously important issue for companies is how to achieve flexibility in their production activities. On the other hand, as workers become oriented to a more diversified way of working according to their own lifecycles and family situations, demand for more flexible working hours is rising. Meeting the need for more flexible working hours from both sides—management and labor—is an important challenge not only for Japan, but also for other developed nations. In this case, in order to create a flexible environment for the most suitable working hours, smooth communication between labor and management would seem to play an important role in carefully considering and meeting the needs of both sides, etc. in accordance with the situations of individual companies and workers.

Looking at working hours regulations in Europe and the United States in an effort to understand the characteristics of those in Japan, we see that these can largely be divided into two types: indirect regulations practiced in the United States and direct regulations practiced in Europe. First, the United States doesn't directly regulate working hours, but obliges companies to pay a premium for overtime work that exceeds statuary working hours (a 50% premium is applied to the portion of working hours that exceeds 40 per week). Meanwhile, European countries directly regulate working hours by setting a statutory number. The Working Time Directive of the European Union (EU), with which member countries must comply, sets a minimum daily rest period (11 consecutive hours) and a limit on weekly working time (not exceeding 48 hours on average) among others to protect workers' health and safety (however, an individual opt-out is possible).

Even in those European countries that have been directly and closely regulating working hours from the beginning, efforts to make working hours more flexible have been making progress. For example, in France, where government involvement is significant, regulations on overtime work and overtime premiums have been eased to the point where they are at the discretion of the labor-management agreements at individual companies. In Germany, the obligation to pay a premium for overtime work was abolished by law in 1994, and working-time accounts, in which workers save up their overtime work hours in their accounts in the same manner as savings in bank accounts, and saved hours can be used later to take leave, etc., have become widespread. In Germany, labor agreements have conventionally played an important role in regulating the styles of employment and labor, and a similar trend has been observed in France as well. It is also worth noting that there is less dependence on monetary compensation such as overtime premiums in both countries. A survey of European countries shows that in southern European countries (Italy, Greece, and Portugal) as well as in the United Kingdom, the percentage of monetary compensation is relatively higher, while in northern European countries (Denmark, Sweden, Finland, and the Netherlands), the percentage of compensated leaves is higher for overtime working hours.

How do working hours regulations in Japan compare to those of other countries? First, they are similar to the direct regulation approach practiced in Europe, in that working hours longer than the statutory number (eight hours a day and 40 hours a week) are prohibited and penalized in principle. However, it is difficult to say that its regulatory system properly considers protecting workers' health and safety, given that there are no regulations for daily rest periods as there are in the EU, and that the number of days of annual paid leave is small (10-20 days, compared with four weeks a year, at a minimum, in the EU's Working Time Directive).

In addition, for management to allow workers to work longer than the statutory working hours, an instrumental consent of the so-called Article 36 Agreement (an agreement under Article 36 of the Labor Standards Act) is necessary for most workers. This system may seem to be stricter than the one in Europe where workers can work longer than the statutory number of working hours only if an agreement is entered into with each worker (the individual opt-out). In practice, however, the Japanese system has not been very effective in curbing long working hours, leaving a loophole for workers to work beyond the statutory limit set by the MHLW. Thus, Japan effectively depends on overtime premiums as a means to curb long working hours. In this sense, its system is rather closer to the one in the United States.

Furthermore, as a result of introducing various exemptions from the statutory limit one after another (Note 2), the Japanese opt-out system has become extremely complicated. With the availability of exemptions varying from one to another for both employers and employees, the operation of the system is significantly distorted, posing a serious problem. For example, the bar for meeting the requirements for a discretionary work system for planning-type jobs is very high, as it demands a decision by a four-fifths majority of a labor-management committee composed equally of labor and management, in addition to individual agreements with workers. Therefore, the percentage of workers to whom the discretionary work system for planning-type jobs is applied is only 0.3% of those in the companies surveyed by the MHLW, suggesting that the system is rarely used. Meanwhile, the exemption system for people in supervisory or managerial positions adds to the problem of so-called managers in name only because notifying an administrative authority is unnecessary, which can lead to the arbitrary use of the system by the employee, while the requirements for people in supervisory or managerial positions are left to the judgment of the employer, although there are general standards.

So, how should we consider the direction of working hours reform? Given recent efforts overseas—particularly in the EU—for a better regulation system and flexible working hours and the problems with regulations in Japan, it is important, first of all, for Japan to shift from regulations that in principle depend on overtime premiums to a system that focuses more on non-working time (rest hours and leaves), with an emphasis on maintaining workers' physical and mental health and WLB. Second, Japan should promote a more flexible working hours system and way of working based on a more decentralized framework (labor-management agreements), instead of government-led uniform working hours regulations.

The reform should be pursued in the following three key areas: (1) regulations to secure workers' health and safety; (2) compensation for overtime work; and (3) exemptions from the statutory working hour limit.

First, we need to create a regulatory system that can effectively secure workers' health and safety. Given that little progress has been made in solving the problem of long working hours, despite calls for it, we should begin serious discussions now on the pros and cons of introducing regulations on total working hours and rest hours to put the protection of workers' health and safety at the center of such regulations, as in the EU. Particularly with respect to the latter, some unions in the Federation of Information and Communication Technology Service Workers of Japan (ICTJ) have entered into a rest hours agreement to require a minimum of eight hours of rest between the end of one shift and the start of the next. As this example indicates, it is possible to turn working hours regulations into Japanese-style ones to secure workers' health and safety, while maintaining the productivity and competitiveness of Japanese industries and companies.

