Is fixed overtime pay lawful? The disclosure and difference-settlement requirements

In short: Fixed (flat-rate) overtime pay is lawful if the requirements are met. But it does not mean "pay it and no more is owed however many hours are worked." To be valid, the ordinary wage and the premium portion must be distinguishable (clear separation) and the fixed portion must be consideration for overtime, and overtime beyond the fixed portion must always be settled as a difference. If it is held invalid, the fixed portion is folded into the base wage and unpaid overtime balloons on recalculation. Whether a given allowance qualifies is judged by a qualified professional.

"We use fixed overtime pay, so we don't need to manage overtime," "writing '40 hours of deemed overtime included' in the job ad is enough" — many owners think this way. But the Supreme Court has drawn the line for when fixed overtime pay is valid, and getting the wording and operation wrong can rebound as unpaid overtime in full. This article sets out, based on Article 37 of the Labour Standards Act and Supreme Court precedent, the requirements for valid fixed overtime pay, how to write the job ad and the contract, and how to run the difference settlement.

Does paying fixed overtime pay mean no extra is owed no matter how many hours are worked?

No. Fixed overtime pay is a mechanism to "pay the premium for a set number of hours in advance"; hours beyond that must be paid separately.

Article 37 of the Labour Standards Act obliges the employer to pay premium wages for overtime, holiday, and night work. This obligation is mandatory and cannot be undercut by agreement of the parties. Fixed overtime pay is merely a way to "pay the Article 37 premium in advance at a flat rate"; if the worker is made to work overtime beyond the assumed hours (e.g. 40 hours a month), the premium for the excess arises separately. So the idea that "since we pay fixed overtime pay, we can work them without limit" is wrong. Grasping working hours and the ceiling under the Article 36 agreement are still required; for the upper limits see how many overtime hours an Article 36 agreement allows.

Type of premium	Rate (Article 37 of the Labour Standards Act and the cabinet order)
Overtime (beyond statutory working hours)	25% or more
The part of overtime exceeding 60 hours a month	50% or more (applies to SMEs too from 1 April 2023)
Night work (in principle 22:00–05:00)	25% or more (added when it overlaps with overtime)
Statutory holiday	35% or more

What are the three requirements (disclosure, separation, difference settlement) for valid fixed overtime pay?

For fixed overtime pay to be valid, the following three must all be present.

Requirement	Content
① Clear separation (distinguishability)	The part of the wage that is the ordinary working-hour wage and the part that is the premium (fixed overtime pay) can be distinguished
② Consideration	The fixed overtime pay is paid as consideration for overtime, holiday, and night work
③ Difference settlement	Where overtime exceeds the hours corresponding to the fixed portion, the difference is paid separately

①② are the framework the Supreme Court set out. The Nihon Chemical case (Supreme Court judgment of 19 July 2018) held that whether an allowance is a premium wage is judged by whether, from the contract terms and the reality, the ordinary working-hour wage portion and the premium wage portion can be distinguished and it can be said to have been paid as a premium wage. The Kokusai Jidosha case (Supreme Court judgment of 30 March 2020) likewise held that the portion that is the ordinary working-hour wage and the portion that is the premium wage must be distinguishable. ③ follows from Article 37 being mandatory: because the fixed portion is a "prepayment," not a "ceiling," payment for the excess cannot be avoided. On the disclosure rules themselves, see also how the working-condition disclosure rules changed.

How should fixed overtime pay be written in the job ad and the employment contract?

When presenting fixed overtime pay at recruitment, disclose the following three. This also reflects the disclosure-at-recruitment approach under the Employment Security Act.

Item to disclose	Example
Base pay excluding fixed overtime pay	Base pay ¥200,000 (does not include fixed overtime pay)
The amount of fixed overtime pay and the hours it corresponds to	Fixed overtime allowance ¥50,000 (paid as 40 hours of overtime)
Handling when the fixed portion is exceeded	Overtime, holiday, and night work beyond 40 hours is paid separately

Wording like "monthly pay ¥250,000 (deemed overtime included)," where it is unclear how much is base pay and how much is premium, risks being held invalid for failing ① clear separation. In the contract and the wage rules too, state the amount and corresponding hours of the fixed overtime pay and that the excess is paid separately. If the amount or hours cannot be fixed yet, do not write those figures; fix them internally first (do not enter placeholder figures you cannot verify).

How do you run the difference settlement for overtime beyond the fixed portion?

Even with fixed overtime pay, grasping working hours and settling the difference for the excess are required together.

1. Record start and end times by an objective method and grasp the actual overtime, holiday, and night hours
2. When actual overtime exceeds the hours the fixed overtime pay corresponds to (e.g. 40 hours), calculate the premium for the excess
3. Pay the excess as wages for that pay-closing period (do not carry it over to the next month to offset)

You cannot run it as "some months don't use up the fixed portion, so we offset it against the heavier months." Premium wages must be paid per wage-calculation period. Not settling the difference can itself be a circumstance that casts doubt on the validity of the fixed overtime pay.

