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Despite the notorious rise of China, Japans economy is still the second-largest in the world, with a promising market for high-end products. After a frustrating decade of starts, stops, and even reverses in economic growth (1990-2002), Japan recovered, with GDP growth near or above 2% since 2003. Although the total unemployment rate is falling only slightly, competition for talented workers is heating up.

Japanese HR practice is a unique mixture of powerful government regulation, resilient customary practices and attitudes, and recent innovations. Much has changed over the last 15 years, but other things have remained the same. Although Japan seems to be growing more Western in some ways, it is unlikely it will ever fully converge, especially with looming demographic shifts. HR in Japan needs to be done with a careful eye toward local attitudes, economic conditions, and legal restrictions.

Labor Law

Japanese companies almost always set policies on compensation, benefits, and working conditions on a company-wide basis rather than in individual employment contracts. HR policies are outlined in a set of employee rules, which must be filed with the government for all workplaces with over 10 employees. Also, though a contract is not required by law, an employee must be clearly notified of his or her wages, bonuses, vacations, etc. at the time of hiring in what is usually called an Employment Notice.

Contracts, although not common, are used when employing people for fixed terms, which can simplify termination. Fixed-term contracts can extend no longer than 3 years.

What rules apply to creating workplace policies? In principle, Japanese law mandates a 40-hour workweek and 8-hour workday for most industries. Overtime pay is set at 25% above regular pay. As a matter of practice, however, many companies expect their employees to work significantly over that limit, without overtime pay. Recently, the Ministry of Health, Labor and Welfare (MHLW) has been cracking down on this practice, targeting thousands of companies and ordering them to pay back overtime wages.

Japan has 14 national holidays, and a requirement of 10 additional days of paid vacation, gradually increasing to 20 days after 6 years of service. Some companies also give their employees the entire first week of May off (Golden Week), due to three successive national holidays on May 3-5.

Recent legislation has set new standards covering the treatment of employees who are pregnant or have children. 12-14 weeks of maternity leave (unpaid, with government health insurance providing a stipend) are mandatory, and it is illegal to fire someone because of pregnancy. Requests for unpaid leave to take care of children must also be granted, within limits.

Lifetime Employment and Termination Restrictions

The Japanese HR environment is heavily marked by the old system of lifetime employment. Although this system has broken down in some ways, many of its legal safeguards remain strong.

Lifetime employment first emerged as a practice in the 1920s and became more general after World War II. Only about a third of Japanese workers enjoyed it, in the larger, more prestigious companies. The idealized Japanese worker would be hired directly out of college at the same time as a group of other graduates of the same age. They would make their way up the corporate ladder as a group, raises and promotions coming on a fixed schedule, primarily based on age. Eventually, before retiring, they would either have a stint at a high-level post or else be transferred to a subsidiary. In most cases, they could not deviate from this system. If someone delayed applying after college, or quit in mid-career, they would not be able to get back in later.

Although this system evolved on its own, it was reinforced by legal safeguards strictly limiting termination. These limitations were put in place not by legislation or union agreements, but by the development of case law. During the 50s and 60s, judges began requiring just cause for termination, and it was rare that they accepted reasons weaker than flagrant malfeasance. In the 90s, amid great financial difficulties, many companies managed to implement more layoffs and early retirement packages despite these requirements. However, firing is still considered a last resort in most cases.

The lifetime employment system remains in that only a minority of companies (mostly in the Tokyo and Osaka areas) has officially abandoned it. Legally, protections against termination remain strong. Also, most companies now include some form of performance assessment in raise and promotion decisions, not just seniority. However, since the 1990s, a large proportion of people entering the workforce have been unable to get on board the system. Instead, they have found part-time or other non-regular work, and languished there, without much opportunity to acquire skills. In general, young people are less likely these days to believe in the promise of lifetime employment.

Nevertheless, regular workers in Japan remain fairly expensive and hard to fire. In response, a good deal of HR management now consists of carefully controlling the entry of regular workers.

Pension Systems

Japan has a 3-tiered pension system. First is the National Pension (NP), which covers all citizens, though only the self-employed and other non-regular workers pay into it directly. Second is Employee Pension Insurance (EPI), which includes all regular workers and is paid into by employers and employees. Finally, there are private pensions, which employers can offer in addition to EPI.

The NP is calculated on a flat basis: everyone enrolled pays a fixed contribution (about $120/month) and receives a fixed amount at retirement, depending on how long they were enrolled. Enforcement is lax; many legislators resigned in 2003 when it was discovered they had not paid their premiums in the 1980s.

