Managing overtime compensation is a critical aspect of labor management in Japan, as failure to comply with regulations can result in substantial penalties and legal disputes. Recent cases have underscored the importance of accurate classification of employees and proper premium wage calculations. Understanding these regulations is essential for both employers and employees to ensure compliance and maintain a fair work environment. Below, we provide a detailed breakdown of Japan's legal framework on overtime wage regulations.
Premium Wages for Overtime, Holiday, and Night Work
Per Article 37 of Labor Standards Act, employers are required to pay premium wages to employees at rates specified by law for overtime, holiday, and night work as follows:
Overtime Allowance
・ For work beyond 8 hours a day or 40 hours a week:
Hourly wage × Overtime hours × within the range from 125% to 150%
・ For work beyond 60 hours a week:
Hourly wage × Overtime hours × at least 150%
Holiday Work Allowance ・ For work on the statutory day off per week:
Hourly wage × Overtime hours × at least 135%
・ Meaning of “Statutory day off”:
- An employer shall provide employees with at least 1 day off per week (Article 35, paragraph 1)
- An employer shall provide employees with 4 days off or more during a four-week work period (Article 35, paragraph 2)
Night Work Allowance ・ For work between 22:00 and 05:00: Hourly wage × Overtime hours × at least 125%
Deriving the Hourly Wage for Premium Wage Calculation
To calculate premium wages (e.g. overtime, holiday and night allowances), the hourly wage is derived from the employee’s regular compensation. The calculation methods vary based on wage structures:
For Hourly Wage Employees ・ Hourly Wage = Basic hourly wage
For Daily Wage Employees ・ Hourly Wage = Basic daily wage ÷ Number of prescribed working hours per day
For Monthly Wage Employees ・ Hourly Wage = Basic monthly salary ÷ Average prescribed working hours per month in a year
This calculation ensures that the hourly wage used for premium wage calculations is fair and consistent.
Basis for Premium Wage Calculation
Certain wages are excluded from the basis of the hourly wage for premium wage calculation. These exclusions are as follows:
Family Allowance
Commuting Allowance
Separate Residence Allowance
Child Education Allowance
Housing Allowance
Wages paid temporarily
Wages paid for periods exceeding one month
All other wages not mentioned above, must be included in the calculation of premium wage.
Exemptions
Employees in supervisory or managerial positions are exempt from the regulations on working hours, breaks, and holiday work restrictions under Article 41 of the Labor Standards Law. As a result, they are not entitled to overtime or holiday work allowances. However, night work allowances under Article 37, paragraph 3 still apply to them.
Companies must clearly specify in employment contracts whether an employee is classified as a manager or supervisor. Legal disputes often arise due to varying interpretations of what qualifies as managerial or supervisory status. If a court determines that an employee does not meet status as a manager or supervisor, the company might face significant unpaid overtime liabilities.
Careful evaluation and documentation are crucial when assigning managerial status to ensure compliance and minimize risks.
If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.
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