Second, we need to find better ways of compensating for overtime work. Given the trend in Europe of reducing dependence on monetary compensation for overtime work, it was clearly a step back from the world trend that, in the previous revision of the Labor Standards Act, overtime exceeding 60 hours a month became subject to an overtime premium rate of 50% or higher. Japan should not follow the trend of becoming like southern Europe in the area of monetary compensation for overtime. We should consider the fact that overtime premiums themselves contribute to long working hours. In Japan's case, given the fact that the problem of working hours has been replaced and trivialized by the problem of whether or not overtime premiums were paid, as overtime work regulations have basically been indirect regulations based on overtime premiums, we should now thoroughly re-examine how overtime work should be compensated.

From that perspective, credit should be given to the fact that it became possible under the last revision of the Labor Standards Act to grant paid leaves (the minimum unit is a half day), instead of paying overtime premiums, for overtime work of 60 hours or more a month that is subject to the overtime premium rate of 50% or more. Extending this system further, the working-time accounts, which were started in Germany and have become widespread throughout the continental European countries, should definitely be introduced in Japan.

Some argue that even if working-time accounts are introduced, their positive effects may be small, as few people take their annual paid leaves in Japan. However, as various surveys indicate, often the reason for this is out of consideration to one's boss and colleagues (reluctance to cause them problems and uneasiness about being the only one taking a leave), rather than a problem with the worker's job. If workers can take leaves through accumulating their own overtime hours, the psychological barrier preventing them from taking leaves should be lowered, as they will believe they have the right to do so. Such a positive effect as daring as taking leaves will not only contribute to WLB, but also should be expected to increase the productivity of the workers themselves, as they will be mentally and physically refreshed. It is also expected to increase the number of workers taking annual paid leaves without having to worry about other people's reactions.

In addition, the low usage rate of annual paid leaves in Japan is largely attributable to the institutional reason that workers are given the right to designate when they will take their paid leaves in the first place. It isn't well known that this is rather uncommon in other countries. It is necessary to transfer the right from workers to employers, as is the standard scheme in Europe, etc. It isn't appropriate to make it mandatory for employers to buy up annual paid leaves, as this will instead give workers a monetary incentive not to use them.

The third area that needs to be addressed is exemptions from the statutory limit on working hours. Here, two approaches are possible. One is to review such exemptions on the assumption that the existing regulatory framework will be maintained. For example, many companies complain that existing flexible work systems—such as the discretionary work system for planning-type jobs and the flextime system—are not "user-friendly." It is important to listen carefully to and address each one of those voices in moving ahead with reforms. However, if the system itself is complicated and is fraught with problems, it remains questionable whether we can promote greater flexibility in working hours in a manner satisfactory to both labor and management simply by reviewing individual exemptions.

The other approach is to review the existing regulatory framework itself. What is intended here is to examine the complex system of exemptions in its entirety and turn it into a simple and easily comprehensible system. One specific way to achieve this end is to integrate two similar but separate exemption schemes—one applicable to people in managerial and supervisory positions and the other to those engaged in specific types of jobs—into a single streamlined one. This reform involves two important tasks. First, the specific scope of exempt employees—i.e., those considered to be ill-suited for management by the number of hours worked such as managers, supervisors, and specialists—should be determined by a labor-management agreement, rather than prescribed by law. Second, the introduction of exemptions should be made subject to notification to the competent administrative authorities, namely, the Labor Standards Supervision Office in each jurisdiction, so as to prevent the arbitrary abuse of such flexibility schemes by employers.

Here, it should be noted that the scope of people who are ill-suited for management by the number of hours worked varies across industries and companies, and even across types of jobs and duties within the company. The question is whether exempt employees, other than those with a fairly high annual income, can really work autonomously. This is not something that can be uniformly determined by law. Neither is it appropriate to set a threshold annual income to draw a line. A few years ago, the government attempted but failed to introduce the so-called white-collar exemption. We should understand that the reason for the failure is not because the proposed annual income threshold (four million yen) was too low, but rather that the government tried to set a uniform criterion for the scope of exempt employees by means of law. Setting the threshold at a higher amount—be it eight million yen or 10 million yen—would not solve the problem.

Regarding the argument that the scope of exempt employees should be determined by a labor-management agreement, some people have been expressing concern that such a system could be abused by employers and result in longer working hours, particularly, in small and medium-sized companies with a low unionization rate. Indeed, if the scope of exempt employees is to be expanded, it should be accompanied by reform measures designed to put the brakes on increases in the number of hours worked and secure the health of workers. As such, those measures in the three key areas of reform are highly complementary to one another and, thus, should be pursued and implemented as a combined, integrated solution.

Finally, an autonomous manner of working, which is the key for determining the scope of exemption, first of all, is difficult in the case of regular employees in Japan, given that those whose future job duties, work locations, and working hours are not limited (hereinafter, "regular employees with unlimited job duties, etc.") make up the majority of regular employees in Japan. With respect to the discretionary work system for planning-type jobs, it is also necessary to re-examine whether this is the type of work that can be done autonomously to begin with, as planning work appears to be a type of job that frequently requires coordination with other divisions.

Given that time-consuming internal coordination has led to long working hours in Japan, increasing the number of job-based regular employees, whose job duties are clearly defined and specified and whose working hours are limited, is exactly how to increase the number of employees who will work autonomously and make the new exemption system and discretionary work system more fruitful. It is important to proceed with a new exemption system and discretionary work system in tandem with an environmental arrangement for regular employees with limited job duties, etc. to increase them at the same time.

As discussed above, I have raised several issues to ponder regarding future working hours reform. I hope that, hereafter, labor and management will hold fundamental discussions from a broader perspective.

*Opinions expressed or implied in this website are solely those of the author, and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI) nor the Ministry of Economy, Trade and Industry (METI).

The original text in Japanese was posted on October 22, 2013.

November 21, 2013