[Payroll Theater] "It's just a name change..." What allowances are not excluded from the basis of overtime pay?

Hello! I'm a humble panda from a labor and social security attorney's office in Aichi Prefecture.🐼

When designing a company's salary system or performing monthly payroll calculations, "various allowances" always come up. "Position allowance," "qualification allowance," "housing allowance," "family allowance"...

However, there is a "bottomless minefield" that company presidents and HR personnel across the country are highly likely to step into regarding the design and calculation of these allowances.

That is,determining which "allowances must be included in the base unit price for overtime pay (premium wages)."

If you think about it lightly and calculate it that way, the moment a Labor Standards Inspection Office investigation occurs in the future, you could be retroactively charged for several years of "unpaid overtime pay," leading to a catastrophe where the company loses millions to tens of millions of yen.

This time, I will deliver a realistic episode from my practice where I, the panda, almost messed up at the boundary between the "name" and the "actual state" of an allowance!

Prologue: The Trap of the Newly Established "Position Allowance"

Panda (hereinafter, 🐼): "Owl-senpai, Owl-senpai! I received a consultation from our client, Company E! They promoted the excellent F-san to chief, so they decided to pay a 'position allowance: 30,000 yen per month' separately from the basic salary. I should just check 'exclude' from the overtime calculation basis in the payroll software's master settings, right?"

Owl-senpai (hereinafter, 🦉): "Oh my, Panda-kun. Your hands are moving quite lightly on the keyboard... If you set that to 'exclude,' the president of Company E will end up crying later. That's not very calm at all."

🐼: "What!? Why? It's not basic salary, it's strictly an 'allowance for the position'!? Why do I have to include it in the unit price for overtime pay?"

💭 (Moffy-san): "Huh! Position allowance is included in overtime pay!? Even though it feels like an 'extra allowance,' the law is strict, isn't it~"

📚 (Archive-san): "It's not that it's strict, it's just that you don't know the basics. Don't underestimate Article 37, Paragraph 5 of the Labor Standards Act and Article 21 of the Enforcement Regulations. The allowances that can be excluded from the basis of premium wages are [exclusively listed (anything else is absolutely not allowed)] by law."

1. There are only 7 "allowances that can be excluded" defined by law!

📚 (Archive-san): "Write this directly into your brain. In principle, there are only the following7 types of allowances that can be excluded from overtime pay calculations."

1. Family allowance (paid according to the number of dependents, etc.)

2. Commuting allowance (paid according to commuting distance or actual costs incurred)

3. Separation allowance

4. Child education allowance

5. Housing allowance (paid according to rent amount or presence of a housing loan, etc.)

6. Wages paid on an extraordinary basis(e.g., marriage allowance, sudden/unexpected payments)

7. Wages paid for periods exceeding one month(e.g., so-called bonuses)

🐼: "Oh, wait...? I don't see 'Position Allowance' anywhere..."

🦉 (Senior Owl): "That's right, Panda-kun. No matter how much the company insists that 'this allowance has nothing to do with overtime pay,' any allowance not listed in these seven categories—for example, 'Position Allowance,' 'Qualification Allowance,' 'Technical Allowance,' or 'Perfect Attendance Allowance'—must all be included in the calculation basis for overtime pay."

"Is it safe if I just change the name to 'Housing Allowance'?"

🐼: "I, I see... Oh! In that case, I'll suggest to the president of Company E that we stop using the name 'Position Allowance' (30,000 yen) and instead pay everyone a flat rate under the name 'Housing Allowance,' which is on the list above. Wouldn't that allow us to exclude it from the overtime pay basis!? I'm a genius!"

📚 (Archive-san): "... (takes a deep breath) You silly panda!!! Such a shallow deception would be seen through by a Labor Standards Inspector in an instant."

🐼: "Eek! It's not a deception, it's just a name change!"

📚 (Archive-san): "Listen. When determining whether an allowance can be excluded, the government judges based on 'the actual circumstances of the payment, not the name of the allowance.' Even if it is named 'Housing Allowance,' if the rule is to 'pay everyone a flat 30,000 yen' regardless of the actual housing costs (such as rent amount or whether they own or rent their home), it is considered a de facto distribution of basic salary and cannot be excluded from the basis for overtime pay."

