Contractual Working Hours and the Inclusive Wage System

I. Introduction
When the Labor Standards Act (LSA) is revised, related rulings also change. A representative example is the change of the Supreme Court ruling in relation to the inclusive wage system as contractual working hours are introduced as mandatory items in employment contracts. Prior to July 1, 2007, the LSA stipulated wages, working hours and other working conditions acceptable for employment contracts, but since that date, it now stipulates wages, contractual working hours, statutory holidays, statutory leave and other working conditions. This means that a previous employment contract that specifies only "working hours" remains unclear in content, but the revised law stipulates that it should include "contractual working hours". Contractual working hours refer to the time set by the employer that the employee is to work, within the allowable total working time (40 hours per week, 8 hours per day) (Article 2, paragraph 8 of the LSA). Therefore, since the revision, the wage in accordance with the contractual working hours has to be specified, which in effect limits the inclusive wage system.

Before revision (prior to July 1, 2007)

Article 24 (Stipulation of Working Conditions) The employer shall specify the wages, working hours and other working conditions for workers at the time the employment contract is concluded.


After revision: Labor Standards Act [Implementation: 2007.7.1] [Law No. 8293, January 16, 2007, some amendments]

Article 24 (Stipulation of Working Conditions) The employer shall notify the employee of the wages, the contractual working hours in accordance with Article 20, holidays in accordance with the provisions of Article 54, annual paid vacation in accordance with the provisions of Article 59, and other working conditions to be determined.

In order to understand the content of such changes, it is necessary to examine specifically the meaning of the contractual working hours introduced with revision of the Labor Standards Act in 2007. In this regard, I would like to discuss the judicial precedents introduced due to the revised law, and then look into the types of suitable employment contract where an inclusive wage system is justifiable.

II. Contractual Working Hours
1. Regulations on contractual working hours
The contractual working hours shall be determined between the worker and employer in the range of working hours pursuant to Article 50 (Legal Working Hours) of the Labor Standards Act, Article 69 (Working Hours for Minors) or Article 46 (Hazardous and Dangerous Work) of the Industrial Safety and Health Act. This means that the contractual working hours must be set within the statutory working hours. Article 17 of the Labor Standards Act requires wages, contractual working hours and other working conditions to be specified in the process of making an employment contract. Therefore, wages defined in the employment contract are limited to 40 hours a week, and in principle, inclusive wages are a violation of the Labor Standards Act. Article 58 of that Act stipulates that if a worker fails to calculate working time by working all or part of the working hours outside the workplace due to business trips or other reasons, he/she shall be deemed to have worked the contractual working hours. Even for part-time workers, "the employer shall obtain the consent of the employee concerned if they have a part-time worker work beyond the contractual working hours prescribed in Article 2 of the Labor Standards Act. In this case, they cannot work more than 12 hours a week. The employer shall pay the part-time worker an additional 50% or more of the ordinary wage for the overtime exceeding the contractual working hours" (Article 6 of the Fixed and Part-time Employment Act). In the past, overtime pay was introduced only for working hours exceeding legal standard working hours. However, for part-time workers, the overtime pay shall be paid if the working hours exceed the contractual working hours (introduced on March 18, 2014). This means that if the part-time worker has 20 contractual working hours per week, an additional wage shall be paid for the hours exceeding those 20 contractual working hours.

2. Reasons for limiting work hours
Contractual working hours refer to the time that the worker has to work within the legal standard working hours. Here, legal standard working hours generally refer to 40 hours per week and 8 hours per day. The limitation on extended work is up to 12 hours in excess of statutory working hours (Article 53 of the LSA). Overtime work for part-time workers is also recognized within a limit of 12 hours by adding to the weekly contractual working hours of part-time workers. That is, extended hours for part-time workers are judged based on contractual working hours rather than legal standard working hours (Article 6 of the Fixed-Term and Part-time Employment Act). In Article 17 of the LSA, stipulating the contractual working hours in the employment contract is mandatory, and then based upon this, wages and contractual working hours are determined. This limits the maximum working hours and ensures the right of employees to protect their health and pursue happiness.
The inclusive wage system refers to a wage system that does not calculate basic wages in advance for a given working time, but rather stipulates that daily or monthly wages shall include the total amount of statutory working hours plus additional working hours. Since the LSA stipulates that basic wages and contractual working hours shall be defined in the employment contract, the inclusive wage system is in effect in violation of that Act.

III. Changes in Court Rulings Regarding the Inclusive Wage System
1. Court rulings – details of changes
Related rulings can be divided into those before and those after July 2007. Before July 2007, the courts did not specifically determine contractual working hours because employment contracts were not required to stipulate wage, working time or other conditions. In other words, even if the basic wage was not calculated in advance, but the inclusive wage equaled the sum of applicable allowances plus the monthly wage in a way that was not disadvantageous to the employee, it was considered valid. As a result, it was possible to accept the inclusive wage system for both jobs where the working hours were difficult to calculate, and jobs where the working hours were not difficult to calculate, but the system was conducive to convenient management.
In 2010, however, the Supreme Court ruled that the difficulty of calculating working hours would determine whether an inclusive wage system was justified and that such a system was not acceptable if the working hours could be calculated. This case is considered to set a related precedent because the employment contract specifies contractual working hours in accordance with Article 17 of the LSA. In other words, the basic wage should be determined on the basis of the contractual working hours when concluding an employment contract, and in principle, the inclusive wage system cannot be introduced when working time can be calculated. Thus, the inclusive wage system is acceptable for workers with supervisory and intermittent duties that make it difficult to calculate working time, but not easily for workers whose working time can be calculated.
Amendment of the Labor Standards Act resulted in the following changes in rulings on inclusive wages.
Before revision
(prior to July 1, 2007)

The Supreme Court concluded that if an employer receives the consent of the employee as a means of encouraging the convenience of calculating working hours and promoting employee willingness, and it is not disadvantageo