Employing in Japan
As the world’s third-largest economy after the US and China, Japan has become synonymous with quality and innovation. The Japanese market is characterised by a global outlook and a willingness to invest long-term in viable products and services — as well as consumers with high levels of disposable income who are drawn to premium, high-end goods and services.
The local workforce here is typically well organised, efficient and highly skilled, and the national quest for quality often goes hand in hand with committed and loyal investors that make excellent business partners. For many foreign companies, Japan is the place for the development of new products and concepts.
Japan also has a modern, highly developed infrastructure including excellent telecommunications and over 20 ports and five international airports, helping to facilitate the distribution of goods and services worldwide. If you can meet the high expectations of the discerning Japanese market and succeed here, you can succeed anywhere.
Statutory Provisions & General Information
Wages must be paid in full and in the local currency directly to the workers on a fixed date at least once a month. It’s common to pay between the 25th to the 31st of the month for current month salary. If salary is paid in arrears, it’s usually by the 10th of the following month.
Employers don’t have to pay variable compensation (including bonuses) if the nature of the payment is discretionary. If the work rules or employment contracts provide for fixed bonus payments — typically, dividing the annual salary in more than 12 instalments and paying the bonuses in June (Kaki Shoyo) and December (Toki Shoyo) — the payment is legally classified as wages and employers are legally obligated to pay it.
On top of salary, companies usually pay transportation fees for employees from their residence to their workplace. This commutation allowance, which is generally the cost of a monthly train pass, is usually subject to a cap and is a non-taxable allowance for the employee. Any other allowance paid on top of base salary is subject to income tax.
The scope of Japanese labour law is defined by the Japanese Civil Code. Article 622 defines employment contracts, article 632 defines a contract for work, and article 643 defines a contract for mandate. The parties are free to decide the functional nature of their contracts, but labour rights apply regardless of the label in the contracts.
Employees in Japan enjoy significant protection under Japanese employment laws and through well-established court precedents. Guidelines and notices issued by the Ministry of Health, Labour and Welfare (MHLW) are also employee friendly. In addition, cultural norms and societal expectations such as the traditional concept of ‘lifetime employment’ play important roles in the employer/employee relationship.
Employers and employees are free to execute a fixed-term contract, which doesn’t need to be renewed unless the parties agree.
However, when fixed-term employment contracts which started after 1 April, 2013 are renewed to reach a period exceeding five years, the employee will acquire a right to request and change the relationship to open-end. There have already been two separate legislative acts with exceptions to this maximum time period.
Probation isn’t compulsory in Japan, but it is common. Typically, the probationary period is three to six months and should not exceed one year. An employee can be terminated during or at the end of the probationary period only if the termination is objectively reasonable and socially acceptable. Although this test is somewhat easier to meet for probationary employees, it may still be difficult to justify the termination.
For employees, the notice period is 30 days or as otherwise detailed in an employment contract. Employers must give at least 30 days’ notice of dismissal or provide payment in lieu of notice. However, due to the difficulty in justifying a termination, many employers offer severance agreements and pay some consideration in exchange for the employee’s voluntary resignation and waiver of claims against the employer. (Note: the 30-day notice period doesn’t apply to employees that are terminated during the first 14 days of the probationary period.)
Overtime pay is required for work done in excess of the statutory working hours. Managers or above are not usually eligible for overtime payment. A common workaround is for individual employment contracts to state that an employee’s remuneration includes a certain amount of overtime (subject to the caps set out in the labour standards).
Pursuant to the labour standards, the following records must be maintained at each workplace for three years:
- A wage ledger, showing paid amounts and the basis of calculation (including hours worked)
- A workers’ roster
- Other related documents on hiring and compensation
The termination process can be exceedingly difficult. An employee can only be dismissed if the employer has objectively reasonable grounds to do so, and the dismissal wouldn’t be considered unreasonable in general societal terms.
Poor performance or misconduct that justifies termination in other countries often doesn’t warrant it in Japan. A termination that’s not justified will be deemed as an abuse of the employer’s termination rights. Such termination is a nullity, and the employee will be reinstated with back pay if the employee seeks such relief.
Due to difficulties associated with terminating employees, employers are increasingly hiring employees for fixed terms of employment. Fixed-term agreements are generally required to be for three years or less.
Japan has four different kinds of insurance system which companies are legally obliged to take part in. All workers that meet certain criteria are covered by the insurance.
- Workers’ accident compensation insurance: covers any illness or injury at work or while commuting to/from work.
- Employment insurance: provided to workers who become unemployed and helps to maintain stable employment, such as providing financial aid and subsidies.
- Health insurance and nursing care insurance: covers medical and nursing care expenses incurred by workers.
