Moonlighting and Side Hustles in Japan: Legal Framework and Corporate Practices for Employee Outside Work

The concepts of "moonlighting" or engaging in "side hustles"—known in Japan as kengyō (兼業, concurrent employment) or fukugyō (副業, side business)—have gained increasing attention globally and within Japan. Driven by desires for additional income, skill development, or entrepreneurial pursuits, more employees are exploring work opportunities beyond their primary employment. Concurrently, as part of its "Work Style Reform" initiatives, the Japanese government has been encouraging a more flexible approach to outside work. This shift necessitates a clear understanding of the legal principles governing such activities and the evolving corporate practices surrounding them.

The General Legal Principle: Freedom to Use Off-Duty Time

Under Japanese labor law, the starting point is that employees are generally free to use their time outside of their contractual working hours as they see fit. An employment contract primarily obligates an employee to provide labor and adhere to workplace discipline during specified working hours. It does not typically grant the employer overarching control over an employee's private life or off-duty activities. This implies that an outright, unconditional ban on all forms of outside work by an employer is often considered legally problematic unless specific and justifiable reasons exist.

This freedom is also underpinned by broader constitutional principles related to the freedom to choose one's occupation. Therefore, employees, in principle, should be able to engage in secondary employment or operate a side business during their personal time.

Permissible Grounds for Employers to Restrict Outside Work

Despite the general freedom for employees, employers can legitimately restrict or prohibit moonlighting or side hustles under certain circumstances where their valid business interests are genuinely at risk. Japanese court precedents have established several key grounds where such restrictions may be deemed reasonable:

1. Interference with Primary Job Performance: If the outside work demonstrably leads to issues such as excessive fatigue affecting work duties, chronic lateness or absenteeism, a decline in concentration, or a noticeable drop in performance quality in their main job with the primary employer. For example, in the Jowada Unyu case (Tokyo District Court, June 5, 2002), the dismissal of a transport company driver for engaging in occasional outside driving work (once or twice a year) was invalidated because the court found no concrete evidence that this activity had caused any specific disruption to his primary duties or the company's operations.
2. Harm to the Employer's Legitimate Business Interests or Reputation:
   • Conflict of Interest / Working for a Competitor: Engaging in work for a direct competitor, or activities that could otherwise undermine the employer's business interests (e.g., diverting clients or opportunities) is a strong ground for restriction. The Hashimoto Unyu case (Nagoya District Court, April 28, 1972) involved an employee who became an officer in a competing company, which was seen as a legitimate reason for concern.
   • Disclosure of Confidential Information or Trade Secrets: If the nature of the outside work poses a significant and realistic risk of the employer's confidential information or trade secrets being leaked or misused.
   • Damage to the Company's Social Reputation or Credibility: This can occur if an employee engages in outside work that is illegal, unethical, or widely considered disreputable, thereby reflecting poorly on the employer, especially if the employer's business relies heavily on public trust (e.g., a bank employee working in certain types of entertainment establishments).
3. Unauthorized Use of Company Time or Resources: Engaging in side business activities during the working hours of the primary job or using the employer's premises, equipment, or other resources for outside work without permission.

The onus is generally on the employer to demonstrate that the specific outside work undertaken by an employee concretely and materially harms or poses a clear and present danger to these legitimate business interests. A mere abstract or potential risk may not suffice.

Corporate Policies: Work Rules and the Shift in Approach

Many Japanese companies traditionally included clauses in their work rules (就業規則 - shūgyō kisoku) that either outright prohibited outside work or, more commonly, required employees to obtain prior permission from the company.

The legal validity of these clauses has been a subject of discussion. While a requirement for notification of outside work is generally considered acceptable and reasonable for an employer to manage potential conflicts or assess impacts on primary duties, a strict permission-based system can be problematic. If an employer unreasonably withholds permission without one of the legitimate grounds mentioned above, such a refusal could be challenged.

Disciplinary action, including dismissal, for violating company rules on outside work is possible. However, the appropriateness of such action will depend on factors such as the clarity of the rule, the nature of the unauthorized outside work, whether it actually caused harm to the employer, and whether the disciplinary response is proportionate to the breach.

"Work Style Reform" and Evolving Attitudes Towards Moonlighting

Recognizing the potential benefits of side jobs for both individuals and the broader economy, the Japanese government, through its "Work Style Reform" initiatives, has actively encouraged companies to adopt a more permissive stance towards employees engaging in kengyō and fukugyō.

