2024.12.12laborLabor Law
Issues with the So-Called Fixed Overtime Pay System
1. Introduction
Recently, regulations surrounding overtime pay have become increasingly stringent. Amid such circumstances, a number of companies have adopted what is commonly referred to as a “fixed overtime pay” system. This article aims to explain the challenges associated with the fixed overtime pay system and propose measures to address them.
2. What Is the Fixed Overtime Pay System?
1. Definition
The fixed overtime pay system is a compensation structure that includes a predetermined amount of overtime pay within an employee’s salary. This is sometimes referred to as “deemed overtime pay.” Under this system, a fixed amount of overtime pay is provided each month regardless of the actual number of overtime hours worked.
2. Pros and Cons
(1) Advantages
① Simplified calculations: Reduces the administrative burden of calculating overtime pay, social insurance contributions, and income tax on a monthly basis.
② Predictable labor costs: Facilitates more accurate financial planning by providing a consistent view of monthly labor expenses.
③ Stable income: Employees benefit from a stable income as they receive a predetermined amount of overtime pay.
④ Efficiency incentives: Since employees receive the same pay regardless of whether they finish work on time or within the designated overtime hours, it may encourage efficient work habits and improve productivity.
(2) Disadvantages
① Fixed payments regardless of actual overtime: Companies must pay the predetermined overtime amount even when no overtime occurs.
② Mandatory time tracking: Employers are still required to manage employee attendance, and any overtime exceeding the fixed amount must be calculated and paid separately.
③ Risk of mismanagement: Misunderstandings or errors in applying the system can lead to illegal practices such as unpaid overtime.
④ Cultural risks: The system may foster a culture where excessive overtime is normalized because “overtime is already paid.”
The fixed overtime pay system is a compensation structure that includes a predetermined amount of overtime pay within an employee’s salary. This is sometimes referred to as “deemed overtime pay.” Under this system, a fixed amount of overtime pay is provided each month regardless of the actual number of overtime hours worked.
2. Pros and Cons
(1) Advantages
① Simplified calculations: Reduces the administrative burden of calculating overtime pay, social insurance contributions, and income tax on a monthly basis.
② Predictable labor costs: Facilitates more accurate financial planning by providing a consistent view of monthly labor expenses.
③ Stable income: Employees benefit from a stable income as they receive a predetermined amount of overtime pay.
④ Efficiency incentives: Since employees receive the same pay regardless of whether they finish work on time or within the designated overtime hours, it may encourage efficient work habits and improve productivity.
(2) Disadvantages
① Fixed payments regardless of actual overtime: Companies must pay the predetermined overtime amount even when no overtime occurs.
② Mandatory time tracking: Employers are still required to manage employee attendance, and any overtime exceeding the fixed amount must be calculated and paid separately.
③ Risk of mismanagement: Misunderstandings or errors in applying the system can lead to illegal practices such as unpaid overtime.
④ Cultural risks: The system may foster a culture where excessive overtime is normalized because “overtime is already paid.”
3. Common Situations Where the Fixed Overtime Pay System May Be Deemed Illegal
The fixed overtime pay system, if mismanaged, can result in violations of labor laws. Key examples include:
1. Base Salary Below Minimum Wage
The apparent increase in salary from adopting the system cannot include the fixed overtime pay when calculating compliance with minimum wage requirements. Base pay, excluding overtime, must meet or exceed the legal minimum wage set for the region.
2. Overtime Pay Below Statutory Rates
The Labor Standards Act mandates that overtime pay must include at least a 25% premium. If the overtime portion of fixed pay does not meet this rate, it is illegal.
For instance, if an employee’s base hourly wage is 1200 yen, the monthly fixed overtime pay for 20 hours should be calculated as follows:
1200 yen × 1.25 × 20 = 30,000 yen
Anything below this amount violates the law.
3. Unpaid Overtime Exceeding Fixed Hours
As noted earlier, any overtime exceeding the fixed number of hours must be compensated separately. If the fixed overtime covers 20 hours but an employee works 30 hours, the additional 10 hours must be paid. Failing to do so constitutes a violation.
1. Base Salary Below Minimum Wage
The apparent increase in salary from adopting the system cannot include the fixed overtime pay when calculating compliance with minimum wage requirements. Base pay, excluding overtime, must meet or exceed the legal minimum wage set for the region.
