HR Issues Arising from Reduced Working Hours and Countermeasures

[HR Insight July 2017 Issue]

CEO Jeon Myung-hwan

The new government formed a Jobs Committee as a presidential advisory body directly chaired by the president, to ensure the swift implementation of the presidential campaign promises. This passage shows how serious youth unemployment and the new entry into the labor market have become. The prevailing view is that the Jobs Committee will bring up "reducing working hours" as its first agenda item. Just before the presidential election, the bill came close to being amended through bipartisan agreement, but due to the existence of other disagreements, it ultimately failed to reach an agreement. However, based on the Ministry of Labor’s administrative interpretation, it appears that neither the ruling nor the opposition party has any particular disagreement over the proposal to reduce the maximum working hours, which were previously up to 68 hours per week, to 52 hours per week. However, even if the regulation is defined as 7 days per week and the maximum weekly working hours are reduced to 52, there are still many hurdles to overcome, such as penalties for violating this regulation, the additional rate when overtime/holiday work allowances are duplicated, whether special extended work (8 hours) is recognized, the timing and method of applying the revised law, and whether special industry exceptions are recognized. The Jobs Committee has taken on the task of coordinating the positions of labor, management, and government and concretizing improvement measures to resolve such problems.

                                                                                     [Figure 1. Status of Working Hours in Korea]

As is already well known, the actual working hours in our country are being examined at a world-class level. Looking at the number of working hours per employed person among 34 OECD countries in 2015, Mexico ranks first with 2,246 hours, while South Korea ranks second with 2,113 hours. The fact that countries such as France and Germany report significantly low working hours in the 1,300–1,400-hour range appears to be because a considerable number of short-hour workers are included who work voluntarily and at their own choice. There may be various reasons for the existence of such long working hours, but it is often attributed mainly to a corporate work culture and a wage structure with a high allowance ratio. Regardless of the cause of long working hours, a national consensus is being formed to improve the phenomenon of long working hours, and both the government and labor-management have the determination to resolve this issue, so the change of reducing working hours is now expected to soon become a reality before us. Therefore, from the perspective of HR personnel, they cannot help but consider what impact a reduction in working hours would have on their company if it were actually implemented in the workplace, and what preparations they need to make. 

The Effects of Reducing Working Hours

While labor and management agree on the broad trend of reducing working hours, they are facing different concerns. In the labor sector, it is argued that if working hours are reduced, wages will decline due to the distorted wage system that our companies have in place. According to research by the Korea Labor Institute, there are approximately 409,000 workers in manufacturing in South Korea who work more than 52 hours per week, and they reportedly work an average of 21.4 hours of night or overtime work per week and receive 884,000 won in allowances. It was concluded that if overtime work is limited to 12 hours, their working hours would decrease by 9.4 hours, and the corresponding allowances would decrease by about 388,000 won. In other words, it is claimed that the average wage will decrease by about 13.1%, from 2,963,000 won to 2,575,000 won. 

Meanwhile, the business community argues that if working hours are reduced, the amount of reduced working hours must be compensated by hiring new personnel, thereby increasing the associated costs. Above all, in the case of small and medium-sized enterprises, many face a marginal industry and have wages set at a level slightly above the minimum wage; in such cases, there are claims that rising labor costs could lead to the bankruptcy of the company itself. The Korea Economic Research Institute analyzed, using data from the Ministry of Employment and Labor’s “Survey on Working Conditions by Employment Type (2012)” and the “Survey on Labor Costs in Companies (2012),” the extent of wage increases or decreases in response to changes in working hours by company size and industry. According to this, the shortage caused by the reduction in working hours is about 266,000 people, and the additional costs to hire them are estimated at a total of 12.3 trillion won. Above all, they argued that since about 70% (8.6 trillion won) of the additional costs caused by reduced working hours must be borne by workplaces with fewer than 300 employees, the cost burden on small and medium-sized workplaces will surge dramatically. 

In this way, the reduction of working hours is likely to produce not only positive effects but also concerns over workers’ wage reductions and increased cost burdens for companies. Therefore, from the company’s standpoint, measures should be considered to offset the increased costs resulting from improved productivity, and from the workers’ standpoint, the appropriate level of wage reduction that can be accepted in proportion to the reduction in working hours should also be considered. 

