Vol.32-No.12 December 1,1993
1. Introduction
In the increasingly borderless economy, more and more Japanese companies do their business abroad. Accordingly, a growing number of Japanese employees work at foreign branches and subsidiaries. As of 1991, as many as 265,565 Japanese nationals employed by companies in Japan were residing abroad for three months or more.1 More often than not, these employees are sent abroad for several years and then return to headquarters in Japan when their successors arrive to take over their positons. That is why such employees are called "rotating Japanese staff." While such rotating staff are seen almost everywhere in the world, their legal status, functions in business activity, and working conditions are not very familiar to those who are outside of Japan. Thus, this article examines the reality of rotating Japanese staff and considers their future prospect.
It is necessary at the outset to note the difference between rotating staff and those who are on business trips abroad. Employees on business trips abroad belong to their home based workplaces. Even when they perform duties in foreign countries, their work stations remain the same and they work under the direction of their supervisors in Japan. In contrast, rotating staff belong to foreign branches or subsidiaries and they work under the direction of their supervisors abroad. In this sense, rotating Japanese staff may be classified as "expatriates," although the period of assignment of "expatriates" is usually longer than that of rotating staff.
II. The Functions of Rotating Staff
1. The Purpose of Overseas Assignment
The role that employees assigned to overseas offices (i.e.,foreign branches and subsidiaries) are supposed to play varies from company to company. In general, however, it depends mainly on the role of the overseas offices of each company. The role of overseas offices, in turn, depends on the stage of development of each company's international business activities. For example, when a manufacturing company in an early stage of internationalization intends to promote the export of its products to a foreign country, it may set up an office in that country for sales activities. The role of employees assigned to such an office is to perform more efficient sales activities than those who are sent abroad on business trips. Next, when a company decides to build a plant in a certain country, it sets up a small office to prepare the construction of the plant and its operation. The staff in such an office is supposed to gather and analyze information, send it to headquarters, and make preliminary contact with potential customers, job applicants etc. Then, when the plant begins its operation, a number of employees including engineers are assigned to the plant in order to secure its smooth operation. After the initial stage of operation of foreign offices or plants, however, the domestication of business activities begins. Headquarters may delegate to local staff a number of essential roles that were formerly assigned to staff from headquarters.
2. Executive Staffing Policies of Japanese Companies Overseas
According to a comparative analysis of human resource management in multinational enterprises, Japanese companies tend to use parent-company nationals for both senior and middle management positions in overseas operations. Although U.S. and European multinationals also use parent-country nationals for senior management positions in developing countries, the percentage of parent-country nationals of European companies in the United States and that of U.S. and European companies in West European countries for senior management positions are lower than that of Japanese companies. For example, as of 1982, expatriates from Japanese headquarters occupied 83 percent of senior management positions in their U.S. branches and subsidiaries, as compared with 20 percent in the case of European companies.2
The degree of domestication in terms of human resource management depends on various factors. As stated above, the stage of overseas operation is one of the most important factors. The percentage of parent-country nationals tends to be large in the early stage of overseas operation, because at such a stage the skills and experiences of the headquarters' employees are necessary to develop and control local offices. Thus, the high percentage of Japanese staff at local offices may reflect the relatively short history of direct foreign investment of Japanese companies. In fact, the percentage of local staff in management positions at local offices is gradually increasing. On the other hand, some Japanese companies may emphasize the importance of maintaining their management style abroad. They may want their local offices to be managed by those who are familiar with what they perceive is the Japanese style of management. Apart from such policies, the degree of domestication in terms of staffing may also depend on the nature of the particular industry. While manufacturing plants where a majority of employees are blue collar workers do not need to depend on many Japanese staff except positions for technology transfer, Japanese general trading companies may feel the need for managerial staff from headquarters who have experience and human networks for international trading.
III. Legal Issues Regarding Rotating Staff
1. Legal Status of Rotating Staff
The legal status of rotating staff depends on the relationship between the headquarters, the local office and the rotating staff. This relationship turns, inter alia, on the legal form of the local office. When a local office is an unincorporated branch or division of a company in Japan, the assignment of rotating staff in most cases takes place as an intra-company transfer. This means that the employee changes his/her workplace or work station within a company. Thus, unlike a business trip, the rotating staff work under the direction of their supervisor in the new workplace. Still, they are supposed to go back to their original workplace, and often retain the status as employees of the original workplace even during the period of transfer.
When a company assigns an employee to a separate legal entity such as its subsidiary or related company abroad, this assignment can be classified as Shukko (Zaiseki-Shukko) or "firming-out." Although this form of human resource management may not be familiar to foreign readers, it often takes place in Japanese companies.3 When an employee of a company (company A) is in Shukko, he/she belongs to the assigned company (company B) and works under the direction of supervisors of company B. However, he/she is supposed to return to company A after the period of assignment. In addition, while working at company B, the employee remains an employee of company A.
