What global businesses need to know about payroll in Japan

Japan has had plenty of ups and downs economically in recent years for a number of reasons, including tight COVID restrictions, and a population that is both declining and aging. However, nothing changes the fact that Japan is the fourth-biggest economy in the world by GDP, the second-biggest in Asia, and one of the most long-standing opportunities for international investment.

Japan’s unique culture is embedded firmly into the way it does business, whether it’s a clear preference for playing by the rules, or for making a strong commitment to work. Indeed, so important are characteristics like trust and fair play in Japan that any transgressions, or areas of non-compliance, are dealt with extremely severely.

This makes it absolutely essential that you’re fully on top of all things payroll and employment before you start your Japanese expansion. This guide sets out all the basics.

Getting Started 

Setting up your payroll in Japan will depend on what type of corporate structure is used. Most foreign companies will set up either as a Godo-Kaisha (limited liability company) or a Kabushiki-Kaisha (corporation). The main difference between the two is that the latter must get certified articles of incorporation, and must publish financial statements. 

There is no minimum start-up capital requirement for either option, although the set-up admin costs for limited-liability companies are generally lower.

Several administrative steps need to be undertaken, including:

• Preparation of articles of incorporation and corporate seals
• Opening a bank account and transferring capital into it
• Applying for incorporation
• Registration with other relevant government and tax authorities
• Applying for a Business Manager visa, for any foreign national who is coming in to run the Japanese operation

The whole incorporation process normally takes around a few weeks, but businesses should brace themselves for a lengthy and detailed process regarding the opening of a bank account. Doing so for making payroll and tax payments is a legal requirement, but Japan has strict laws around business compliance and anti-money laundering. New companies may find it tough to open an account in Japan, while even well-established organizations have faced difficulties in the past. Working with a partner with Japan-specific experience and expertise can ease this process considerably.

Employment Considerations

Written contracts are mandatory in Japan, and must set out all relevant information around the employment of a worker: any clauses that are in violation of Japan’s Labour Standards Law are automatically considered invalid. Most of these contracts are renewed year to year, although fixed-term contracts of longer than three years are not permitted. Unions are common in Japan, although foreign workers may find it hard to gain membership or representation, especially if they aren’t proficient in Japanese.

It is perhaps most important to point out that terminating employment in Japan is extremely difficult. This is due to a huge range of laws protecting employee rights, and the role that collective bargaining can play in strengthening this even further. More often than not, dismissal and a related severance package are agreed mutually between the employee and employer concerned.

Probation periods don’t have a fixed period enshrined in law, but usually run between three and six months. However, if an employer decides to let an employee go after this period, all the normal rules around termination apply.

Working time is one of the real stand-out characteristics when it comes to doing business in Japan. Legally speaking, there is a standard working week of 40-44 hours across five days (managerial staff are exempt). However, Japan has long held a culture of working extremely long hours, as it’s generally thought that employees who put in extra time are more likely to get promoted. It’s also important to note that the same expectation doesn’t usually fall on foreign workers in Japan.

Overtime arrangements must be agreed between employee and employer, and approved by labor standards officials. Employees who are officially requested to work overtime should not work more than an extra five hours per day, 45 hours per month, or 365 hours within a year.

Various different rates of overtime pay apply, the main ones being 125% of the normal rate for work outside statutory hours for the first 60 hours of overtime in a month, and 150% for overtime over and above that. Working on statutory days off pays at 135%, and there are a number of different rates for late-night work.

Compensation, Bonuses and Severance

Minimum wages in Japan vary across different local areas, known in Japan as prefectures. Japan has 47 prefectures in total, which can make payroll very complex if you employ people in many different areas of Japan. Tokyo’s minimum wage was 1113 yen per hour (approx. £6.10; $7.80; €7.10) at the end of 2023, a year in which the national average passed the 1000 yen mark for the very first time.

Wages are normally paid on or around the 25th of each month, either directly to an employee or into a bank account. It’s common for transport allowances to make up a proportion of salaries to cover the cost of commuting, especially in big cities where most employees are likely to use public transport. 

However, a large proportion of Japanese earnings are made up of bonuses: on average, non-managerial workers in Japan receive nearly five months of base salary in bonuses every year. The payment of the 13th and 14th-month bonuses, in the summer and December respectively, is traditional in Japan – however, it is less common among foreign businesses in Japan that prefer a Western-style 12-month payroll setup.

