Who benefits from the new overtime pay system?

February 16th, 2015 by Philip Brasor & Masako Tsubuku

On Feb. 13, a Labor Policy Council sub-committee submitted to the labor ministry a report with suggestions for a bill to revise the labor standards law. The revision, which the ministry plans to submit to the next regular Diet session, applies to the work of skilled white collar professionals and will allow them to “work in a manner that demonstrates their achievements” more effectively, which is another way of saying that employers will no longer be required to pay these workers overtime for extra hours on the job, which in turn means that employers cannot be accused of pressuring them to work overtime for no pay, a system popularly known as saabisu zangyo, or “free overtime.”

Ostensibly, the revision will affect a small portion of the labor force, since it will only apply to workers who make at least ¥10.75 million a year, mainly foreign currency traders, financial analysts, consultants, etc.

Burning the candle at both ends.

Burning the candle at both ends.

According to the advisory panel’s recommendations, if a company wants to utilize this new overtime system, it must reach an agreement with the targeted workers and somehow introduce rules that will guarantee the employees avoid overwork as much as possible by, for instance, making sure they don’t work weekends.

The panel also recommends another revision to so-called sairyo rodosei, the “discretionary labor system.” Under to this system the worker and his employer decide together how many hours the former will work and how much pay he will receive based on those hours. If the two parties believe that in order to accomplish his tasks he may occasionally need to work longer hours, then those hours and appropriate compensation should be incorporated beforehand into his wages. But if the worker works even more hours than the overtime covered by the extra wage, he will not be paid extra in accordance with the new system, though there may be special conditions for after-midnight and weekend work.

This system targets sales agents, researchers, legal workers — people who tend to require flexible hours since the size of their work load varies in accordance with the nature of a specific project. The whole point, according to the labor ministry, is to peg pay to achievement.

An report in Tokyo Shimbun points out that there is more to the proposed bill than the two revised overtime systems. The ostensible purpose of the revisions is to prevent “overwork,” so the sub-committee also recommends a law guaranteeing a minimum number of paid vacation days a year, even for management employees; and that overtime rates be increased for employees of small and medium-sized companies to those already being paid by large companies.

With regards to workers on flextime systems, overtime should be paid for any hours that exceed 50 in a week, and employees with small children should be better able to set their hours in order to address parenting contingencies.

These changes sound progressive, but representatives of labor groups who participated in the sub-committee discussions expressed serious reservations about their direction, saying they may actually have the opposite effect and lead to overwork. They may even exacerbate karoshi (death from overwork), something the revisions are supposed to prevent.

To the labor side, the current system of stipulating a normal workload as being five days a week, eight hours a day, with any extra hours worked as qualifying for overtime pay, should remain unchanged. The problem is that it isn’t enforced strictly enough. By deregulating the current law, there is a danger that workers will be pressured even more into working longer hours.

The government has countered by saying that cutting the relationship between wages and work hours will lead to greater economic activity and should even mean shorter work hours. The management representatives on the sub-committee added that a “broader choice of working styles” will mean greater productivity and thus more sustainable economic growth.

The main problem is that there is no definition of what qualifies as “achievement.” For sales agents, it may not be a problem since they have sales targets, but what about researchers? For the time being, the new changes will only affect about 100,000 workers, but in 2005 the Japan Business Federation (Keidanren) said they wanted this kind of “zero-overtime” system for all workers who make over ¥4 million, which is about 40 percent of the white collar workforce.

They’ve since reduced it to 10 percent of the workforce, but obviously they aim to increase that portion. And as one labor lawyer interviewed by Tokyo Shimbun explained, the discretionary labor system already in effect has led to longer hours, so a revised system may simply make matters worse.

But the real issue is how these revisions affect wages. According to a study by Mitsubishi UFJ Research (pdf), the average “fixed wage” (shotei-nai kyuryo) has remained the same since 1995, mostly due to changes in the makeup of the labor force, which now includes more part-time and regular workers than there were 20 years ago. That means any increase in pay for the average worker comes from bonuses (tokubetsu kyuryo) or overtime pay (shoteigai kyuryo).

As the English nomenclature suggests, bonuses are paid at the discretion of the employer, usually as a reflection of either the company’s business achievements or the individual worker’s. However, in Japan, employees consider bonuses to be part of their salary, as do consumer markets. Banks take bonuses into consideration when extending loans. Mitsubishi found that in 1995, bonuses accounted for 22.9 percent of the average pay of workers who received them, and that now bonuses make up only 18.5 percent of their yearly pay. Since salaries have remained flat during that interval, it means overall pay has actually decreased.

The only way a worker can make more money over time is thus to work extra hours. Mitsubishi found that overtime pay increased steadily through the mid-2000s as the Japanese economy grew, and then dropped suddenly with the onset of the recession in 2008. In recent years, as the economy improved, overtime pay has increased.

That means overtime pay is a better index of economic achievement than salaries or even bonuses, but it doesn’t mean workers are benefiting from better corporate performance, since they are contributing to it with more time spent on the job. When Mitsubishi evaluated industries that tend to demonstrate low productivity, it found that workers also tend to work longer hours, which is particularly conspicuous for young workers, who may need more time to finish projects, and higher-income workers, whose higher incomes are a direct function of working more overtime.

According to Organization for Economic Cooperation and Development statistics, in the United States, which leads the world in per person hours worked with 1,790 a year, part-timers, who are defined as working less than 35 hours a week, make up 13 percent of the labor force, while in Japan, which is second with 1,745 hours a year per person, part-timers make up more than 20 percent of the labor force. That means full-time employees are working more hours than their American counterparts, and Mitsubishi reports that the average number of hours worked by full-time regular employees in 2013 was 2,022.

Though companies have demanded the zero overtime revision in order to increase productivity, their main goal is to reduce personnel costs. If that’s the case, then the revision flies in the face of the government economic recovery strategy, which is to boost corporate profits that will in turn boost wages and consumption. If overtime is cut, then workers lose the only recourse they have — at the moment, at least — for wage growth. Moreover, in order to fulfill work loads that will be used to judge performance they may have to work more hours without pay.

Who benefits in the end?

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