Startup Work Rules and Fixed Overtime Pay: The Duty to Prepare Work Rules and Case Law Principles

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Imagine a company that recruits with a job posting stating "fixed overtime pay (includes JPY 50,000 for an expected 30 hours)," yet after employees join, keeps operating without it being clear which allowance on the pay slip the JPY 50,000 corresponds to. The employment contract only says "fixed overtime pay will be paid," the work rules contain no provision on it, and no records of daily overtime hours have been kept.

Fixed overtime pay is not a system that lets you dispense with managing and recording overtime hours simply by paying a fixed amount. You need to carefully confirm the distinction from ordinary wages such as base salary, the number of hours and amount covered, additional settlement when the statutorily calculated amount exceeds the fixed amount, the tracking of actual daily working hours, and consistency across each document from the job posting to the pay slip. That said, these are comprehensive checkpoints for confirming that the system is being operated soundly, and how a single deficiency in a document affects the validity of the system as a whole must be examined concretely. If doubts arise as to the distinction from ordinary wages or as to whether the payment is in substance consideration for overtime work, the company runs the risk that, even though it believed it was paying fixed overtime pay, the payment will be treated as unpaid premium wages.

The Duty to Prepare Work Rules and the Statutory Procedures

Article 89 of the Labor Standards Act requires an employer that regularly employs 10 or more workers to prepare work rules and file them with the administrative authority. This "regularly 10 or more" threshold is determined for each workplace, including part-time and casual workers. Whether a small sales office or branch office counts as an independent workplace or is treated as one with the head office is judged according to the actual circumstances. For example, even if the head office has fewer than 10 people, if a branch has 10 or more, that workplace has a duty to prepare and file work rules. Conversely, even if the company as a whole has more than 10 people, if each workplace counted independently has fewer than 10, the duty to prepare work rules under Article 89 does not itself arise.

Note that even if a workplace has fewer than 10 people, the company is not exempt from its various labor management obligations. The duty to state working conditions (Article 15 of the Labor Standards Act), the duty to pay premium wages (Article 37 of the same Act), and the duty to track daily working hours apply regardless of the number of employees. Moreover, even before the duty to prepare work rules arises, if the company voluntarily establishes work rules and makes them known to employees, it becomes easier to manage working conditions uniformly within the company, through the effect of Article 7 of the Labor Contracts Act, which makes reasonable working conditions part of the employment contract, and through the minimum standard effect of Article 12 of the same Act, which invalidates agreements falling below the work rules.

After preparing the work rules, the company puts them into operation by following the prescribed statutory procedures. When preparing or amending the rules, the employer must hear the opinion of a labor union organized by a majority of the workers at the workplace or, if there is none, of a person representing a majority of the workers (Article 90, Paragraph 1 of the Labor Standards Act), and must attach a written opinion stating that opinion when filing (Paragraph 2 of the same Article). What the Article requires is hearing an opinion; it does not require obtaining consent.

Work rules that have been filed first function as contractual norms once they have been made known to the workers. Article 106, Paragraph 1 of the Labor Standards Act provides that workers must be informed by methods such as posting or keeping the rules in a conspicuous place at the workplace or delivering them in writing. This notification procedure is also highly significant from the perspective of Article 7 of the Labor Contracts Act, which recognizes the effect of reasonable work rules, Article 10 of the same Act, which sets out the requirements for changing working conditions to employees' disadvantage by amending the work rules, and the minimum standard effect under Article 12 of the same Act. It is important to examine separately the administrative liability arising from defects in the filing with the administrative authority or in hearing opinions, and the civil-law question of whether a provision becomes part of individual employment contracts.

The Ministry of Health, Labour and Welfare publishes "Model Work Rules," and the full version I confirmed on the Ministry of Health, Labour and Welfare's page (Japanese) on September 13, 2026 is the December 2025 version. The Model Work Rules are a general-purpose template, so if you introduce fixed overtime pay, write the number of covered hours, the amount, and the method of settling any excess concretely into the provisions to match your company's pay structure.

Requirements for Fixed Overtime Pay to Be Recognized as Premium Wages

Fixed overtime pay is a mechanism for paying premium wages for overtime work and the like as a predetermined fixed amount. Supreme Court precedents have set out a clear framework for determining whether such payments are legally valid as payment of premium wages under Article 37 of the Labor Standards Act. At its core are whether the portion of wages for ordinary working hours and the portion corresponding to premium wages can be clearly distinguished, and whether the money paid is paid as consideration for overtime work and the like. In addition, where the amount of premium wages calculated by the statutory method exceeds the fixed overtime pay, the employer is obliged to pay the shortfall. This does not mean that the entire system is always invalid unless there is a separate agreement to pay the difference.

