Work Rules That Permit Side Jobs: Designing an Approval System and Aggregating Working Hours

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When an employee notifies the company of a side job, how far can the company restrict that activity? And who keeps track of the hours worked at another company and bears the overtime premium? These are the two points you face in practice when revising work rules.

The Shift to Permitting Side Jobs in Principle and the Criteria for Restriction

Under an employment contract, the employee works under the employer's direction, and the employer pays wages in return. How employees use their time outside working hours is fundamentally their own choice, and that freedom is respected as long as it does not interfere with the provision of work or the company's legitimate interests.

The Ministry of Health, Labour and Welfare's Model Work Rules are sample provisions for companies to refer to when drafting their own. Whether particular rules legally apply to a given company is determined by its actual work rules, employment contracts and the law. Still, the way the model has changed shows the government's basic stance clearly. The Ministry established the "Guidelines for the Promotion of Side Jobs and Multiple Jobs" in January 2018 and revised them in September 2020 and July 2022. In line with this, the provision formerly listed among the matters employees must observe in the Model Work Rules, "not to engage in the business of another company or the like without permission," was deleted. The current Model Work Rules adopt the principle that employees may engage in the business of another company or the like outside working hours, on condition of giving notice.

Accordingly, a provision that uniformly prohibits side jobs without any reasonable grounds runs in a different direction from the current government guidance. If a company is going to restrict side jobs, it needs to be able to explain objectively why it can prohibit them and to what extent it can restrict them.

The current Model Work Rules take the position that, in principle, employees may take on a side job after giving notice, while the company may prohibit or restrict it if any of the following grounds applies.

• Interference with the provision of work
• Leakage of business secrets
• Harm to the company's interests through competition
• Damage to the company's reputation or credibility, or destruction of the relationship of trust

These four grounds are positioned not so much as a basis for unconditionally prohibiting side jobs, but as criteria for reviewing individual notifications. Designing a notification or approval system amounts to specifically checking whether any of these four grounds applies.

Aggregating Working Hours and Allocating the Overtime Premium

Article 38(1) of the Labor Standards Act (Japanese) provides: "Working hours shall be aggregated for the purpose of applying the provisions on working hours, even where work is performed at different workplaces." The Ministry interprets "different workplaces" to include cases where the employers are different. Therefore, for an employee who has a side job subject to aggregation, the company cannot determine whether statutory overtime has occurred using only its own attendance data.

Working hours are aggregated by first adding up the scheduled working hours at each company "in the order in which the employment contracts were concluded." Then, the daily non-scheduled work is added "in the order in which it was actually performed."

The statutory working hours under Article 32 of the Labor Standards Act are, as a rule, 8 hours per day and 40 hours per week. Scheduled working hours do not necessarily coincide with statutory working hours, however. Where a variable working hours system or a special rule for certain industries or types of work applies, the check is made according to the relevant framework.

Of the portion that exceeds the statutory working hours as a result of aggregation, each company pays the overtime premium for the hours it had the employee work (Article 37 of the same Act). For a company to have an employee work statutory overtime, it must have concluded and filed its own Article 36 agreement and must comply with the extension limits set in that agreement.

Under this standard aggregation method, both the company that contracted first and the company that contracted later confirm the other company's scheduled working hours through the employee's self-reporting or other means. When a company has the employee perform non-scheduled work, it also ascertains and aggregates the non-scheduled work at the other company. Which company bears the overtime premium for the overtime that occurs is not determined entirely by the order in which the contracts were concluded. Unless the company sets internal rules on the items to be reported and the frequency of submission, it will be unable to determine the number of working hours needed for monthly payroll calculations.

How the Management Model Reduces the Burden

Aggregating hours by the standard method, matching the employee's daily hours at the other company, places a heavy operational burden on companies. To reduce this burden, the Ministry's guidelines provide a simplified method of working hour management called the "management model."

In the management model, the company that concluded its employment contract first is designated Company A, and the company that concluded its contract later is designated Company B. Upper limits are then agreed on for Company A's non-statutory working hours and for Company B's working hours.

Before the side job starts, the limits are set in advance so that the combined total of the two stays below 100 hours in any single month and within an average of 80 hours over each period of two to six months. Holiday work is included within these limits. This standard assumes the general cap on overtime work; for work subject to special rules and the like, the individual provisions are checked. Of course, each company remains obliged to stay within the scope of the Article 36 agreement it has concluded.

By operating within the limits each company has set, Company B can calculate the overtime premium without tracking Company A's actual daily working hours, reducing the work of daily aggregation. Information sharing and measures needed for health management continue to be carried out.

However, care is needed with payment of the overtime premium. Company B pays the overtime premium for all hours it actually had the employee work. The basis for calculating the premium is not the limit that was set but all of the hours actually worked at Company B. Company A likewise pays the overtime premium for its own non-statutory working hours.