Notice periods in Japan in cases of termination are 30 days, or 30 days pay in lieu. There is no legal framework around severance pay, but employers will generally come to an agreement with employees on the value of a one-off severance payment. As the rules around termination are so strict, this is normally the easiest way forward for both parties.

Tax and Social Security

Income tax, social insurance and national labor insurance deductions are withheld at source by employers, who should register with each relevant authority as part of the set-up process. Japan has seven progressively higher rates of income tax: the first rate of 5% applies to the first 1.95 million yen (approx. £10,800; $13,600; €12,500) earned each year; the highest of 45% applies to all earnings over 40 million yen (approx. £220,000; $280,000; €255,000).

Corporate tax rates are 23.2% for large businesses (defined as those with paid-in capital of more than 100 million yen (approx. £550,000; $700,000; €640,000). For small and medium-sized enterprises, tax rates vary between 15% and 23.2% depending on the size of their taxable income each year. Companies in Japan are also required to pay a number of other smaller taxes, including local corporate taxes, enterprise tax, and inhabitants tax, which generally brings the total tax rate to between 30% and 35%.

VAT in Japan is known as Consumption Tax and runs at 10%, except for food, non-alcoholic drinks and newspaper subscriptions where it is 8%.

There are four key elements of Japan’s social insurance system, with contributions as follows:

• Worker’s Accident Compensation Insurance: between 0.25% and 8.8% employer (rates vary according to industry and level of risk)
• Unemployment Insurance: 0.95% employer, 0.6% employee
• Health and Nursing Care Insurance: 5.91% each (7.48% each for workers aged 40 and over)
• Employees’ Pension Insurance: 9.15% each

As a result of employers paying the social insurance tax, all Japanese employees carry a government-subsidized social insurance card that qualifies them for a 70% discount on services in any medical facility.

Different stipulations are in place for global companies paying foreign expatriates separately from the Japanese payroll system. The expats receive significant tax benefits by being paid offshore, but lose key benefits of the Japanese payroll system, including health insurance and other measures. Those areas will need to be handled individually by the expat employee.

Holidays and Leave

Japan is known for its working culture of long hours and presenteeism. This means that even though the statutory paid leave entitlement is reasonable, many employees don’t use all the time available to them – even though unused days can be rolled over into the following year.

Employees start to receive paid leave entitlement after six months of service, and increases kick in every 12 months thereafter (i.e. after 1.5 years, 2.5 years, and so on). Initial entitlement is ten days per year, then increasing to 11, 12, 14, 16 and 18 days, and finally to 20 days after 6.5 years of service. 

Employees are entitled to time off on Japan’s 16 days of public holiday each year, but there is no legal provision regarding public holiday pay. Public holidays that fall on weekends often result in the ‘day off’ being transferred to the following Monday.

Japan also doesn’t have any legal entitlement around sick leave or pay, although many companies (especially foreign ones with Japanese operations) tend to provide sick pay entitlement voluntarily. In any case, Japanese employees tend to use some of their annual leave if they get ill.

Maternity leave entitlement is 14 weeks – six before the birth and eight after. Mothers are entitled to a lump-sum maternity payment per child of 420,000 yen (approx. £2300; $3000; €2700). Alternatively, they can receive two-thirds of their usual salary for the 14-week period if they are signed up to the health insurance provision of their employer. 

After this, both mothers and fathers can take ‘child care leave’ up until the child’s first birthday.  Both of these schemes are paid at two-thirds of base salary and are covered by social insurance. 

Additionally, employees in Japan are entitled to five days of bereavement leave in the event of a death in their immediate family, and a further two days if they are required to arrange the funeral. There is also an entitlement of up to three months of unpaid leave to care for a family member.

In Summary

Japan remains a global economic superpower, and so remains a very attractive proposition for almost any international business looking at expansion. However, there are many legal and cultural differences that set Japan apart from most of the rest of the developed world, and this can make establishing and maintaining payroll compliance very difficult. Tapping into the expertise and support of a global payroll partner, especially if they have the technology to help you, can make a real difference in getting to grips with Japan’s unique requirements.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.