Japan: Court guidance on implementation of fixed overtime allowances

Under the Japanese Labour Standards Act (LSA) an employer must enter into an agreement regarding overtime and holiday work with a union or employee representative representing the majority of their employees, before it can ask its overtime-eligible workforce to work more than 40 hours per week, or 8 hours per day (Legal Work Hours). Even with this so-called ‘36 Agreement’ in place, the employer is required to pay the premiums stipulated in the LSA for each hour worked by an overtime eligible employee in excess of Legal Work Hours.

Payment of a ‘fixed overtime allowance’ is one method employers have traditionally used to manage the costs and administrative burden of this overtime premium payment obligation. Employers stipulate in the employee’s contract of employment a proportion of their monthly remuneration which represents a fixed overtime allowance’, paid on top of the base salary to cover overtime premiums stipulated in the LSA, for any work the employee performs in excess of Legal Work Hours. A recent Japanese Supreme Court decision (followed by subsequent Tokyo District Court decisions) has stipulated in greater detail the requirements which must be met by employers seeking to implement such a scheme, in order to be legally compliant.

The recent decisions suggest that, to be fully compliant, employment contracts or work rules should:

• set out the exact monetary amount of the fixed overtime allowance, and include a maximum number of hours of premiums for:
  • overtime; and/or
  • work between 10pm and 5am; and/or
  • work on the prescribed rest day required by Japanese law to which the fixed overtime allowance relates; and
• state that LSA premiums will be separately paid for overtime hours worked in excess of the hours covered by the fixed overtime allowance.

Fixed overtime allowances should be calculated taking the above statutory premiums on wages into account, and so as to reflect a genuine estimate of the overtime an employee is expected to work, potentially with a buffer. It should however also be noted that there are restrictions on regularly working more than 45 hours of overtime, so fixed allowances should not be for more than 45 hours of premiums.

Employers should note that lawfully implementing a fixed overtime allowance for existing employees (particularly where the employer wishes to keep total remuneration levels the same as to date) requires considerable planning, care and consultation with their workforce.

Actions for employers

Where a scheme is in place, employers should continue to fully explain overtime policies in any collective agreement, work rules and contracts of employment. For full compliance, the above requirements should be met, and employees hours should be monitored to ensure that hours worked in excess of a fixed overtime allowance are paid for.

Article written by Peter Godwin, Partner, Emma Deas, Associate, and Georgina Stevens, Associate.