How is overtime pay calculated in Japan?

Question

阿部国際法律事務所 · Accepted Answer

Work beyond 8 hours a day or 40 hours a week requires a premium of at least 25%, and at least 50% beyond 60 hours a month. Statutory holiday work requires 35% and late-night work 25%.

Overtime pay in Japan is calculated as "hourly base wage × premium rate × hours". Work beyond the statutory limits of 8 hours a day and 40 hours a week requires a premium of at least 25%, rising to at least 50% for overtime beyond 60 hours in a month. Work on a statutory day off requires at least 35%, and late-night work between 10 p.m. and 5 a.m. at least 25% (Labor Standards Act, Art. 37, and the Cabinet Order on premium rates). Only the allowances listed in the law, such as family, commuting and housing allowances, may be left out of the hourly base; all other allowances must be included. Unpaid overtime can, for the time being, be claimed for up to three years back (Art. 115 and Supplementary Provisions Art. 143(3)).

When this becomes an issue

・A former employee's lawyer sends a letter demanding three years of unpaid overtime.
・An employee treated as a "manager" with no overtime pay asks to be paid.
・Some employees are starting to exceed 60 hours of overtime a month, and you are not sure your payroll applies the 50% rate.
・You have been leaving qualification or position allowances out of the overtime base, and you are not sure that is allowed.

1. Which hours count as overtime

Under the Labor Standards Act, "overtime" means time beyond the statutory working hours, not beyond the hours set by the company. The statutory limits are 40 hours a week and 8 hours a day, excluding breaks (Art. 32).

For example, if a company's scheduled working day is 7 hours and an employee works 8 hours, the extra hour is within the statutory limit. The Article 37 premium is not legally required for that hour. How much is paid for it depends on the work rules, wage rules and employment contract.

To have employees work beyond the statutory hours or on statutory days off, the employer must conclude a written agreement with a union representing a majority of the workers (or, if there is none, a majority representative) and file it with the Labor Standards Inspection Office (Art. 36(1), the so-called "Article 36 agreement"). The standard cap under such an agreement is 45 hours a month and 360 hours a year (Art. 36(4)). Even where special temporary circumstances apply, overtime plus holiday work must stay below 100 hours in any month and average no more than 80 hours over any 2 to 6 months (Art. 36(5) and (6)).

2. Premium rates

The minimum premium rates are as follows.

・Overtime beyond statutory hours: 25% or more (Art. 37(1) and the Cabinet Order on premium rates)
・The part of overtime exceeding 60 hours in a month: 50% or more (proviso to Art. 37(1))
・Work on a statutory day off: 35% or more (Cabinet Order on premium rates)
・Late-night work (10 p.m. to 5 a.m.): 25% or more (Art. 37(4))
・Overtime that falls in late-night hours: 50% or more, and 75% or more for the part beyond 60 hours in a month (Ordinance for Enforcement of the Labor Standards Act, Art. 20(1))
・Work on a statutory day off that falls in late-night hours: 60% or more (Art. 20(2) of the Ordinance)

The 50% rate for overtime beyond 60 hours a month has applied to small and medium-sized enterprises since 1 April 2023. According to the Ministry of Health, Labour and Welfare (MHLW), hours worked on the statutory day off are not counted toward the 60 hours, but hours worked on other days off (for example, Saturdays under a five-day week) are.

For the part beyond 60 hours a month, a labour-management agreement can allow the employer to grant paid leave ("substitute leave") instead of paying the additional premium (Art. 37(3)). Substitute leave must be granted within two months from the day after the end of the month in which the 60 hours were exceeded (Ordinance, Art. 19-2(1)(iii)).

3. Calculating the hourly base wage

For monthly salaries, the hourly base is "monthly wage ÷ scheduled working hours in the month". If the scheduled hours differ from month to month, the average monthly scheduled hours over a year are used (Ordinance, Art. 19(1)(iv)). Daily wages are divided by the scheduled hours per day, and piece-rate pay is divided by the total hours worked in the pay period (Art. 19(1)(ii) and (vi)).

Mistakes often arise with allowances. Only the following seven items may be excluded from the base for premium pay (Art. 37(5) of the Act and Art. 21 of the Ordinance).

・Family allowance
・Commuting allowance
・Separate-residence allowance
・Children's education allowance
・Housing allowance
・Wages paid on a temporary basis
・Wages paid at intervals longer than one month

Position, qualification, sales and attendance allowances are not on this list, so as a rule they must be included. If they are left out, the hourly base is too low and all overtime pay is underpaid.