Thus, the employee has a dual contractual relationship both with company A and B. In some cases, company A even continues to pay his/her wages to the employee while company B reimburses some portion of this to company A. In other cases, however, it is company B that pays Shukko employee's wages, and company A is supposed to pay the differential between the wages from company B and those which he/she would receive from company A. Furthermore, it is not company B but company A that retains the power to discharge the Shukko employee even when he/she is working for company B. Therefore, if company B has to carry out a reduction-in-force, company B does not discharge the employee: he/she merely returns to company A. These features of Shukko essentially apply to the assignment of Japanese staff to foreign subsidiaries.
2. Procedures to Assign Employees to Overseas Offices
Japanese companies rarely hire new employees for executive staff positions at their overseas offices. They usually send regular employees abroad based upon a certain selection procedure. Moreover, in many cases, the employer and the employee who is supposed to work abroad do not conclude a written agreement or contract for overseas assignment. Whether employees go to foreign branches or subsidiaries, procedures for such an assignment are not very different from those used for domestic transfer or Shukko.
In a domestic context, Japanese courts have held that a company may transfer its employees from one workplace to another unless their employment contracts, work rules, or collective bargaining agreements put a limitation on the change in workplaces. As a matter of fact, most work rules contain a provision providing the employer with broad authority to transfer employees. Thus, in such cases, it is not necessary to obtain each employee's consent for the employer to transfer him/her. On the other hand, with respect to Shukko, courts have held the employer's discretion to be somewhat narrower, taking into account the fact that the employee in Shukko is supposed to serve a different employer than he/she originally contracted with. In addition to provisions under work rules or collective bargaining agreements regarding Shukko, the employer must take care of the employee's welfare in terms of working conditions at the company he/she is to be assigned, the period of assignment, and the conditions for returning.
Because of the scarcity of court decisions, it is not clear whether the same principles as in the case of domestic transfer and Shukko apply to overseas assignments. However, some scholars contend that such an assignment must be based on each employee's consent4. As the basis for this conclusion, they emphasize various adverse effects that foreign assignments could have on employees' work and life.
3. The Applicability of Japanese Labor Law5
In analyzing the issue of the applicability of Japanese labor law to rotating Japanese staff working abroad, it is necessary to note that Japanese jurisprudence, following civil law tradition, distinguishes two aspects of labor law: public and private. Roughly speaking, public labor law is a legal system under which a government regulates the labor and employment relationship, while private labor law sets out rules or rights and obligations between employers and employees. In the area of public law, it is widely recognized that most Japanese labor laws apply only territorially. Although they may apply to employees on a business trip abroad who ordinarily work in Japan, they do not cover rotating Japanese staff working on foreign soil. So long as they belong to workplaces in a foreign country and work under the direction of supervisors there, it is the labor laws of that country that regulate their working and employment relations.
Private labor law mainly covers contractual rights and obligations between employers and employees as well as their responsibilities under tort law. In this area, the applicability of Japanese law to Japanese rotating staff is analyzed in the framework of choice of law or private international law. Although rules for the choice of law vary from country to country, a general trend is that party autonomy essentially applies with respect to employment contracts. Therefore, if an employer and an employee designate a law that applies to their contractual relationship during the foreign assignment, courts should respect their choice of law.
However, many countries including Japan recognize an exception in that party autonomy is subject to limitation in terms of public policy. If the party's choice of law is contrary to public policy of the country where an action is brought or work is performed, the court shall not defer to party autonomy. Many statutory laws that regulate labor and employment relationships may constitute public policy in this sense, since such regulations are based on strong governmental interest in protecting workers' welfare in each country.
Under the Japanese conflict rule, when the governing law that the contractual parties chose is not certain, the law of the place where the contract was made should govern. With respect to disputes arising under employment contracts of rotating Japanese staff, the place of contract is most likely Japan, and Japanese law shall govern such disputes so long as the litigation takes place in Japan. However, when the lawsuit is brought in a foreign country, the conflict rule of the forum, which is not necessarily the same as that of Japan, will determine the applicable law.
IV. Working Conditions of Japanese Rotating Staff
Most Japanese companies that are sufficiently large to send employees abroad have written rules providing for the working conditions of such employees. Also, there may be collective bargaining agreements on these matters. The following is a brief description of the working conditions of rotating Japanese staff.6
1. Period of Assignment
The period of assignment for rotating Japanese staff depends, among other things, on the region where they are assigned. In the case of assignment to North America and Europe, the period is often three to five years with the length being extended in recent years. On the other hand, the period of assignment to other regions tends to be shorter with many companies setting it at three years or less. This difference may be influenced by the relative difficulty in living in developing countries.