Response to Potential Issues Arising from Reduced Working Hours 1 (Approach through Staffing)

 According to the Ministry of Employment and Labor’s on-demand supervision results on long working hours in the first half of 2016, workplaces violating the overtime limit account for about 50% of the 100 workplaces surveyed. Moreover, in Korea’s manufacturing sector, the actual state of overtime work is understood to be at a serious level, with about 21% of workplaces exceeding 12 hours of overtime per week, about 5% of workplaces exceeding 8 hours of holiday work, and about 48% of workplaces having less than 50% utilization of annual leave.

                                                                      [Figure 2. Results of the On-Demand Long-Working Hours Supervision in the First Half of 2016]

This result is presumed to be because, in manufacturing, factories often have to operate 365 days a year or operate in shift systems including holidays. Of course, even if the system is operated on a shift basis, if sufficient rest time and holidays are provided, it is often possible to operate with 52 working hours or less per week. However, a considerable number of small and medium-sized enterprises are unlikely to fall under this case. This is because, in our country, the proportion of the two-shift, two-team system is still relatively high (60.8%, according to the 2012 Ministry of Employment and Labor labor cost survey), and the share of shift systems with relatively longer working hours, such as the two-team system or the three-team, two-shift system, is also high.

                                                                              [Figure 3. Example of Improvement in Shift Work System]

Therefore, if it is judged that the upper limit of the reduced working hours due to the shift system cannot be maintained, various improvement proposals for work systems should be developed through adjustments such as the shift cycle, the method of distributing break times during working hours, and group commuting times, as shown in [Figure 3]. In addition, if a reduction in the number of workers present on site within a given time is inevitable as a result, the scale of additional staffing needed should be estimated in advance, and the resulting financial impact, such as the increase in costs, should be evaluated. Furthermore, flexible and selective working hour systems or discretionary working hour systems permitted by law should be appropriately utilized in designing shift systems so that alternatives for the most effective improvement of the work system can be found.

Response to Potential Issues Arising from Reduced Working Hours 2 (An Approach Through Productivity Improvement)

Unless there is a case where additional staffing is absolutely necessary due to reduced working hours, it may be possible to consider improving productivity based on the current workforce size and offsetting that by the amount of reduced working hours. In particular, for workers engaged in jobs that require high levels of concentration and planning ability, such as administrative management and research and development positions, there are research findings that the degree of immersion in work is much more highly correlated with productivity than working hours. 

According to a 2012 self-confession report on productivity by service and office workers conducted by Ernst & Young among 3,000 employees of domestic companies, personal activity time during the workday is 1 hour 54 minutes, and inefficient work time during the workday amounts to 2 hours 30 minutes. Converted into economic value based on the number of employees and average wages at workplaces with five or more employees, this amounts to a staggering 146 trillion won, and even reducing such waste by just 30% would create an opportunity to generate an additional 44 trillion won in annual value. Therefore, except in cases where hiring additional staff is unavoidable due to reduced working hours, this can be said to be a measure that HR personnel should consider first and foremost as a way to improve productivity. In this case, identification and analysis must first be carried out to determine where the fundamental cause of the long working hours present in that company lies. Only then can we establish various approaches for improvement. 

According to the “Korean Corporate Culture Diagnosis Results” investigated in 2016 by the Korea Chamber of Commerce and Industry and McKinsey, a habitual culture of overtime work has firmly taken root, with 43.1% of employees working more than three days of overtime on a five-day workweek, and the study pointed out the “paradox of overtime” that productivity decreases the more employees work overtime. There were also many worker opinions that long working hours are occurring due to inefficient work practices such as rigid work schedules, long meetings, and face-to-face reporting. It was also found that, due to internal pressure, reluctance to take leave or leave of absence increases the number of working days, often resulting in relatively longer annual working hours. It would not be an exaggeration to say that these survey results reflect common problems present in a considerable number of our companies. 

Therefore, through changes in organizational culture and work processes, enterprise-wide productivity improvement tasks should be identified and continuously implemented. Above all, based on securing and maintaining a work-life balance for employees, various innovative activities should be carried out to establish a healthy and creative work culture. Furthermore, to secure flexibility in the work system, flexible work arrangements such as autonomous working hours and telecommuting may be introduced, and if building a smart work system based on IT technology can improve productivity, it may even produce results that outweigh the reduction in workload caused by shorter working hours. 

Consulting inquiries (CEO Myunghwan Jeon): cplajmh@eoncg.com

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