Even a doctor making $150,000 a year can still claim overtime

On July 7, 2017, Japan’s Supreme Court ruled in favor of a doctor seeking for payment of overtime wages in addition to his annual salary of ¥17 million.  Japan’s employment law provides that employees working beyond 8 hours should be entitled for overtime pay. As job categories exempted from this law are relatively limited, previously there was an argument that highly paid employees with certain discretion at their work are exempted from, and therefore not entitled to, overtime payments.  In fact, there was a local court case finding that an executive in an investment bank was not entitled for overtime given his discretion at work and the amount of his salary.

This ruling clarifies that the Supreme Court does not concur with that approach, and even highly paid employees may still claim overtime insofar as their gross salaries do not clearly indicate allocations between the base salaries and overtime payments.  We discuss this in more detail below.

Background

A doctor was hired by a medical institution for ¥17 million per year and worked for six months.  His working conditions were 8 hours a day, 5 days a week. Under his employment agreement and the overtime policy of the hospital, overtime payments were available only for emergency work as necessary, or for work directly contributing to the revenues of the hospital.  It was provided that extended hours for regular and routine work were outside of the scope of overtime, and that these overtime hours were already included in and compensated by the annual salary.

The doctor was later dismissed from his employment and sought overtime payments in addition to the payments he received in accordance with the overtime policy.

The trial court found that the parties had agreed to include compensation for overtime hours in the annual salary, holding that the employment law rule for overtime hours should not extend to the doctor given that the nature of his work was highly discretionary, and he has been highly compensated.  While the trial court admitted that the employment agreement did not clearly distinguish the portion for overtime pay from the base salary, the court held that this does not affect the conclusion, since the accrual of overtime pay was clearly defined in the overtime policy. This was affirmed by the appeal court.

Decision

The Supreme Court reversed and remanded the holding above, reiterating that overtime wages should be distinguished from base salaries when they are included in regular salary payments.  In the present case, as the medical institution did not clearly indicate the amount that constituted overtime pay within the annual salary paid to the doctor, it should not be considered that the annual salary includes overtime payments.

The case was remanded to the Tokyo High Court.  On February 22, 2018, the High Court concluded the overtime wage was ¥4 million in the 6 months the doctor was employed, in addition to the doctor’s ¥17 million salary.

Key Takeaway

Many multinationals in Japan pay their employees in annual salaries simply because that is common globally.  In particular, many professionals and engineers are paid in annual salaries with the perception that they should be all inclusive.  The court decision above clearly suggests to the contrary.

Unless companies take proper steps to protect themselves, they are exposed to potential overtime claims even for highly skilled employees.  Some adopt agreements with employees to exempt application of overtime for discretionary workers, but this may not be the perfect solution for all companies, since the scope of eligible employees are relatively limited.

To address this concern, on July 6, 2018, new legislation was passed to create an exemption for overtime payment for skilled professionals, which is expected to be effective sometime in April 2019.  Although the details will be announced later in applicable regulations to be promulgated by the relevant authorities, this may shed light on this prolonged issue. We will discuss this topic in another post when details are available.