Japan's Discretionary Labor System: Scope and Legal Challenges in the Age of AI and HR Tech

Japanese Attorney at Law - Bengoshi L.L.

• 7 min read

Japan's Labor Standards Act (LSA) meticulously regulates working hours, mandating overtime pay for work exceeding statutory limits. However, the LSA also provides for exceptions to standard time-tracking, one of the most significant being the "Discretionary Labor System" (裁量労働制 - sairyō rōdō sei). This system allows employers, under strictly defined conditions, to "deem" employees in certain roles to have worked a pre-agreed number of hours, irrespective of their actual time spent. While intended to offer flexibility for professionals whose work output is not easily managed by fixed hours, its application, particularly in the context of new technologies like AI and HR Tech, presents ongoing legal challenges and risks of misapplication.

Understanding the Core Concept: "Deemed" Working Hours

The fundamental principle of the Discretionary Labor System is that for eligible employees, their working hours for the purpose of wage calculation are not based on actual clocked time but on a "deemed" number of hours (みなし労働時間 - minashi rōdō jikan). This deemed figure is typically established through a labor-management agreement or a resolution by a labor-management committee.

The rationale is that for certain types of work, particularly those requiring significant professional discretion, creativity, or specialized knowledge, the employer cannot, or should not, minutely direct the methods of execution or the allocation of time. Productivity in such roles often depends more on the quality of output and achievement of objectives rather than the sheer number of hours worked.

It is crucial to understand that this system primarily addresses the calculation of working time. Other LSA protections, such as the right to statutory breaks, premium pay for work performed during late-night hours (10 PM to 5 AM), and work on statutory holidays, generally continue to apply. If the "deemed" hours themselves exceed the statutory daily or weekly limits, then overtime pay based on those deemed overtime hours must be paid.

The Two Main Types of Discretionary Labor Systems in Japan

Japanese labor law outlines two distinct categories under which the Discretionary Labor System can be implemented:

A. Specialist-Type Discretionary Labor System (専門業務型裁量労働制 - senmon gyōmu-gata sairyō rōdō sei) (LSA Article 38-3)

This system is applicable to a limited list of 19 specifically designated professional job categories where the nature of the work inherently requires the employee to exercise significant discretion in how they perform their tasks and manage their time, making direct employer supervision of these aspects impractical. These roles are enumerated by law and ministerial ordinances and include:

  • Researchers and developers of new products or technologies.
  • Information systems designers and analysts.
  • Journalists and editors (excluding those solely engaged in proofreading or simple data entry).
  • Designers (e.g., graphic, industrial).
  • Broadcasters, movie producers, and directors.
  • Lawyers, certified public accountants, real estate appraisers, patent attorneys, architects (with first-class licenses).
  • Game software creators.
  • And others specified by ordinance.

Implementation Requirements for the Specialist-Type System:

  • A written labor-management agreement (労使協定 - rōshi kyōtei) must be concluded with either the labor union representing the majority of employees at the workplace or, if no such union exists, with an individual representing the majority of employees.
  • This agreement must clearly stipulate:
    1. The specific job categories covered by the system from the legally designated list.
    2. The number of hours per day that will be "deemed" as worked by employees under the system.
    3. A clause stating that the employer will not give specific instructions to covered employees regarding the means of performing their work or the allocation of their working time.
    4. Measures to be taken by the employer to maintain the health and welfare of employees under the system.
    5. Procedures for handling any complaints from employees regarding the system's application.
  • The concluded labor-management agreement must be filed with the competent Labor Standards Inspection Office.

B. Planning-Type Discretionary Labor System (企画業務型裁量労働制 - kikaku gyōmu-gata sairyō rōdō sei) (LSA Article 38-4)

This system is even more narrowly defined and carries stricter implementation requirements. It can be applied to employees whose primary duties involve "planning, designing/drafting, research, and analysis concerning the management of the business," provided these tasks are performed at a "core operational division" of the company (e.g., headquarters). The nature of these tasks must be such that the employer does not give concrete instructions regarding the means of performance and time allocation, leaving these substantially to the employee's discretion.

Eligible Employees for the Planning-Type System:
The employee must possess the knowledge and experience necessary to appropriately carry out such discretionary duties.

Implementation Requirements for the Planning-Type System (More Stringent):

  • A Labor-Management Committee (労使委員会 - rōshi iinkai) must be established at the workplace, composed of an equal number of representatives from both the employer and the employees.
  • This committee must adopt a resolution by at least a four-fifths majority of its members.
  • The resolution must specify:
    1. The specific job categories covered.
    2. The scope of eligible employees (e.g., by qualifications, experience levels).
    3. The number of hours per day to be "deemed" as worked.
    4. Concrete measures to be taken by the employer to maintain the health and welfare of employees under the system (often requiring more detailed provisions than for the specialist type, such as ensuring days off, limiting late-night work, or providing health checks).
    5. Procedures for handling employee complaints.
    6. Crucially, the individual written consent of each employee to be covered by this system is absolutely required. An employee cannot be compelled to be subject to the planning-type system, and an employer must not treat an employee disadvantageously for refusing to give consent.
  • The adopted resolution must be filed with the competent Labor Standards Inspection Office.