This shift is reflected in the Model Work Rules issued by the Ministry of Health, Labour and Welfare (MHLW). While earlier versions often contained restrictive clauses, the MHLW has revised these models to promote a default position where employees are, in principle, free to engage in outside work. The revised Model Work Rules generally suggest that employees should notify their employer beforehand, and they also outline specific circumstances under which a company can restrict or prohibit such activities (aligning with the judicially recognized grounds above, such as interference with duties, harm to business interests, etc.). The policy direction is clearly towards facilitating, rather than broadly prohibiting, outside work.

To support this, the MHLW also established the "Guidelines for the Promotion of Side Jobs and Second Jobs" (副業・兼業の促進に関するガイドライン), first released in January 2018 and subsequently revised (e.g., September 2020, July 2022). These guidelines provide detailed advice for both employers and employees on how to manage outside work appropriately. Key aspects include:

• Emphasizing employee health management, especially concerning total working hours.
• Procedures for notification by employees to their primary employer.
• Guidance on how companies can set reasonable restrictions within their work rules.
• Clarification on issues related to social insurance and workers' accident compensation.

Managing Total Working Hours and Employee Health:
A significant challenge for employers when employees engage in outside work is the management of their total working hours and ensuring their health and safety. Japanese labor law primarily regulates working hours per employer. The MHLW guidelines encourage transparency and cooperation. They suggest that employees should self-report their total working hours to their primary employer if they are engaged in side jobs, allowing the primary employer to take necessary health-related measures. Employers are encouraged to establish systems to manage employee health, considering the combined workload. This remains a complex area, as the primary employer does not directly control the hours worked for another entity.

A Practical Scenario: Freelance Data Processing as a Side Job

Consider an employee working for Company X who, due to financial needs, takes on freelance data processing work as a cloud worker in their spare time.

• Legitimate Business Interests of Company X: Is this side job likely to harm Company X? Data processing is generally a neutral activity. Unless the work is performed for a direct competitor, involves Company X's confidential data, or is so demanding that it causes the employee to be chronically fatigued and underperform at Company X, direct harm is unlikely.
• Impact on Primary Job Performance: The main concern for Company X would be if the total hours worked (primary job + side job) lead to sleep deprivation, reduced alertness, or errors in their primary role.
• Company X's Work Rules: The employee should review Company X's work rules. If prior notification or permission is required, compliance is crucial to avoid potential disciplinary issues. The prudent course, as often advised, is for the employee to inform the company and, if required, seek approval, even if they believe the side job poses no conflict.

Guidance for Companies and Employees

For Companies:

• Develop Clear and Reasonable Policies: Instead of blanket prohibitions, establish clear, well-communicated policies on outside work that are grounded in protecting legitimate business interests. These policies should align with the MHLW guidelines.
• Focus on Notification: Consider implementing a system where employees notify the company of outside work, rather than a strict permission-based system, unless the specific nature of certain roles (e.g., high-level executives, R&D with sensitive information) warrants tighter control.
• Manage Health and Working Hours: If permitting or aware of employees' side jobs, provide guidance on managing overall workload and health. Be mindful of potential overwork even if the excess hours are not directly for your company.
• Regularly Review Policies: Ensure policies are up-to-date with evolving legal interpretations and government guidelines.

For Employees:

• Review Company Policies: Understand the work rules and any specific procedures regarding outside employment.
• Notify or Seek Permission: Comply with company requirements for notification or permission. Open communication can prevent misunderstandings.
• Self-Manage Performance and Health: Ensure that outside work does not negatively impact performance in the primary job or lead to health issues due to excessive total working hours.
• Avoid Conflicts: Steer clear of any outside work that could create a conflict of interest with the primary employer or involve misuse of their resources or confidential information.

Conclusion

The Japanese legal framework generally recognizes an employee's freedom to engage in outside work during their personal time, balanced by the employer's right to protect its legitimate business interests. Driven by government initiatives like the "Work Style Reform" and evolving societal expectations, there is a clear trend towards greater acceptance and facilitation of moonlighting and side hustles. Companies are encouraged to move away from overly restrictive policies towards more flexible approaches that require notification and focus restrictions on specific, justifiable concerns. However, managing potential issues such as overall employee well-being due to combined working hours and ensuring no detriment to the primary employment relationship remain key considerations for both employers and employees in this evolving landscape.