Many Japanese employers, especially in sales, IT and start-ups, pay a fixed sum each month that covers, say, 20 or 30 hours of overtime. The employee receives it whether or not they work those hours. The attraction is predictable cost and simpler payroll. The risk is that a court decides the arrangement is invalid.
The Supreme Court has set out the tests in a line of cases. In the Koshinkai case (2017), a doctor's high salary was held not to include overtime because the overtime part could not be distinguished from the rest. In the Nippon Chemical case (2018), the Court accepted a fixed allowance that the contract and practice showed was paid for overtime. In the Kokusai Motorcars case (2020), a taxi company's formula that deducted overtime pay from commission failed because it was not genuinely consideration for overtime. Two requirements emerge: the overtime part must be clearly separable from ordinary pay, and it must actually be paid for overtime. Hours beyond those covered must be paid in addition.
If the arrangement fails, the consequence is severe. The fixed sum counts as ordinary pay, raising the hourly rate, and all overtime is owed on top for up to three years.
What it means for a foreign employer
- Write it properly. The contract and work rules should state the amount, the hours it covers and that excess hours are paid separately. Job advertisements are expected to show the same details.
- Keep counting hours. Fixed overtime pay does not remove the need to record working time or pay the excess.
- Do not use it to hide a low base. Excluding it, base pay must still clear the minimum wage, and a large block of fixed overtime invites challenge.
- Explain it to candidates. A candidate's quoted pay may include it. Ask how many hours it covers before comparing with your offer.
Sources
- Supreme Court, Koshinkai case, 7 July 2017; Nippon Chemical case, 19 July 2018; Kokusai Motorcars case, 30 March 2020.
- Labour Standards Act, Article 37.