Rare Japanese Labor Win Prompts New Fears

"Voluntary" overtime may become a thing of the past, as companies such as Toyota and McDonald's start paying employees for extra work
Commuters walk towards their offices in central Tokyo. TOSHIFUMI KITAMURA/AFP/Getty Images

It's not easy being a worker in Japan. In big cities such as Tokyo or Osaka, salarymen still start the day early, work long into the evening, and are then expected to socialize with section chiefs. The pay of factory workers, faced with low-cost competition from China and other Asian countries, has barely budged in a decade even at the most successful companies. And years of restructuring spurred by Japan's long economic downturn mean many workers have fewer rights and lower earnings than the previous generation (BusinessWeek.com, 5/28/07).

It's perhaps no surprise, then, that a survey by the Japan Productivity Center for Social-Economic Development last summer found that 80% of employees said they would cancel a date if asked by a superior to do overtime.

As depressing as all that seems, hard-pressed Japanese workers are finally making progress in their fight against one bugbear: uncompensated "voluntary" overtime, a practice which in some cases involves already busy employees working an extra 80 hours or more free of charge every month. Toyota (TM) and McDonald's (MCD) are among a growing group of companies taking the lead in reforming their overtime policies.

Faltering Growth in Export Markets

While getting paid for all hours worked is a tonic for employees, the moves are causing anxiety. Analysts are concerned that the changes could hurt businesses at a time when the Japanese economy is slowing and inflation is rising. At the same time, Corporate Japan is worrying about faltering growth in the U.S. and other important export markets.

Starting this month, Toyota will begin paying 40,000 factory workers for participating in quality control programs outside normal hours that until now were supposedly voluntary. The decision follows a Nagoya court ruling concerning a 30-year-old Toyota employee who died suddenly in 2002 after conducting more than 100 hours a month of unpaid quality control work in addition to paid duties.

The court disagreed with the Labor Standard Supervision Office in Toyoda City, Toyota's hometown, which had said the family of the deceased wasn't eligible for compensation because the quality control work was voluntary. "This is something that workers have been trying to change for decades," says Tadao Wakatsuki, chairman of the All Toyota Labor Union, a small but vocal union of the automaker's workers. "It shows that times have changed."

A Court Decision Changes Everything

In another high-profile move, McDonald's Holdings, Japan's largest fast-food restaurant chain, said in May that it will begin paying its store managers for overtime. Like that of Toyota, the McDonald's decision followed a court ruling. In January, the Tokyo District Court deemed the company was guilty of creating phony management positions to avoid paying employees overtime (BusinessWeek.com, 1/29/08).

Under Japanese labor law, companies don't have to pay supervisors and managers overtime. The court found that many of McDonald's "managers" had few management responsibilities, and while the company initially appealed the decision, ensuing bad publicity appears to have forced the change of policy.

That case spurred a host of other companies to look at the way they paid their own staffers. In March, Seven-Eleven Japan began paying overtime to more than 500 managers at directly run shops and Aoyama Trading, Japan's largest men's wear retailer, has been paying overtime to more than 900 store managers since April. Aoki Holdings, another men's wear retailer, began paying its store managers overtime in May.

Will Toyota's Quality Control be Hurt?

In the fast-food sector, McDonald's move is likely to affect rival chains that carry out similar practices. According to research by the Nikkei Marketing Journal, almost 70% of restaurant operators still classify store managers as managerial positions despite the court ruling against McDonald's. If they're compelled to follow McDonald's example, it will increase labor costs at a time when food inflation is already gnawing into margins.

In Toyota's case, concerns run deeper than a simple increase in wage costs. A bigger worry is how the changes will affect the vital quality control program. Set up in the 1960s, the program involves about 40,000 workers in 5,000 teams of about eight workers that meet periodically to discuss many of the continuous improvements, or kaizen, that underpin the fabled Toyota production system.

Toyota watchers, though, say that as long as the sessions themselves aren't scaled back as part of cost-cutting drives, there's no reason why the system can't function as well as it has until now. "Even if they're paying a bit more to the workers, they should still be able to generate the ideas," says Andrew Phillips, an analyst at KBC Securities in Tokyo.

McDonald's New Check on Unpaid Work

Perhaps a bigger challenge for companies trying to pay workers for overtime may be persuading them to claim all the hours they have worked. Despite Japan's low unemployment rate, many employees fret over job security and are likely to avoid asking for overtime pay for fear of being singled out as troublemakers. That's amplified in Japan where, despite years of restructuring, working an entire career at one company remains the norm.

Last fall, coffee producer Key Coffee said it failed to pay about $20 million, or 1.15 million hours of unpaid overtime, to 1,000 of its 1,100 employees mainly because they didn't report hours worked to the company. As part of its reforms, McDonald's is creating a supervisory division to ensure that managers and their supervisors cannot underestimate the number of hours they work.

The behavior of office workers, who are entitled to claim pay for working after hours, also suggests many employees find it almost impossible to demand what they're owed. Indeed, a survey by the Japanese Trade Union Confederation found that among male employees, 80% between ages 25 and 45 work at least some unpaid overtime, with two-thirds working more than 20 hours of unpaid overtime a month.

One in 25 admitted to working 80 hours a month in overtime, a level that is considered to put someone at risk of karoshi, a Japanese term that literally means "working to death." Of course, while those levels are excessive, executives privately argue that long hours are vital to maintaining Japan's competitive edge.