Annual salary system and overtime pay

If you hire an employee, of course you will be shown the amount of salary for that person, but in the case of foreign-affiliated companies, it is often shown on the basis of annual salary system. For example, ‘A Sales staff paid 7 million yen per year and overtime pay is included’.

As hiring side, you will often have natural recognition that overtime pay is included as it pays out this much annual salary. However, there is a pitfall.  To be legally admitted that overtime pay is included in the annual salary except for the employee who falls under the management role, following three tests must be met.

Test 1: Are the amounts equivalent to regular hours and overtime hours clearly divided among annual salary amounts?
Even with the annual salary system, salary must be paid every month according to the labor law. The monthly payroll ledger and the salary statement should be able to distinguish between the amount for regular hours and overtime hours. The amount of overtime work explains how many hours of overtime work is included.

Test 2: Is the amount for overtime work substantially paid solely for overtime work, regardless of the name of allowance? Those which are linked to age, years of service, performance etc. are risky.

Test 3: How many hours of overtime work is assumed?
It is necessary to consider that the overtime hours assumed are not exceeding the hours of upper limit of 36 agreements.

If these three tests are not met, there remains a significant risk to be judged that the annual salary does not include overtime work when it comes to a trial. And the entire annual salary amount is assumed as the basic unit price for calculating unpaid overtime, so you may be required to pay large amount of money.

Please pay adequate attention when adopting an annual salary system. Besides these three tests, there may be more detailed conditions required depending on