In the Iryo Hojin Koshinkai case (Supreme Court judgment of July 7, 2017), which is also discussed in the Ministry of Health, Labour and Welfare's Q&A on fixed overtime pay (Japanese), the court emphasized the importance of clearly distinguishing between ordinary wages and premium wages and of paying the difference when the statutorily calculated amount is not covered. Even where fixed overtime pay is built into the base salary, the amount and the corresponding number of hours must be stated expressly in the contract, so that it can be distinguished computationally from the ordinary wage portion.

As for whether an allowance is consideration for overtime work and the like, the Nippon Chemical case (Supreme Court judgment of July 19, 2018) set out a framework for making that determination by comprehensively considering the content of the employment contract and similar documents, the explanation given by the employer at the time of hiring, the actual working conditions, and the position of the allowance within the overall wage structure. Even if an allowance is labeled "fixed overtime allowance" on the pay slip or in the rules, if it cannot be evaluated as consideration for overtime work in light of the actual circumstances, its effect as premium wages will be denied.

In light of the above, the points to confirm when setting up the system can be organized into the following four:

• Clearly separate and state the amounts of base salary and other allowances and of the fixed overtime pay portion
• State the number of hours and the amount covered by the fixed overtime pay in the employment contract and the work rules
• Pay the difference when the statutorily calculated amount based on actual working hours exceeds the fixed overtime pay, and pay separately for holiday work, late-night work, and the like that are not covered
• Properly record and track actual daily working hours, and keep them in a state that allows comparison with the set number of hours

With regard to tracking actual working hours, the Industrial Safety and Health Act also contains provisions requiring employers to track the status of working hours, for purposes such as conducting interviews and guidance by a physician.

If the payment cannot be distinguished from the ordinary wage portion, or is not recognized as consideration for overtime work, its effect as payment of fixed overtime pay is denied, and the premium wages must be recalculated after including the amount of the allowance in ordinary wages. That said, the mere fact that past differences went unpaid, or that there were some deficiencies in working-hour records, does not necessarily mean that the full amount of allowances already paid will immediately be included in ordinary wages. The practical risk is that, as a result of the amount paid as fixed overtime pay being incorporated into "wages for ordinary working hours," the unit rate for calculating premium wages jumps, leading to a situation in which premium wages based on past actual overtime hours must be recalculated from scratch and a large difference paid.

Consistency Among the Job Posting, Employment Contract, Work Rules, and Pay Slip

When recruiting with fixed overtime pay, the Ministry of Health, Labour and Welfare sets out specific matters that must be stated in the job posting. As also mentioned in the Q&A on fixed overtime pay referred to above, three points must be stated to job seekers in writing or by similar means: the amount of base salary excluding fixed overtime pay; the method of calculating fixed overtime pay (the number of covered hours and the amount); and the fact that additional premium wages will be paid if overtime work and the like exceed the set number of hours.

It is important that the conditions stated here do not contradict what is written in the employment contract or notice of working conditions delivered after joining, the company's work rules, and the pay slips issued each month. If the working conditions are changed from those at the time of recruitment, state the changes in accordance with the law and confirm what has been agreed. For example, suppose the job posting stated "fixed overtime pay for 30 hours, JPY 50,000," but the employment contract only says "includes fixed overtime pay," the work rules have no provision providing a basis for it, and the pay slip does not show which allowance is the fixed overtime pay. In such a state, the requirements of distinguishability and contractual agreement can no longer be supported.

Lining up the four documents, namely the job posting at the time of hiring, the employment contract at the time of joining, the internal work rules, and the monthly pay slip, and cross-checking whether the number of covered hours and the amount paid stated in each match, is a prerequisite for making the system function properly.

The Different Roles of a 36 Agreement and Fixed Overtime Pay

Fixed overtime pay is merely an arrangement concerning the payment of premium wages, and it must be considered separately from the legal authority to order workers to work beyond statutory working hours. For an employer to order employees subject to working-hour regulations to work beyond statutory working hours, except in cases such as emergencies under Article 33 of the Labor Standards Act, the employer must conclude a labor-management agreement (the so-called 36 Agreement) with the majority labor union at the workplace or, if there is none, with a properly selected majority representative, and file it with the competent Labor Standards Inspection Office (Article 36, Paragraph 1 of the same Act). Setting the number of hours covered by fixed overtime pay in the employment contract or work rules is not, by itself, a sufficient basis for ordering overtime; there must be both the valid conclusion and filing of a 36 Agreement and a basis for the authority to order overtime work, such as in the work rules.