If fixed overtime pay is held invalid, what does the company lose?

If held invalid, the fixed portion is not recognized as a premium wage and is folded into the ordinary working-hour wage (the base for the premium calculation).

As a result, the unit price of the premium rises, and unpaid overtime is recalculated retroactively. Because the extinctive prescription for wage claims is, for the time being, three years (Article 115 of the Labour Standards Act and its supplementary provisions), the affected period is also long. Further, where the court finds the conduct malicious, it may order payment of an additional payment capped at the same amount as the unpaid sum (Article 114 of the Labour Standards Act). "What was meant as fixed overtime pay is added back into the base wage in full" — this is the heaviest risk. Claims for unpaid overtime, litigation, and negotiation of individual disputes are the domain of an attorney, and tax treatment should be discussed with a tax accountant.

Frequently asked questions

Q. If we introduce fixed overtime pay, do we no longer have to calculate overtime each month?
A. No. Fixed overtime pay is a prepayment of the premium for a set number of hours; you must grasp the actual overtime, holiday, and night hours and, when the hours corresponding to the fixed portion are exceeded, pay the difference. The duty to grasp working hours and the Article 36 agreement are required regardless of whether fixed overtime pay exists.

Q. Is "monthly pay ¥250,000 (deemed overtime included)" valid?
A. Wording that does not let you distinguish how much is the ordinary wage and how much is the premium risks being held invalid for failing the clear-separation requirement. The Supreme Court (Nihon Chemical, Kokusai Jidosha) requires that the ordinary working-hour wage portion and the premium wage portion be distinguishable. Disclose the base pay and the amount and corresponding hours of the fixed overtime pay separately.

Q. In a month where the fixed overtime pay is left over, can we offset it against next month's overtime?
A. No. Premium wages must be paid per wage-calculation period, and offsetting an unused portion of one month against the excess of another month is not permitted. In a month that exceeds, pay the difference as wages for that period.

Q. Concretely, what happens if fixed overtime pay becomes invalid?
A. The fixed portion is folded into the base wage for the premium calculation, the unit premium rises, and past unpaid overtime is recalculated. The prescription for wage claims is, for the time being, three years. If found malicious, an additional payment (capped at the same amount as the unpaid sum) may be ordered.

この記事の根拠

• Labour Standards Act, Article 37 (premium wages for overtime, holiday, and night work). It requires premium wages of at least the rate set by cabinet order within a band of 25% to 50% of the ordinary wage for overtime and holiday work, at least 50% for overtime exceeding 60 hours a month, and at least 25% for night work. The 50% for over-60-hours applies to SMEs from 1 April 2023 (Reiwa 5). It is mandatory and cannot be undercut by agreement (e-Gov Law Search, Labour Standards Act, Act No. 49 of 1947; accessed 4 September 2026).
• Supreme Court judgment, Nihon Chemical case (19 July 2018). Held that whether an allowance is a premium wage is judged by whether, from the contract terms and reality, the ordinary working-hour wage portion and the premium wage portion can be distinguished and it can be said to have been paid as a premium wage (Courts in Japan website; accessed 4 September 2026).
• Supreme Court judgment, Kokusai Jidosha case (30 March 2020). Held that the portion that is the ordinary working-hour wage and the portion that is the premium wage must be distinguishable (Courts in Japan website; accessed 4 September 2026).
• Labour Standards Act, Article 114 (additional payment) and Article 115 (prescription). The court may order an additional payment of up to the same amount as the unpaid premium wages, and the prescription for wage claims is, for the time being, three years (e-Gov Law Search, Labour Standards Act, Act No. 49 of 1947; accessed 4 September 2026).
• The Ministry of Health, Labour and Welfare's approach to disclosing fixed overtime pay at recruitment. When presenting fixed overtime pay in recruitment, disclose the base pay excluding fixed overtime pay, the amount and corresponding hours of the fixed overtime pay, and that the excess is paid separately (Ministry of Health, Labour and Welfare; accessed 4 September 2026).
• Whether a given allowance qualifies as valid fixed overtime pay requires a judgment in light of the contract, the wage rules, and the reality of payment. Confirm against the latest primary sources (e-Gov Law Search, the Courts in Japan website, the Ministry of Health, Labour and Welfare, etc.) and individual circumstances.

This article does not decide whom to consult. Designing the work rules and wage rules and the operational design of fixed overtime pay are the work of a Shakai Hoken Roumushi. Claims for unpaid overtime, litigation, and negotiation of individual disputes are the domain of an attorney, and tax treatment is the domain of a tax accountant. For fees when consulting 四葉社会保険労務士事務所, see the fee schedule; for frequently asked questions, see the FAQ.

This article is general information. The validity in an individual case and whether a design is appropriate are handled by a qualified professional after a consultation, in light of the latest primary sources (e-Gov Law Search, the Courts in Japan website, the Ministry of Health, Labour and Welfare, etc.) and individual circumstances. Written by Joji Uramatsu (Shakai Hoken Roumushi, Gyoseishoshi, Registered Real Estate Transaction Specialist).