- Employees’ pension insurance: provides benefits for old age, death or disability.
Workers’ accident compensation insurance and employment insurance are known collectively as ‘labour insurance’, while health and nursing care and employees’ pension insurances are collectively referred as ‘social insurance’.
A company must enter these insurance systems when first incorporating or hiring staff/workers by submitting labour and social insurance notification forms to the relevant authorities. The company usually pays insurance premiums by deducting the portion of the premiums payable by employees/workers from their wages and paying these together with the portion of the premiums payable by the company to the relevant authorities.
Social insurance premiums are deducted from a worker’s monthly salary. Pension and health premiums are calculated as a percentage of the ‘standard salary’. The standard salary is determined by taking the average compensation of three previous months and fixing that average according to a standard salary table that provides a single amount, called the ‘standard salary’, for any salary in that taxed range. The standard salary is capped. The maximum standard salary is JPY 620,000 for pensions and JPY 1,390,000 for health. Unemployment and workers’ accident compensation insurances premiums are calculated as a percentage of the actual compensation instead of the standard salary.
Bonus payments are subject to the above insurances, but particular rules apply depending on the frequency and regularity of the payments. Also, there are annual caps on premium payments relating to bonuses.
All residents contribute to pension insurance. This premium is revised every April and is determined by factors such as price fluctuation and the real-wage index. Salaried workers under the age of 70 pay a percentage of their standard salary. The premium for salaried workers is 18.30%, paid half by the employer and half by the employee. Pension benefit is paid once the insured person is 65, unemployed and has paid pension premiums for at least 10 years. The benefit amount depends on one’s total contribution.
Non-Japanese workers who have lived and worked in Japan for less than 10 years may apply to claim a lump sum payback on their national pension when they leave Japan and no longer will be eligible to receive Japanese pension benefits. However, this only applies for those who have been covered by employees’ pension insurance for at least six months. The application must be sent within two years after leaving Japan.
Employers pay a child allowance premium (0.36%) along with the pension premium. This premium funds the government programme that provides childcare allowance to residents with children.
Health insurance provides medical coverage for all insured residents, and long-term care insurance provides elderly care benefits. It also provides allowances in cases of childbirth, injury, sickness and death.
National health insurance insures non-salaried residents under the age of 75. Employees’ health insurance covers salaried workers under 75 and their dependents under 75. Both non-salaried and salaried persons become insured under the latter-stage elderly healthcare system upon turning 75. National health and employees’ health insurances cover 70% of medical expenses for persons under 70 and those who are 70 to 74 with a standard salary of JPY 280,000 or more. Otherwise, the government covers 80% of medical expenses for those who are 70 to 74 with a standard salary below JPY 280,000 and 90% for those over 75. If total monthly medical costs of a household exceed a maximum amount, the exceeded amount will be reimbursed. The maximum is determined by the insured person’s compensation and age.
Like pension insurance, employees’ health insurance premiums are calculated based on standard salary. The percentage depends on the employer’s registered prefecture. Tokyo’s rate is 9.87%, paid half by the employer and half by the employee. Persons aged 40 to 64 are subject to an additional 1.79% premium on top of their health premium for long-term care insurance, with the employer and employee each paying half.
Unemployment insurance provides unemployment allowance, as well as childcare and family care leave allowances. The length of receiving unemployment allowance depends on age, termination reason and the period in which one has paid unemployment insurance premiums. The waiting period for the first allowance payment is four weeks if the company has terminated the employee, as opposed to a waiting period of up to three months if the employee quits on their own accord. Allowance is paid monthly from thereon provided the person can prove they are actively searching for a job.
Representative directors are not eligible for this insurance, as they’re not under an employment agreement but are under a service contract. Directors on boards of directors are also not eligible, but directors who simultaneously function as an employee (usually a high-ranking employee with a title such as department head) are eligible.
The premium rate differs according to the employer’s industry type, and the employer pays a larger percentage than the employee. For example, if an employer is in a general industry type, meaning the employer is not in agriculture, forestry, fishery, sake production or construction industries, the employer will pay a 0.60% premium and the employee 0.30%.
Workers’ accident compensation insurance provides medical care allowance for work and commuting-related injuries, diseases and deaths, as well as compensation allowance for unpaid medical leave periods that exceed four days. The same rule applies for directors as with unemployment insurance, but there are two ways in which representative directors and directors may become eligible. One way is to apply for special enrolment, which has several requirements such as industry type and number of employees. The second way is to receive unemployment insurance eligibility as a director who simultaneously functions as an employee. Representative directors are not eligible for unemployment insurance and, therefore, not applicable for this second method.
