HRadvisory

<Issue>

A Japanese branch of a multinational software corporation was advised by the Labor Standards Supervisory Office (LSSO) to resolve a labor issue as a result of a random inspection conducted by LSSO, and directed to retroactively pay three months of overtime to all employees who had performed overtime work without receiving proper compensation.

Actual/Law Cases Case 1: Unintended Violation of Labor Standards

• The company did not have an HR Manager or an HR consultant in Japan, so human resources management had been delegated to the country manager in close contact with the HR Manager at headquarters (HQ).

• The compensation structure was based on the company’s international remuneration policies and a performance review system designated by HQ, and was not modified to comply with Japanese labor laws.

• A comprehensive Employment Agreement was concluded between each employee and HQ, which contained terms and conditions for Base Salary, Commission, Bonuses, Hours of Work, Days-off, Vacation, Paid and Unpaid Leaves, Mandatory Social Contributions, Expenses, Termination, and Retirement Benefits; however, no details regarding overtime hours or compensation were specified therein, as required by law.

• The company had not concluded an Overtime Agreement with an employee representative prior to the start of the actual overtime, as required by law.

• Work Rules had not been filed with the LSSO, although the company had more than 10 employees, including part-time workers.

Step 1: Immediate Action

• The company was required to prepare and submit an official report outlining how each point raised by the LSSO would be addressed within the designated period of time.

• Pursuant to advice from the LSSO, the company was required to retroactively pay the three-month overtime in full to all relevant employees within the designated period of time.

• As required by law, the company was required to conclude an Overtime Agreement with the employee representative and file it with the LSSO.

Step 2: Follow-up Action

• The company had to create and file with governing authorities the Work Rules for the Japanese branch that were based on the company’s international policies and performance review system, but modified to comply with the Labor Standards Act (LSA).

A Note on Strategic Human Resources Management Relevant to this Case

The company could have pursued an alternative strategy, under certain conditions, which involves concluding a Labor-Management Agreement (L-M Agreement) with a policy provision that effectively empowers employees to manage their respective schedules, including overtime, as a means to facilitating performance objectives, thereby ensuring operational cost-efficiency by reducing demand on unnecessary compensation. In such cases, the company could take one or both measures described below to address any mismatches between legal regulations and actual working hours, in accordance with the LSA, for each applicable area of responsibility:

Option 1)

Introduce a Professional Type of Discretionary Working Hours System for the System Consulting Division, a special designation for certain types of employees in specific industries, and conclude an L-M Agreement with an employee representative that effectively delegates to employees decision-making authority regarding how to allocate working hours. As an effect of such an L-M Agreement, system consultants are exempted from legal overtime restrictions, other than working on holidays and hours worked between 10 p.m. and 5 a.m.

Option 2)

Create an overtime scheme, referred to as Deemed Overtime Allowance, that includes an allowance to pay fixed amounts of overtime for expected hours of overtime work, instead of paying actual amounts of overtime, which are subject to change from month to month.

A Note on Strategic Human Resources Management Relevant to this Case