4. Worked example

Take an employee with a base salary of JPY 260,000, a position allowance of JPY 20,000 and a commuting allowance of JPY 15,000, whose average scheduled hours are 160 a month.

・Base for premium pay: JPY 260,000 + JPY 20,000 = JPY 280,000 (the commuting allowance may be excluded)
・Hourly base: JPY 280,000 ÷ 160 hours = JPY 1,750
・If the employee works 20 hours of statutory overtime in the month (none late at night): JPY 1,750 × 1.25 × 20 hours = JPY 43,750

If the same employee works 70 hours of overtime, the first 60 hours are paid at 1.25 and the 10 hours beyond 60 at 1.5: JPY 1,750 × 1.25 × 60 + JPY 1,750 × 1.5 × 10 = JPY 131,250 + JPY 26,250 = JPY 157,500.

5. "Managers get no overtime" — be careful

The rules on working hours, breaks and days off do not apply to persons "in a supervisory or managerial position" (Art. 41(ii)). The MHLW describes such a person as one who "stands in an integrated position with management" in deciding working conditions and other labour management, and says this must be judged from the actual position and authority, not from the job title or rank. Even a "section chief" or "store manager" who lacks sufficient authority and matching treatment is not a managerial employee, and overtime and holiday premiums must be paid.

The MHLW's pamphlet also explains that working hours of managerial employees are still tracked because the late-night premium must be paid to them. Late-night hours should therefore be recorded for managers as well.

6. What the employer faces if overtime is unpaid

Wage claims are subject to a five-year limitation period under the Act, but for the time being the period is three years (Art. 115 and Supplementary Provisions Art. 143(3)). According to the MHLW, this applies to wages payable on or after 1 April 2020.

In addition, at the employee's request, a court may order an employer that violated Article 37 to pay an "additional payment" equal to the unpaid amount (Art. 114). For the time being, this must also be claimed within three years of the violation (Supplementary Provisions Art. 143(2)). A violation of Article 37 is also punishable by imprisonment of up to six months or a fine of up to JPY 300,000 (Art. 119(i)).

Wage ledgers and other records must, for the time being, be kept for three years (Art. 109 and Supplementary Provisions Art. 143(1)). Employers must also keep track of employees' working hours for the purpose of health interviews (Industrial Safety and Health Act, Art. 66-8-3). These records are what the employer will rely on if a claim is made.

Steps you can take now

・Check how your work rules and wage rules define scheduled hours and treat overtime within the statutory limit.
・List every allowance you exclude from the overtime base and check that each is one of the seven items in Article 21 of the Ordinance.
・Confirm that your payroll applies at least 50% to overtime beyond 60 hours a month.
・For employees treated as "managers" without overtime pay, review their actual authority, working patterns and treatment.
・Check the content and filing of your Article 36 agreement, and whether actual overtime stays within the caps.
・Compare time-card or attendance-system records with PC logs and other data for gaps.

When to consult a lawyer

・When a former employee or their lawyer sends a demand letter or a certified letter claiming unpaid overtime.
・When the Labor Standards Inspection Office investigates or issues a corrective recommendation.
・When reviewing how managerial employees or fixed overtime pay are handled.
・When several employees may have the same shortfall and you need to work out how to settle it retroactively.

Frequently asked questions

Q. Our scheduled day is 7 hours. Is a premium required if an employee works 8 hours?
A. The Article 37 premium is not required until work exceeds 8 hours a day or 40 hours a week. What is paid for the extra hour depends on the work rules and the employment contract. If the work rules promise a premium for it, that rule applies.

Q. If we pay fixed overtime, do we still need to calculate overtime?
A. Yes. If the premium calculated from actual overtime, holiday and late-night hours exceeds the fixed amount paid, the difference must be paid (Art. 37). Monthly hours therefore still need to be recorded and calculated.

Q. Do hours worked on the statutory day off count toward the 60 hours?
A. According to the MHLW, they do not. Work on the statutory day off is paid at a premium of at least 35%. Hours worked on other days off count as overtime toward the 60 hours.

Q. How far back can unpaid overtime be claimed?
A. For wages payable on or after 1 April 2020, the limitation period is, for the time being, three years. A court may also order an additional payment equal to the unpaid amount.

Q.How is overtime pay calculated in Japan?

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