Fixed Overtime Pay and "Manager and Supervisor" Status in Japan: Key Risks and Remediation Points for IPO Review

Companies preparing for an IPO in Japan are asked by their lead underwriter and the stock exchange to explain, in concrete terms, how they comply with the Labor Standards Act and other labor laws. Japanese subsidiaries of foreign companies, and companies that apply their overseas headquarters’ HR policies in Japan, are no exception.

Two issues stand out because they are frequently flagged and take time to fix: fixed overtime pay and the treatment of "managers and supervisors" (kanri kantokusha). If either is handled incorrectly, it can lead to unpaid overtime premiums, and settling past amounts retroactively can require a substantial payment. This article explains the key issues and how to remediate them, and also touches on the ongoing policy discussion on manager and supervisor status.

1. Background: Overtime Premium Rules in Japan

Under the Labor Standards Act, employers must pay at least the following premium rates for work beyond statutory working hours (in principle, 8 hours per day and 40 hours per week), work on statutory days off, and late-night work.

The statute of limitations for wage claims is currently three years (for wages due on or after April 2020). If a deficiency is found, up to three years of back pay may be at issue.

2. How Fixed Overtime Pay Works and When It Is Valid

Fixed overtime pay (also called "deemed overtime pay") is a system in which premium pay for a set number of overtime hours is built into base salary or an allowance. Many companies use it because it makes the salary offered at hiring more competitive and gives employees a predictable income.

When designing the system, the first step is to define which premiums it covers: overtime only, or holiday and late-night work as well. This affects both the amount required and how the shortfall is calculated, yet in practice this point is often left unclear.

Under Japanese case law, fixed overtime pay is recognized as a valid payment of overtime premiums only if it meets the following three requirements.

1. Clear separation: The portion for regular wages and the portion for overtime premiums must be distinguishable. If fixed overtime pay is included in base salary, the amount attributable to it must be clearly stated.
2. Compensation for overtime: The payment must be made as compensation for overtime and similar work. This should be made clear in the written notice of working conditions, the employment contract and the Rules of Employment (shugyo kisoku). We also recommend a name that makes this purpose clear, such as "fixed overtime allowance."
3. Payment of the shortfall: If the actual overtime premium exceeds the fixed amount, the difference must be paid. Paying fixed overtime does not relieve the employer of the obligation to pay overtime.

The number of hours covered also requires care. In one court case, fixed overtime pay covering 80 hours per month was held void as contrary to public policy, because it assumed constant long working hours. There is no clear threshold above which such pay is automatically invalid, but companies should check, in light of actual working hours, that the design does not presuppose excessive overtime. For reference, the overtime cap is in principle 45 hours per month and 360 hours per year.

If fixed overtime pay is held invalid, the employer must pay overtime premiums separately, and the amounts already paid as fixed overtime are added to the base used to calculate the premium. As a result, the settlement amount can grow significantly.

3. What IPO Reviewers Check on Fixed Overtime Pay

The stock exchange and the lead underwriter examine fixed overtime pay closely to judge whether the company can maintain lawful labor management after listing. They check both the design of the system (the Rules of Employment, employment contracts, etc.) against the three requirements above and whether actual payroll follows it. Even if the documents are in order, the payments may not be treated as valid fixed overtime pay if practice does not match.

If issues such as unclear separation or unpaid shortfalls are found, a series of corrective steps is needed, from revising the system and reflecting changes in payroll to settling past shortfalls, which takes considerable time. Because this can directly affect the listing schedule, we recommend starting early.

4. How to Remediate Fixed Overtime Pay

Deficiencies generally fall into the following types, and more than one often applies.

• The design of the system itself is flawed
• The written system and actual practice do not match
• The system is sound, but operations such as paying the shortfall (payroll) are not handled properly

Review the Rules of Employment and wage regulations, employment contracts, payslips, attendance records and payroll data to identify the source and scope of the problem, then respond according to its type. If the design is flawed, revise the Rules of Employment or the pay structure; if documents and practice diverge, align them; if payroll is at fault, change how it is processed. Where wages are unpaid, confirm the employees, periods and amounts involved, and settle past amounts at the same time.

Calculate the Shortfall by Amount, Not by Hours

A common stumbling block is how to calculate the shortfall. A typical approach is to subtract the hours covered by fixed overtime pay from actual overtime hours and pay only for the excess. However, because of errors in the original hourly rate calculation or later pay raises and allowance changes, the fixed allowance may in fact fall short of the premium for the hours it is meant to cover.

Example: A fixed overtime allowance set as "30 hours" is worth only 20 hours at the current hourly rate, and the employee works 40 hours of overtime that month.

