Work Rules, Article 36 Agreements and Working Hours at a Japanese Subsidiary: What to Explain to Head Office

To employ staff at a Japanese subsidiary, you need work rules and an Article 36 agreement (a labour-management agreement on overtime and rest-day work) that comply with Japan's Labor Standards Act, separately from your head office's global policies. An employer that regularly employs 10 or more workers must prepare work rules and file them with the Labour Standards Inspection Office (Labor Standards Act, Article 89), and overtime can only be required once an Article 36 agreement has been filed (Article 36(1)).

The law caps overtime and fixes premium pay rates. Employers must also track working hours by objective means and ensure that employees take five days of annual leave each year.

• Your Japanese entity now has more than 10 employees, but you only have the head office Employee Handbook and no Japanese work rules.
• An Article 36 agreement was signed once at incorporation, and nobody knows whether it has been renewed.
• Head office says a role is "exempt" so no overtime pay is due.
• Overtime of Japanese staff is tracked only through self-reported spreadsheets.

Japanese working-time rules result from the statute, work rules, labour-management agreements and individual employment contracts working together. When explaining to head office, it helps to distinguish the following three documents.

An employer that regularly employs 10 or more workers must prepare work rules and file them with the authorities (the Labour Standards Inspection Office), including whenever they are amended (Labor Standards Act, Article 89). The following must always be included (items 1 to 3).

• Start and finish times, breaks, rest days, leave, and shift rotation where shifts are used
• How wages are determined, calculated and paid, the closing and payment dates, and pay rises
• Retirement, including the grounds for dismissal

Retirement allowances, bonuses, safety and health, and commendations and discipline must be included where such schemes exist (items 3-2 to 10).

When preparing or amending work rules, the employer must hear the opinion of a union organised by a majority of workers or, if there is none, a person representing a majority of workers (Article 90(1)). A document recording that opinion must be attached to the filing (Article 90(2)). Work rules must be made known to employees by posting, keeping them available, providing copies or other prescribed methods (Article 106(1)).

When an employment contract is concluded, if the employer has made known work rules setting reasonable working conditions, the contract follows those rules, except for terms the parties agreed separately that are not below the work rules (Labor Contracts Act, Article 7). Any part of an employment contract that sets conditions below the standards of the work rules is void, and the work rules apply instead (Article 12).

To change working conditions to employees' detriment by amending work rules, the amended rules must be made known, and the change must be reasonable in light of the disadvantage to employees, the need for the change, the appropriateness of the new terms, the state of negotiations with unions and other circumstances (Labor Contracts Act, Article 10).

An employer must not have employees work more than 40 hours a week or 8 hours a day, excluding breaks (Labor Standards Act, Article 32), and must give at least one rest day each week (Article 35(1)).

To go beyond these limits or require work on statutory rest days, the employer must conclude a written agreement with a majority union or majority representative and file it with the competent Labour Standards Inspection Office (Article 36(1); Enforcement Regulations, Article 16(1)). The agreement's coverage period is limited to one year (Article 36(2)(ii)).

The majority representative must not be a manager or supervisor (Article 41(ii)) and must be chosen by a vote, show of hands or similar procedure held with the stated purpose of selecting the person who will conclude the agreement. A person chosen at the employer's direction does not qualify (Enforcement Regulations, Article 6-2(1)). An agreement signed with an employee appointed by the company may not meet this requirement.

Overtime under an Article 36 agreement is capped.

Where a one-year variable working-hours system with a coverage period of more than three months is used, the limits are 42 hours a month and 320 hours a year (Article 36(4)). A special clause must also set out measures to protect the health and welfare of employees working beyond the limits and the premium rate for such work, among other matters (Enforcement Regulations, Article 17(1)).