Introducing the management model requires that Company A request it and that both the employee and Company B agree. It cannot proceed on an arrangement between Company A and the employee alone. The sections on "How to introduce the management model" and "Points to note" in the Ministry's Side Jobs, Multiple Jobs and Working Conditions (Japanese) also allow the proposal to be made through the employee and advise that the three parties share the necessary information. In the actual notification or notice documents, record the working hour limits set by each company and the fact that Company B has agreed to introduce the management model.

Items to Check Under a Notification System

When adopting a notification or approval system for side jobs, decide in advance what the notification form must state and what the company will review.

First, confirm the industry and business of the side job employer and whether it competes with the company's business. For work at a competitor or at a company with which there is a business relationship, determine individually whether it constitutes harm to the company's interests through competition. If the side job employer shares business partners or customer segments with the company, the handling of customer information and the like may become an issue even if the duties themselves do not compete.

Next, consider the specific duties and the likelihood of contact with the company's trade secrets and technical information. Even if the side job employer appears to be in a different industry, check whether, depending on the duties, the employee would end up taking out know-how or technology developed at the company. How to organize the information assets the company should protect is also discussed in What Is a Confidentiality Clause? Review Practice for Contracts Other Than NDAs.

In addition, have the employee accurately report the working hours, working days and form of work at the side job. Ascertain the date the contract with the side job employer was concluded, the scheduled working days, start and end times, and expected non-scheduled work, as well as whether it is an employment contract or a service agreement. Working hours are aggregated where a person works under multiple employers as a worker to whom the working hour regulations of the Labor Standards Act apply. Time spent under a contract for work or a mandate as a genuine independent business is not subject to this aggregation. However, as the Ministry's explanation of worker status (Japanese) indicates, this is determined not by the title of the contract alone but according to the actual circumstances of the provision of work, such as whether there is direction and supervision.

Also include in the work rules an obligation to re-notify when the notified details change. If the company cannot learn that the side job employer has changed or that the working hours have increased, the notification system will not have its intended effect.

Dealing with Competition and Leakage of Secrets, and Health Management

Introducing a system that permits side jobs does not automatically loosen confidentiality obligations or non-compete obligations based on the work rules or the employment contract.

The Ministry's guidelines describe the non-compete obligation during employment as an obligation not to unfairly infringe the employer's legitimate interests. When determining whether a prohibition or restriction is appropriate, do not merely look at whether the businesses are in the same industry, but examine in detail the employee's duties at the company and the actual work at the side job employer. Where the company's legitimate interests are not infringed, there are cases in which a side job should be permitted even if it is in the same industry or the same type of job. The design and limits of making a non-compete obligation work effectively are explained in detail in A Non-Compete Clause Is Not Better Simply Because It Is Drafted Broadly.

As for confidentiality, check what important company information the employee has access to and whether there is a risk that the employee will misuse that information at the side job. For example, where a software engineer does contract development work in a personal capacity, distinguish clearly between using general knowledge and skills the person has developed through work and diverting the company's own non-public design documents or source code. At the notification stage, exchange a written pledge that the protected information assets will not be used in the side job, and confirm that the employee will cooperate with an investigation to a reasonable extent if any doubt arises. Any investigation is likewise limited to the scope related to the information or conduct in question.

A competitive relationship not anticipated at the time of notification may come to light after approval. Where a competitive relationship arises because of a business partner pointing it out or the expansion of the side job employer's business, first check specifically whether it falls under "where the company's interests are harmed through competition" as set out in the Model Work Rules. Do not conclude that there is harm to the company's interests from the mere fact that the employee works at a competitor; examine individually the nature of the duties, the range of information the employee can access, and whether there is any real damage.

If circumstances harming the company's legitimate interests are confirmed, after hearing the employee's side, consider whether the matter can be dealt with by partially restricting the work or whether to require the employee to stop the side job. Whether disciplinary action is permissible must be judged separately from withdrawing approval or ordering the employee to stop. Article 15 of the Labor Contracts Act (Japanese) provides that disciplinary action that lacks objectively reasonable grounds and is not considered appropriate in light of social norms is invalid as an abuse of right. Avoid moving immediately to severe discipline on the basis only of working in the same industry or a procedural failure to give notice; make the judgment by comprehensively assessing the seriousness of the conduct, whether confidential information was taken, the specific impact on the company, and so on.

Employee health management also deserves attention. The duty of care for safety under Article 5 of the Labor Contracts Act is not waived even when side jobs are permitted. Even for a side job in the form of a contract for work or a mandate that is outside the scope of working hour aggregation, ascertain the total working time and accumulated fatigue, and where excessive burden is apparent, consider adjusting the workload or working hours at the company. It is important to check periodically after notification whether there has been any change in the side job employer or working hours, and to set up a contact point and operating rules through which employees can raise physical or mental health concerns.

Support for Drafting Rules and Operations

Our Labor and HR page describes our support for revising work rules and preparing employment contracts with side jobs in mind. If you want to put your internal operations in order, going beyond drafting internal rules to include day-to-day labor consultations, please also see Legal Outsourcing.