2. Overtime Pay Below Statutory Rates
The Labor Standards Act mandates that overtime pay must include at least a 25% premium. If the overtime portion of fixed pay does not meet this rate, it is illegal.
For instance, if an employee’s base hourly wage is 1200 yen, the monthly fixed overtime pay for 20 hours should be calculated as follows:
1200 yen × 1.25 × 20 = 30,000 yen
Anything below this amount violates the law.
3. Unpaid Overtime Exceeding Fixed Hours
As noted earlier, any overtime exceeding the fixed number of hours must be compensated separately. If the fixed overtime covers 20 hours but an employee works 30 hours, the additional 10 hours must be paid. Failing to do so constitutes a violation.
4. Strategies for Effective Use of the Fixed Overtime Pay System
1. Set Appropriate Fixed Overtime Hours
Establish realistic fixed overtime hours based on average overtime patterns. Setting hours too high results in unnecessary labor costs, while setting them too low fails to reduce administrative efforts for additional overtime calculations. If there is significant monthly variation in overtime, this system may not be suitable.
Moreover, as work-life balance gains prominence, long overtime hours are increasingly scrutinized, so care must be taken.
2. Establish and Communicate Clear Rules
Detail the rules for the fixed overtime pay system in employment regulations and communicate them to employees. This includes clearly specifying the fixed overtime hours and corresponding pay amounts. Since pay structures may vary among employees, ensure the calculation methods are documented in salary regulations.
It is also critical to distinguish fixed overtime pay from base pay in pay slips. Avoid vague terms such as “management allowance” when labeling fixed overtime, as this may result in legal challenges and incorrect base pay calculations.
3. Conduct Proper Time Management and Pay Additional Overtime
Even under the fixed overtime system, employers must manage attendance and compensate for any overtime beyond the fixed hours. Employers have a legal obligation to accurately track employee working hours. Refer to government-issued guidelines when necessary:
Guidelines for Appropriate Time Management by Employers
https://www.mhlw.go.jp/stf/seisakunitsuite/bunya/koyou_roudou/roudoukijun/roudouzikan/070614-2.html
4. Train Personnel Managers
Provide education and training to personnel managers to ensure correct application of the system. Mismanagement can lead to illegal practices such as unpaid overtime. Additionally, foster a workplace culture that does not normalize excessive overtime simply because it is pre-paid.
Establish realistic fixed overtime hours based on average overtime patterns. Setting hours too high results in unnecessary labor costs, while setting them too low fails to reduce administrative efforts for additional overtime calculations. If there is significant monthly variation in overtime, this system may not be suitable.
Moreover, as work-life balance gains prominence, long overtime hours are increasingly scrutinized, so care must be taken.
2. Establish and Communicate Clear Rules
Detail the rules for the fixed overtime pay system in employment regulations and communicate them to employees. This includes clearly specifying the fixed overtime hours and corresponding pay amounts. Since pay structures may vary among employees, ensure the calculation methods are documented in salary regulations.
It is also critical to distinguish fixed overtime pay from base pay in pay slips. Avoid vague terms such as “management allowance” when labeling fixed overtime, as this may result in legal challenges and incorrect base pay calculations.
3. Conduct Proper Time Management and Pay Additional Overtime
Even under the fixed overtime system, employers must manage attendance and compensate for any overtime beyond the fixed hours. Employers have a legal obligation to accurately track employee working hours. Refer to government-issued guidelines when necessary:
Guidelines for Appropriate Time Management by Employers
https://www.mhlw.go.jp/stf/seisakunitsuite/bunya/koyou_roudou/roudoukijun/roudouzikan/070614-2.html
4. Train Personnel Managers
Provide education and training to personnel managers to ensure correct application of the system. Mismanagement can lead to illegal practices such as unpaid overtime. Additionally, foster a workplace culture that does not normalize excessive overtime simply because it is pre-paid.
5. Conclusion
When implemented correctly, the fixed overtime pay system can offer advantages for both employers and employees. However, attention must be paid to the potential legal and operational issues discussed in this article. Companies considering the system should consult with labor consultants or legal experts to design a compliant and effective structure.