1. 1

   Choose the majority representative

   Employees elect someone who is not a manager or supervisor by vote or show of hands (Enforcement Regulations, Art. 6-2)

2. 2

   Decide the content

   Set the employees covered, the one-year period, the circumstances for overtime and the caps per day, month and year (Art. 36(2))

3. 3

   File using Form 9

   Use Form 9-2 if there is a special clause, and file with the competent Labour Standards Inspection Office (Enforcement Regulations, Art. 16(1))

4. 4

   Make it known to employees

   Post it, keep it available or provide copies (Art. 106(1))

5. 5

   Check hours each month

   Confirm for each employee that actual overtime and rest-day work stay within the caps (Art. 36(6))

Where employees work overtime or on rest days under an Article 36 agreement, premium pay is due (Labor Standards Act, Article 37(1)). A Cabinet Order sets the rates at 25% for overtime and 35% for rest-day work.

Family allowances, commuting allowances and certain other payments are excluded from the base for calculating premium pay (Article 37(5)).

Some countries exempt employees from overtime pay based on role or salary. Under Japan's Labor Standards Act, the provisions on working hours, breaks and rest days apply to all employees except limited categories such as "persons in a supervisory or managerial position or persons handling confidential matters" (Article 41(ii)).

Because a title or salary level alone does not necessarily bring someone within this category, whether a role treated as exempt by head office can be excluded from overtime pay in Japan needs careful assessment of the actual duties. Flextime, where start and finish times are left to employees (Article 32-3), and the discretionary work system for specialist roles (Article 38-3) can be used only once requirements such as a labour-management agreement are met.

Employers must track workers' working hours in order to carry out interviews with doctors (Industrial Safety and Health Act, Article 66-8-3). The method must be objective, such as time card records or computer usage logs, or otherwise appropriate, and records must be kept for three years (Industrial Safety and Health Regulations, Article 52-7-3).

For employees entitled to 10 or more days of annual paid leave, the employer must designate, for each employee, the timing of five of those days within one year of the reference date (Labor Standards Act, Article 39(7)). Days the employee takes on their own initiative and days allocated under a planned leave scheme can be deducted (Article 39(8)).

The employer must keep an annual leave register showing the timing, number of days and reference date for each employee (Enforcement Regulations, Article 24-7). If you use the head office PTO (paid time off) policy, check that it secures the statutory number of days and the five designated days.

Even where an employment contract is governed by foreign law, if an employee working in Japan tells the employer that a particular mandatory rule of the law of the place most closely connected with the contract should apply, that rule also applies (Act on General Rules for Application of Laws, Article 12(1)). The law of the place where the work is to be performed is presumed to be the most closely connected law (Article 12(2)). Choosing a foreign governing law does not necessarily take the employment relationship outside Japanese labour rules.

The following points help avoid misunderstandings when briefing head office.

• In Japan, overtime requires an Article 36 agreement filed in advance, and the caps are set by statute.
• The employer must designate the timing of five days of annual leave even if the employee does not ask.
• Work rules are a statutory document that must be filed; a translated global policy is not enough.
• Changing working conditions to employees' detriment is subject to requirements including reasonableness (Labor Contracts Act, Article 10).

See also our column on dismissing employees in Japan, our checklist for hiring foreign nationals and our column on managing remote work.

• Check the headcount at each workplace of your Japanese entity and, if it is 10 or more, whether work rules have been prepared and filed.
• Find a copy of the Article 36 agreement and check that its period has not expired and that you have proof of filing.
• Confirm that the majority representative is a non-managerial employee chosen by vote, show of hands or similar means.
• Total each employee's monthly overtime and rest-day work and check that it stays under 100 hours a month and within an 80-hour average over two to six months.
• Set up attendance tracking based on objective records such as time cards or computer logs.
• Prepare an annual leave register and designate dates for employees unlikely to take five days.

• The Labour Standards Inspection Office has contacted you about an inspection or issued a corrective recommendation.
• A current or former employee has claimed unpaid overtime in writing.
• You want to merge the head office Handbook with Japanese work rules, or change working conditions to employees' detriment.
• You need to decide whether roles treated as exempt require overtime pay.

We help Japanese subsidiaries of foreign companies put work rules and Article 36 agreements in place and prepare explanations for head office. See our international practice.

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