Despite these strict requirements, the Discretionary Labor System is sometimes misapplied, leading to legal disputes and potential liability for unpaid overtime. Common pitfalls include:

  • Applying the System to Ineligible Roles or Employees: A frequent issue is attempting to apply the system to job categories not listed for the specialist type or to roles that do not genuinely involve the high level of discretion or core business planning functions required for the planning type. General sales positions, for example, are typically not eligible under either category.
  • Lack of Genuine Discretion: Even if a role is nominally eligible, the system is invalidly applied if the employer continues to exert significant control over how and when work is performed. This can include mandatory attendance at daily meetings, specific instructions from superiors on work methods and progress, adherence to fixed schedules despite a facade of "flexible clock-in/out," or intensive performance monitoring that negates employee discretion. For instance, the A-D-D case (Kyoto District Court, October 31, 2011; upheld by Osaka High Court, July 27, 2012) found the application of the system invalid where employees lacked actual discretion over their work.
  • Procedural Deficiencies: Failure to correctly conclude the labor-management agreement, obtain the necessary majority for a Labor-Management Committee resolution, secure individual employee consent (mandatory for the planning-type), or properly file the agreement/resolution with the Labor Standards Inspection Office can render the system's application void.

Consequences of Misapplication:
If the Discretionary Labor System is found to have been invalidly applied to an employee, the "deemed" hours provision becomes ineffective for that employee. Instead, their working hours must be calculated based on their actual time worked. This means the employer could be liable for significant amounts of unpaid overtime pay (calculated at statutory premium rates) for all hours worked beyond the LSA's standard limits.

AI, HR Tech, and the Discretionary Labor System: A Cautious Approach

The increasing use of AI and HR Tech in the workplace has added another layer of complexity. While some might argue that these technologies, by automating routine tasks, free up employees for more "discretionary" or intellectual work, this does not automatically qualify them for the Discretionary Labor System.

  • Technology Doesn't Define Eligibility: The introduction of AI or HR Tech tools does not, in itself, change the fundamental nature of a job to make it eligible for this system. The core legal tests concerning the specific designated job categories, the nature of the tasks, and the employee's actual level of discretion remain paramount.
  • Risk of Pretext: There is a concern that some employers might use the introduction of new technologies as a pretext to inappropriately apply the Discretionary Labor System, primarily to reduce overtime pay obligations, even when employees are not genuinely exercising the required level of discretion. For example, an employee in sales might be given new AI-powered analytical tools but still operate under sales targets and managerial direction that leave little room for true discretion over work methods or time allocation.

Debates on Expanding the System's Scope

There has been ongoing debate in Japan regarding the scope of the Discretionary Labor System, particularly in the context of evolving work styles and the government's "Work Style Reform" initiatives. Around 2017-2018, there were government proposals to potentially expand the system's applicability, for instance, to certain types of "proposal-based sales" roles (企画提案型営業 - kikaku teian-gata eigyō).

  • Arguments for Expansion: Proponents suggested it could offer greater flexibility, align work management practices with modern knowledge-based work, and potentially enhance productivity.
  • Concerns and Criticisms: Critics raised significant concerns that broadening the scope without extremely careful safeguards could lead to an increase in uncompensated long working hours ("service overtime"), make it difficult to objectively define "discretion" for a wider array of roles, open avenues for abuse by employers, and ultimately undermine the LSA's primary objective of protecting employee health by regulating working hours.
  • Outcome of Reform Debates: The proposed broad expansion of the planning-type discretionary labor system, particularly to general sales roles, faced strong opposition and was ultimately not enacted as part of the main Work Style Reform legislative package that passed in 2018 (effective 2019/2020). Instead, the government introduced the distinct "Highly Skilled Professional System" as a new exemption category for a very limited group of high-earning professionals. The list of eligible roles for the specialist-type system has seen minor technical updates over the years but no major expansion into fundamentally new types of work like general sales.

The need to ensure that any system of deemed hours genuinely reflects the nature of the work and does not compromise employee health and well-being remains a central tenet of these discussions.

Conclusion

The Discretionary Labor System in Japan serves as a specific, narrowly defined exception to the LSA's standard rules on working hour calculation. It is not a flexible work arrangement to be applied broadly. Employers must adhere strictly to the prescribed eligible job categories, ensure that employees genuinely exercise substantial discretion over their work methods and time allocation, and meticulously follow all procedural requirements, including labor-management agreements/resolutions and, where applicable, individual employee consent.

The introduction of AI and HR Tech does not alter these fundamental legal prerequisites. Misapplication of the Discretionary Labor System carries significant legal risks, primarily in the form of substantial claims for unpaid overtime. Any consideration of applying this system should be approached with extreme caution, thorough legal review, and a clear focus on whether the roles and actual working conditions truly meet the demanding criteria set forth by Japanese labor law.