The EPI, unlike the NP, is calculated according to income: the employee and employer pay 7.3% of monthly income each to the government. It is mandatory and standardized for all regular employees. Large companies can also choose to manage it themselves as part of a more generous pension (called the Employee Pension Fund).

Generally, private companies also manage their own private pensions on top of the EPI. These can be of various types, but are usually contributory and defined-benefit. Defined-contribution systems have also been possible since 2001, but these have been chosen mostly by smaller companies. Separate from this paid-in system, there is also a common Retirement Allowance practice in which employees receive an unfunded lump-sum benefit at retirement.

Other Benefits

All regular employees must be enrolled in the governments Health Insurance Plan (HIP), employee and employer paying 4.1% of monthly income each. Universal healthcare is provided by the government to all citizens. Non-regular employees pay their own premiums only to the National Health Insurance Plan (NHIP). Foreign employees working in Japan are not required to be either of these systems, and employers often enroll them in private health insurance plans.

Other government-mandated benefit payments include those for unemployment insurance, workers compensation insurance, and childrearing allowance insurance (the last only for eligible employees). Many companies also include family allowances and housing allowances in their compensation packages.

Management of Regular vs. Non-Regular Employees

Non-regular employees today comprise about 43% of the workforce, up from 16.6% in 1987. They normally receive significantly less in benefits than regular employees. For example, one is only obligated to enroll employees in government pension programs if they work over three-quarters of the time that regular employees do. Therefore, many companies are developing tiered systems of employment. In these systems, there is a core of lifetime (or at least long-term) employees, a layer of shorter-term fixed-contract or dispatch employees to supply various professional skills, and an outer layer, often part-time, doing routine and support work.

However, not all the burdens of regular employment are removed by hiring other types of employees. For example, fixed-term employees may sometimes be given the same protections from firing in court as regular employees, if contract renewal is routine and repeated. Also, there are political responses to the greater proportion of non-regular employees: the government is pushing to make companies provide pension contributions for employees working at least half the hours of regular employees, rather than the current three-quarters requirement. The new prime minister, Shinzo Abe, has highlighted improving conditions for part-time workers, and future legislation may include stronger encouragement of companies to bring part-time employees into regular employment tracks.

Recruiting: Traditional System

Japanese companies used to get the bulk of their employees through college (or high school) recruitment. Because of this, the college recruitment process was, and still is, elaborate. Companies usually develop close connections with one or a few schools through networks with professors, alumni, and administrators. Top companies and the government monopolize the graduates of top colleges like Tokyo University. Companies organize informational events at their preferred schools to attract candidates, who send in postcards of inquiry. The recruitment process, over the early part of the senior year, includes applications, written tests, and several interviews. Afterwards, there is a process of competition for top candidates. At the end, the chosen candidates normally begin work as a group in April each year.

Foreign companies have found themselves somewhat shut out of this complex system, and have to use other methods.

Recruiting: What To Do Instead

Foreign companies are advised to use two basic frameworks in recruiting in Japan. First, look for the sorts of people the established companies are less interested in; and second, look in places and ways they do not.

Because of traditional Japanese standards, there are many types of excellent candidates who in general will fare poorly with more traditional companies. Those who quit a permanent job at a Japanese company, for example, will be seen by some as untrustworthy. However, these mobile, mid-career employees often work well at foreign companies. In addition, some skilled people in their 40s and 50s have been downsized, or have taken early retirement, and will have difficulty reentering the workplace due to their age. These senior candidates often have lots of energy and drive to continue working well into their 60s. Female employees who are geared to longer professional careers are often good candidates as well. Very few women are able to make it to the managerial level in Japan (about 9%), and they often seek out foreign companies in the expectation that they will have better opportunity there.

Freeters, the underemployed twentysomethings that have become a byword in Japan today, are also worth considering. Although some have a preference for light part-time work, others are employable, but simply never made it into the corporate world after college.

Returnees, Japanese who are educated in Western colleges and return to Japan to work, are a valuable resource for foreign companies. They are bilingual and acculturated to both Japanese and Western attitudes. True expatriates, by contrast, are much more expensive and usually have difficulty connecting with the workforce due to linguistic and cultural issues.

Recruitment agencies, once marginal, now play an important role in Japan, especially for executive search. One executive recruiter said that in the early 90s, her calls to midlevel managers were refused 90% of the time, but now almost everyone will speak to her. Headhunting is a common practice in Japan today.

Other avenues include newspaper and magazine ads, job fairs, and Internet sites.

Conclusion

A well-selected and well-managed Japanese staff can be dependable and the key to your companys success in Japan. However, one must tailor policies according to Japanese expectations and a unique blend of labor law and custom.

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