🦉 (Senior Owl): "That's right. Similarly, even if you call it 'Family Allowance,' if it is not linked to actual dependency status, such as '10,000 yen for those with a spouse,' but is instead 'paid as a flat 10,000 yen to everyone,' it must be included in the basis for overtime pay. Trying to keep overtime pay low by 'just changing the name of the allowance' is the point most likely to be challenged by the Labor Standards Inspection Office."

💭 (Moffy-san): "I see! Even if you make the name sound legitimate, if the content is a 'flat payment,' the magic of the law won't work. Archive-san is scary when she's angry, but what she's saying is 100% correct!"

3. What kind of disaster happens if you mistakenly 'exclude' it?

🐼: "If we keep calculating without including the Position Allowance (30,000 yen) in the overtime pay basis on our own, how much damage will that specifically cause?"

📚 (Archive-san): "Let's do some simple math. For example, let's say there is an employee with a basic salary of 220,000 yen, a position allowance of 30,000 yen, an average monthly prescribed working time of 150 hours, and 30 hours of overtime per month."

First, we calculate how much the basic wage per hour and the overtime wage (overtime unit price) will decrease because the 30,000 yen position allowance was excluded.

※ In accordance with the calculation rules based on the Labor Standards Act, fractions of less than 1 yen are rounded (less than 0.5 yen is rounded down, 0.5 yen or more is rounded up).

1. Impact on the unit price per hour

First, let's compare the "correct unit price" that includes the position allowance with the "incorrect unit price" that excludes it.

1. Correct calculation (including position allowance)

• Wages serving as the basis for calculation: Basic salary 220,000 yen + Position allowance 30,000 yen = 250,000 yen

• Basic unit price per hour: 250,000 yen ÷ 150 hours = 1,666.6... yen ⇒ 1,667 yen

• Overtime unit price (25% premium): 1,667 yen × 1.25 = 2,083.75 yen ⇒ 2,084 yen

2. Incorrect calculation (excluding position allowance)

• Wages serving as the basis for calculation: Basic salary only 220,000 yen

• Basic unit price per hour: 220,000 yen ÷ 150 hours = 1,466.6... yen ⇒ 1,467 yen

• Overtime unit price (25% premium): 1,467 yen × 1.25 = 1,833.75 yen ⇒ 1,834 yen

By excluding the position allowance, an underpayment of 250 yen (2,084 yen - 1,834 yen) per hour of overtime occurs.

2. Simulation of specific damages (underpayment amount)

If this employee works 30 hours of overtime every month, the damages will be as follows.

• Monthly underpayment (damages) Correct overtime pay (2,084 yen × 30 hours = 62,520 yen) - Incorrect overtime pay (1,834 yen × 30 hours = 55,020 yen) = 7,500 yen / month

• Annual underpayment (damages) 7,500 yen × 12 months = 90,000 yen / year

• If left for 3 years (statute of limitations for unpaid wages)
  90,000 yen × 3 years = 270,000 yen

If there are 10 employees under the same conditions, the potential debt the company faces will balloon to 2.7 million yen. As you can see, just by excluding a single allowance that should have been included in the calculation, it can develop into a major loss or legal risk later on, so setting the correct calculation basis is extremely important.

🐼: "T-two million seven hundred thousand yen...!!! (faints)"

🦉 (Owl Senior): "That's right. On top of that, there's a possibility that late payment interest and additional payments could be imposed, so it becomes a truly alarming amount for the company. That is precisely why the moment we hear about a new allowance, we must conduct a thorough and careful interview about its payment requirements and configure the payroll software correctly."

Epilogue: Panda works on the correct settings

🐼: "That's too terrifying...! I'll contact the president of Company E immediately and tell them, 'Since the position allowance is subject to overtime pay, I'll make sure it's included (calculated) in the payroll settings!'"

🦉 (Owl Senior): "Yes, that's the way to go. If the president looks puzzled and asks, 'Huh? Even though it's an allowance, it's included in overtime pay?', if you gently explain the rules of these 7 excluded allowances, they should be extremely grateful."

💭 (Moffy-san): "Panda-san, I'm glad you prevented a major crisis! Once again, the teamwork between the AI team and Owl Senior has saved the company from a pinch!"

📚 (Archive-san): "...Well, I'll give you credit for noticing it. Now, once you understand, rewrite the master settings for Company E's payroll software immediately. Every minute you delay, the mental health of my database deteriorates!"

🐼: "Yes! I'll change the settings right away!! (Dash!)"

Don't be fooled by the 'sweet trap' of allowance names; look at the reality and aim for smart and clean labor management.