The number of hours covered by fixed overtime pay is a payroll framework that determines how much premium wages will be paid as a fixed amount each month. By contrast, a 36 Agreement is a procedure for exceptionally legalizing work beyond statutory working hours, which the Labor Standards Act prohibits in principle, and the two have entirely different legal roles. Even if fixed overtime pay is set, it does not oblige workers to work that many hours of overtime, nor is it a basis for legally permitting overtime itself. If an employer has workers perform work beyond statutory hours that requires a 36 Agreement without concluding or filing one, then no matter how strictly the fixed overtime pay calculations were performed, separate liability arises that may be subject to criminal penalties as a violation of Article 32 of the Labor Standards Act or the like.

Calculating Settlement of the Excess and Procedures for Reviewing Existing Systems

Even with fixed overtime pay, comparison with the statutorily calculated amount each month is essential. Calculate the total premium wages for the total hours of actual overtime work and the like using the method prescribed in Article 37 of the Labor Standards Act, and if that amount exceeds the corresponding fixed overtime pay already paid, pay the shortfall additionally. The calculation determines the statutory premium wage amount for all covered work in that month and then settles the difference from the fixed overtime pay. Moreover, even if actual working hours fall within the fixed overtime hours, if the statutorily calculated amount exceeds the fixed overtime pay due to the premium rate for late-night work or changes in the base wage used for the calculation, the shortfall must be settled. Allowances for holiday work and late-night work that are excluded from the fixed overtime pay must, of course, be paid separately.

Conversely, even in a month in which actual overtime work and the like falls below the set number of hours, reducing the fixed overtime pay or asking workers to return it is, in principle, not contemplated. Fixed overtime pay is a contract that guarantees a fixed amount of premium wages regardless of monthly increases or decreases in overtime hours, and I think it is problematic to cut the amount paid solely because actual working hours were low. It is important to share an understanding of the nature of this mechanism with the company's payroll staff as well.

When reviewing an existing system, first gather the four documents, namely the job posting, employment contract, work rules, and pay slip, and check that the number of covered hours and the amount paid are stated consistently and that, where there have been changes, the necessary statements and agreements have been made. At the same time, confirm that the procedures for preparing and amending work rules appropriate to the number of people at each workplace, hearing the opinion of the majority labor union or a properly selected majority representative, filing with the Labor Standards Inspection Office, and informing employees have all been carried out without omission. Further, cross-check the actual working-hour records in the attendance management system or time cards against the fixed overtime pay framework, and confirm, including for months within the framework, that shortfalls based on the statutory calculation have been properly paid and that a 36 Agreement serving as the basis for overtime work has been validly concluded and filed.

If, in the course of the review, it emerges that there are months in which the fixed overtime hours were exceeded but the difference was not paid, organize the attendance data accurately and then consider the method of retroactive settlement and the procedures for revising the employment contract and work rules. A review of labor risks in general, including working-hour management and customer-facing issues, is discussed in detail in Labor Risks Startups Tend to Put Off, and Responding to Customer Harassment. Rebuilding the legal function as the organization expands is explained in How Should You Rebuild Your Legal Function After Series A?, and the overall picture of legal design from the early stages is explained in What Is Startup Legal?. Retainer support, including reviews of work rules and fixed overtime pay systems, is covered under Startup Legal and Fundraising Support.

Frequently asked questions

Does a startup with fewer than 10 employees not need work rules or rules on fixed overtime pay?

The duty to prepare and file work rules itself arises under Article 89 of the Labor Standards Act where 10 or more workers are regularly employed at each workplace, so I think a workplace with fewer than 10 workers is not itself subject to the duty to prepare them. However, obligations such as the duty to state working conditions expressly (Article 15 of the Labor Standards Act), the duty to pay premium wages (Article 37 of the same Act), and keeping track of actual working hours arise regardless of the number of people at the workplace, so I think having fewer than 10 workers does not mean that labor rules become unnecessary.

If fixed overtime pay is paid, may employees be made to work overtime up to the hours it covers?

That cannot be said. Fixed overtime pay is a method of paying premium wages in advance as a fixed amount, and it is not a legal basis for having workers perform overtime work. For an employer to have employees work beyond the statutory working hours, except where the requirements of Article 33 of the Labor Standards Act are met, I think it separately needs, in addition to concluding and filing a labor-management agreement (36 Agreement) with the majority representative of the workplace, a basis for the right to order overtime work in the work rules or the like.

If fixed overtime pay is found not to meet the requirements of distinguishability and of being consideration for overtime, does the entire employment contract become invalid?

I do not think it becomes uniformly invalid. Where the portion paid as fixed overtime pay is not recognized as consideration for overtime work and the like, that portion is treated as wages for ordinary working hours and incorporated into the basis for calculating premium wages, and the company may then need to recalculate the premium wages based on actual working hours and pay the difference from the amount already paid. I think the agreements on base pay and other allowances do not automatically become invalid.