Japan Legal Update | Vol. 40

Labor & Employment 

Supreme Court Decides Whether a Fixed Overtime Allowance is Considered Statutory Overtime Wages

On July 19, 2018, in a case in which the parties litigated whether payment of a so-called fixed overtime allowance is considered payment of overtime wages as prescribed in Article 37 of the Labor Standards Act, Japan's Supreme Court (First Petty Bench) affirmed that a fixed overtime allowance is considered statutory overtime wages. The Court's reasoning was: (i) in light of the description in the employment contract and the explanation that the employer gave to the employee, the fixed allowance was positioned as compensation for overtime work, etc. in the employer's wage structure; and (ii) the amount of the fixed allowance paid to the employee was not divorced from the employee's actual overtime work.

In this case, the Tokyo High Court originally issued a narrow judgment on February 1, 2017, that the payment of a fixed overtime allowance is considered payment of statutory overtime wages only when: 

  • The employer sets up a system through which the employee can determine that the amount of statutory overtime wages that he or she is to be paid surpasses the amount of the fixed overtime allowance, and the employee can immediately demand that the employer pay the difference;
  • The employer implements that system in good faith;
  • The balance between the amount of the base salary and the amount of the fixed overtime allowance is appropriate; and
  • There are no factors that constitute a situation undermining the welfare of employees, such as, for example, nonpayment of statutory overtime wages or health deterioration due to overtime work.

As a result, observers closely monitored how the Supreme Court would hold on this issue. The Supreme Court ultimately chose not to support the High Court's decision, stating, "it should not be interpreted that the requirements indicated by the original decision are indispensable."

Based on this Supreme Court decision, companies that have a fixed overtime allowance system should confirm whether the fixed overtime allowance is expressly positioned as being paid as compensation for overtime work in employment contracts and wage rules, so that courts will not deny that the company paid statutory overtime wages by paying a fixed overtime allowance. In addition, companies should recheck the reality of the employee's actual overtime work in order to confirm that the amount of fixed overtime allowance is not divorced from the reality of the overtime work.

On the issue of fixed overtime allowance, the Supreme Court held in its decision of July 7, 2017 (see our August 2017 issue) that clear differentiation is required between the base salary portion and the overtime wage portion, and payment of not less than the statutory amount of overtime wages is required.


METI Releases Revision of Interpretative Guidelines on Electronic Commerce and Information Property Trading

On July 27, 2018, the Ministry of Economy, Trade and Industry ("METI") released the revised "Interpretative Guidelines on Electronic Commerce and Information Property Trading." These guidelines present METI's approach to the interpretation of existing laws regarding electronic commerce and information property trading. The revisions address, among other things, the treatment of erroneous orders in electronic commerce by using AI speakers, a right of claim for payment under an agreement in which a virtual currency is used as consideration, and the applicability of product safety-related laws in Japan with respect to internet sales by foreign businesses of products directed at the Japanese market.

Projects and Infrastructure

Act to Promote Entry by Japanese Enterprises into Overseas Infrastructure Businesses Takes Effect

The Act, which was enacted at the ordinary session of the Diet in May 2018, became effective on August 31, 2018. The Act provides that in order to strongly promote the expansion of Japanese enterprises' operations into overseas infrastructure businesses—such as railways, airports, seaports, urban and housing developments, and sewage systems—Japan's Minister of Land, Infrastructure, Transport and Tourism will formulate basic policies. Based on those policies, the relevant administrative bodies will take necessary actions, such as research on overseas infrastructure businesses. Japanese enterprises' entry into overseas infrastructure businesses will be promoted as a result of the Act, and relevant businesses should review the Act's contents.


National Tax Agency Publishes Guidelines on Reduced Consumption Tax Rate System

On August 9, 2018, the National Tax Agency published the "Guidelines on Reduced Consumption Tax Rate System (August 2018)." The consumption tax rate is scheduled to be increased to 10 percent as of October 1, 2019, coupled with a simultaneous reduction in the tax rate for certain taxable items, including food and beverages. The guidelines summarize, among other things, countermeasures that enterprises should take in association with the introduction of the reduced tax rate system. Under the reduced tax rate system, companies will need to issue and/or keep qualified invoices to address multiple tax rates, which will also affect enterprises without any sales of food or beverages. All enterprises that carry on business in Japan should be prepared for the reduced tax rate system, taking into account these guidelines. (See our May 2018 issue for further information on the new invoice system.)

Tokyo Office Contacts 

John C. Roebuck

Yuichiro Mori

Yuki Yoshida

Yoshitake Masuda

Harukuni Ito

Kyosuke Katahira

Toshiaki Takahashi

Hiroyuki Fujimoto

Ian M. Wright

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