The amount-based method is the reliable one. Calculate the premium for all actual overtime, subtract the fixed allowance and pay the remainder. Any shortfall then appears automatically, without having to check each month how many hours the allowance actually covers.

5. How Manager and Supervisor Status Is Determined, and the "Manager in Name Only" Risk

Under the Labor Standards Act, a manager and supervisor is a person who stands in an integrated position with management with respect to determining working conditions and other aspects of labor management. Such employees are exempt from the rules on working hours, breaks and days off, so no overtime or holiday premiums are required. However, late-night premiums must still be paid.

Note that a company’s internal "managers" and managers and supervisors under the Labor Standards Act do not necessarily coincide. Status is determined case by case based on the following factors as a whole, not on job titles.

At foreign-affiliated companies, it is not uncommon for the headquarters’ global job grading (e.g., "Manager") to be applied directly to the Japanese entity and for all such employees to be treated as exempt from overtime pay. However, the same title does not necessarily mean the person qualifies as a manager and supervisor under Japanese law.

Treating employees as managers and supervisors based only on their title, without the actual substance of the role, is known as "manager in name only" (nabakari kanrishoku) and has been repeatedly challenged in court. If an employee is found not to qualify, past overtime premiums must be paid, and the more employees affected, the greater the burden.

6. How IPO Reviewers Examine Manager and Supervisor Status

In the listing review, reviewers check whether the company’s decision to exempt certain employees from the rules on working hours, breaks and days off as managers and supervisors is appropriate in light of the facts. Rather than relying solely on internal job grades, the company needs to define the scope based on actual circumstances.

This is reflected in the documents submitted with the listing application. The disclosure items for the Growth Market published by the Tokyo Stock Exchange require the following under the status of employees and labor.

• For each department, a list of the number of employees the company regards as managers and supervisors (management positions) and the number who qualify as managers and supervisors under the Labor Standards Act, with reasons for any difference
• Average monthly overtime hours for each department, including managers and supervisors

It is therefore important to distinguish between internal management positions and statutory managers and supervisors, and to be able to explain the scope of employees treated as such and the basis for that judgment. Even though overtime premium rules do not apply to managers and supervisors, their working hours must still be monitored for health protection purposes.

7. How to Remediate the Treatment of Managers and Supervisors

1. Identify the employees concerned: List all employees treated as managers and supervisors, organized by position and role.
2. Verify the actual circumstances: Review duties, responsibility and authority, work style and treatment to reassess whether each employee qualifies. If people with the same title work under different conditions, check each individually.
3. Decide on the corrective approach: If the position is meant to stand in an integrated position with management, revise duties, authority, work style and treatment so that they actually match manager and supervisor status. If not, end the exempt treatment, apply working-hour rules and pay overtime and holiday premiums.
4. Review and settle past periods: For periods in which the employee did not qualify based on the facts, confirm working hours and unpaid amounts and settle them. This must be reviewed separately from any forward-looking changes.
5. Prevent recurrence: Establish internal criteria and review procedures, and confirm actual circumstances when appointing employees or changing roles. Because reorganizations and changes in authority can alter the facts, review eligibility periodically.

8. Ongoing Policy Discussion on Managers and Supervisors

The Report of the Study Group on Labor Standards Legislation, published by the Ministry of Health, Labour and Welfare (MHLW) in January 2025, noted that some employees who should not qualify are being treated as managers and supervisors, and called for the requirements to be clarified. It also stated that, while the discretionary work system and the Highly Professional System include health and welfare measures, there are no such special measures under the Labor Standards Act for managers and supervisors, and that this should be reviewed.

However, the specific content and timing of any changes have not been finalized. As of September 2026, the Labor Policy Council is still deliberating on labor standards legislation.

Under current law, status is already determined based on actual circumstances. In addition, under the Industrial Safety and Health Act, employers must monitor the working hours of managers and supervisors, who may also be subject to a physician’s interview for employees working long hours if certain conditions are met. Rather than waiting for legal changes, reviewing and correcting current practice against existing standards now will also make it easier to respond to future amendments.

9. How RSM Shiodome Partners Can Help

RSM Shiodome Partners’ labor and social security attorney (sharoshi) firm provides end-to-end support on fixed overtime pay and manager and supervisor status, from assessing the current situation to revising the Rules of Employment and wage regulations, reflecting changes in payroll systems and settling past amounts. Working with certified public accountants and tax accountants within our group, we can also handle this efficiently alongside financial and tax due diligence. If you have any concerns about how these systems are operated, please feel free to contact us.

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