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Asia-Pacific employment law bulletin 2024


Changes to Discretionary Labour System

The Discretionary Labour System is a system that allows employers to pay employees according to a predetermined number of hours instead of their actual working hours. Under Japanese law, there are two types of Discretionary Labour Systems: the first is for professional employees (19 different roles in total, including designers, systems engineers, lawyers, and accountants) and the second is for management-related employees (i.e. employees who engage in the planning, drafting, researching, and analysing of particulars involved in business operations).

To implement the professional employees system, a labour management agreement with the union or the employee representative needs to be entered into and the agreement then needs to be submitted to the Labour Standards Inspection Office. To implement the second system for management-related employees, there are four steps that need to be followed: (1) establish a labour management committee; (2) pass a resolution by a majority (four-fifths or more) of members of the committee; (3) submit the resolution to the Labour Standards Inspection Office; and (4) obtain the individual consent from an employee.

Amendments to the law have, as from April 2024 introduced the following changes to the system for professional employees:

  • M&A advisory work has been added as a type of work which will qualify for the Discretionary Labour System;
  • obtaining individual consent from an employee who will be subject to the Discretionary Labour System will be required; and
  • based on these changes, the labour management agreement must include the following provisions:
    • consent from an employee;
    • an employee cannot be treated in a disadvantageous manner if he/she refuses to consent;
    • a process for withdrawing consent (where and how to submit a withdrawal, etc.); and
    • ensuring a record of consent and its withdrawal is kept.

The system for management-related employees must include the following:

  • a labour management committee needs to determine the process for withdrawing consent (where and how to submit a withdrawal, etc.); and
  • if applying this system will cause an employee’s salary or evaluation system to change, the contents of the change need to be explained to the committee.

If a company has adopted a Discretionary Labour System for either professionals and/or management-related employees, HR teams should take note of the new changes.

Looking ahead

Employers must now (as from April 2024) include additional information in employment contracts in relation to the “scope of the change” to the workplace and work engaged in. For example, if there is a possibility that the employee will be transferred to the Osaka office from the Tokyo Office, the Osaka office also needs to be included as the potential workplace in the employment contract. Similarly, if the employee will be engaged in a certain type of work (such as human resources), but there is a possibility that the employee will be transferred to another department in the company (such as the finance team), the latter needs to be disclosed as a change of the scope of the work an employee may be engaged in.

Further, if there are limits on the renewal of a fixed-term employment contract, such limits need to be disclosed to an employee from April 2024. Japanese law already grants fixed-term employees the right to convert their fixed-term employment contract to a non-fixed-term employment contract if they are continuously employed for more than five years. However, under the recent amendment, when the discussion regarding the employment contract renewal takes place after five years of continuous service, the employer is required to draw the employee’s attention to this right.

Vanguard Lawyers Tokyo: Akiko Yamakawa, Tomohiro Yokota