The purpose of the overseas assignment may also influence the length of stay. When an employee is sent to work at top management positions of foreign subsidiaries and branches, it is likely that they will stay there for three years or longer. This may be because it takes time for top management to achieve efficient performance at a new working environment in a foreign country. In contrast, the period of assignment for overseas training is most likely to be less than three years.
2. Working Hours and Holidays
In many cases, working hours set by local offices apply to rotating Japanese staff along with local hires. This is also true of weekly and other special holidays. Unified working hours appear to be important for carrying out the systematic operation of business. With respect to paid annual leave, however, Japanese companies tend to give their rotating staff what they would receive if they were working in Japan.
3. Salary, Bonuses, and Severance Pay
The compensation system for rotating Japanese staff is very complex. Moreover, the contents of the systems vary from one company to another. Generally speaking, the methods of determination and payment of salary to rotating staff working overseas can be divided into three patterns. Under the first pattern, a Japanese company continues to pay its rotating staff the base salary or the core domestic salary they would receive if they worked in Japan. In most cases this salary is paid in Japan. In addition, rotating staff receive allowances for overseas assignment. The amount of these allowances will be determined by such factors as each employee's job title and the cost of living abroad. Such a dual compensation system is apparently influenced by the fact that the family of rotating staff often choose to remain in Japan, especially when children are junior or senior high school students.
The second pattern divides base salary into two parts, one of which is to be paid in Japan and the other overseas. The ratio of the amount to be paid in Japan depends on each company's policy and the number of members in the employee's family remaining in Japan. In many cases, the amount of the base salary is determined according to the domestic standard. Like under the first pattern, however, rotating staff usually receive a certain allowance for overseas assignment in addition to the base salary.
The third salary pattern for rotating staff centers on an overseas salary. Base salary is set only for overseas payment, although some allowance is usually paid if rotating staff leave their dependent family in Japan. Even under this third pattern, the amount of domestic salary which rotating staff would receive in Japan but for the overseas assignment is often the basis for determination of their base overseas salary.
On the other hand, the practice regarding bonuses and severance pay is usually simple. In most cases, the domestic standards for the eligibility and calculation of bonuses and severance pay essentially apply to rotating staff abroad. This is designed so as not to put rotating staff at disadvantages as a result of overseas assignment.
4. Fringe Benefits
Like many other foreign enterprises doing international business, Japanese companies provide a number of special fringe benefits for their employees working on overseas assignment. The purpose of providing such special benefits is to make up for inconveniences which accompany working and living on foreign soil.
In most cases, companies provide financial support for their rotating staff to go back to Japan temporarily for congratulatory or condolatory occasions such as marriages and funerals of family members. Also, support for housing is usually available in one way or another: housing allowance, loans, leasing, and information services. With respect to health care, many companies bear the expenses of medical insurance for their rotating staff and, to a certain degree, for accompanying families. In addition, since the education of accompanying children is one of the most serious problems for rotating Japanese staff, companies often give them various forms of educational support.
5. Personnel Appraisal
There is not very much information on the personnel appraisal of rotating Japanese staff working abroad. The process of appraisal appears to be diverse in terms of the evaluator as well as the evaluation system. In some cases, rotating staff are evaluated by their supervisors at headquarters, while in other cases the evaluators are supervisors at the local level, though they are often Japanese.
This phenomenon may reflect the difference in the contents of their respective jobs, especially in cases where rotating staff perform different duties from those of local employees. However, the more important reason may be that, as stated above, rotating staff retain their status as employees of headquarters even when they work abroad. Since rotating staff are still employees of the headquarters, they are covered by the job-ranking and personnel evaluation system used at headquarters.
V. Conclusion: Future Prospect of the Rotation System
It has not been that long since most Japanese companies began to operate in foreign countries. Thus, their skill in human resource management in international business is still in the developing stage. Also, corporate cultures of Japanese companies are often different from those of local and other foreign companies. As a result, the domestication of overseas operations has been relatively slow compared to multinational enterprises of other countries. This has sometimes resulted in a number of problems in employee relations.
For the development of Japanese companies as multinational enterprises, it is necessary for them to further the domestication of their operations abroad. This requires the reconsideration of the roles and functions of rotating Japanese staff as well as the training and promotion of local staff. On the other hand, with respect to positions for which rotating staff are indispensable, Japanese companies should clarify the special features of such positions and explain them to local staff. The mutual understanding based on good communication is one of the necessary conditions for the successful operation of inter-cultural workplaces.
Notes
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