Premiums are covered by the employer. The rate depends on the employer’s industry type and can vary from 0.25% to 10.3%. Common industry types are finance, insurance and real estate (0.25%), warehousing and security (0.7%) and wholesale/retail trade, restaurant and lodging (0.4%).
Employers pay an additional 0.002% premium for asbestos insurance, which funds asbestos health damage relief.
Employer statutory benefit contributions are approximately 16% of the salary and taxable allowances.
Holiday & Leave
Newly hired employees are generally granted 10 days’ paid annual leave after the completion of six months’ service. The entitlement rises by one day a year for the following two years and by two days a year thereafter, up to a maximum of 20 days.
Unused leave expires after two years and cannot be carried over unless the contract says otherwise. Employers are not required to pay out unused annual leave in case of termination, but it can become a part of the negotiation on leaving the company.
It’s not uncommon for employers to offer 15–20 days paid annual leave from the first day of employment.
The maximum workday is six days a week, and employers are obligated to give a minimum of one holiday a week. This one-day holiday doesn’t need to be any particular date, and it’s not mandatory to give public holidays as company holidays. However, it’s common practice to give two company holidays a week (usually Saturdays and Sundays) plus public holidays if such holidays fall on weekdays. Japan has around 16 national holidays each year. In addition, most companies are closed from 29 December to 3 January even though only 1 January is a national holiday. Many Japanese companies are also closed for up to one week in August for Obon holidays.
Under Japan’s labour laws, all full-time employees are guaranteed the minimum 10 days of paid annual leave per year after serving an initial six months of employment and being present for at least 80% of the hours they were supposed to be working.
The statutory minimum number of paid vacation days per year, in addition to the company holidays, are:
Usually, the full entitlement of annual leave for a given year is granted (received) on either the annual anniversary of employment or on a standard day each year that applies to all employees.
Following the entry into force of the special rules applicable to willing high-level professionals on 1 April, 2019, qualifying employees will have to take holidays of no less than 104 days and no less than four days every four weeks. Their employers must grant them at least one holiday (two weeks in a row) every year and other prescribed health support.
In general, there are no sick leave rights in Japan. When employees get sick, they use their paid vacation to take leave of absence. Some foreign companies grant sick leave to their employees as a special benefit. There’s no requirement to grant sick leave unless the work rules or employment contract state otherwise. Employees who are absent from work due to non-work-related sickness or injury are not entitled to pay from their employer.
Employees are covered by workers’ accident insurance in the cases of injury, illness, disability or death resulting from employment. In the case of work-related accidents, there are a number of benefits available. Under employees’ health insurance coverage, employees are entitled to two-thirds of the applicable standard wage (calculated according to a specific formula) as illness/injury allowance after three days of absence for 18 months.
However, if the employer offers the employee any wages during this period, the allowance will be reduced by the amount received.
Dismissal is rarely an immediate option, and work rules often include a suspension period (e.g., from three to six months) during which the employee needs not perform their duties but maintains a contractual relationship with the employer. If the employee recovers during this period and can return to work, they’ll be reinstated. If the employee doesn’t recover within this period, the employer can give notice of termination. Various rules can be adopted in this respect, and the duration and reasons for suspension will vary.
- Before birth: Maternity leave of six weeks before childbirth or within fourteen weeks in the case of two or more expected children must be granted to expecting mothers.
- After birth: Employees cannot work before eight weeks have passed since childbirth. However, once six weeks have passed since childbirth, an employee can submit a request to work, and the employer can allow them to perform duties that are approved by a doctor.
It’s not mandatory to pay an employee during maternity leave. If no wages are paid, the
employee is paid two-thirds of their base wage from her health insurance.
Employers are prohibited by equal opportunity laws from treating a female employee disadvantageously because of maternity leave. Therefore, employees can resume the same job on the same working conditions after maternity leave.
There’s no statutory requirement for paternity leave at present.
An employee that’s raising a child (biological or adopted) less than one year old and willing to continue to work after childcare leave must be allowed to take parental leave until the child reaches one year of age. If both the father and mother take childcare leave, the leave period is extended until the child reaches one year and two months.
The leave period may be extended until the child reaches two years if:
- The employee wants to register with day care but is unable to, or
- If the employee’s spouse that was looking after the child and was planning to continue to do so after the child turns one year old cannot do so due to their death, injury or illness
It’s not mandatory to pay the employee during childcare leave. If no wages are paid or only a partial wage below 80% of the base wage is paid, the employee will be paid from half to two-thirds of their base wage from their unemployment insurance.
Nursing care leave
It’s not mandatory to pay the employee during nursing care leave. If no wages are paid or only a partial wage below 80% of the base wage is paid, the employee is paid 40–80% of the base pay from their unemployment insurance.
It’s common to give leave for marriage, death of a relative, etc. These would be defined in the rules of employment.
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