As the third-biggest economy in the world by GDP, Japan is naturally a prime contender for any international business evaluating new markets. It’s an affluent country where hard work and respect are ingrained into culture, and where both technology and manufacturing play key roles within both the national economy and within everyday life.
The Japanese economy has had its relative ups and downs over the last few decades, but has remained reasonably solid and stable throughout. At the time of writing, the full effects of COVID-19 on global business had yet to manifest itself, but the low impact on Japan compared to other countries should hold it in good stead in the years to come.
It is always important to remember that Japan is a country where playing by the rules is expected and where transgressions are punished severely, both legally and in reputational terms. From a payroll perspective, that therefore makes it essential that you start on the front foot by meeting all key regulations and requirements. This guide sets out the basic elements of payroll in Japan:
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.
There are several administrative steps that 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
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.
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.
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 hours are a hot topic in Japan: although there is a legal minimum of 40 hours a week (44 for some businesses) or eight hours a day, Japan has a long-hours culture that makes exceeding this commonplace, because those who are in the office longer are generally thought to be more likely to be promoted. However, foreign workers aren’t normally expected to put in the hours that Japanese workers do. Managerial staff are exempt from these restrictions.
Overtime arrangements must be agreed between employee and employer, and approved by labor standards officials. Various different rates of overtime pay apply, the main ones being 125% of 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). The national average for 2020 was 902 yen per hour (approximately £6.50; $8.70; €7.30). Wages are normally paid on or around the 25th of each month, either directly to an employee or into a bank account, and it is common for transport allowance 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. Bonuses are normally paid twice a year, once in June or July and again in December.
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.
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. £14,000; $18,000; €15,800) earned each year; the highest of 45% applies to all earnings over 40 million yen (approx. £290,000; $390,000; €325,000).
Corporate tax rates are around 30% for large businesses; for small and medium-sized enterprises, tax rates vary between 26% and 33.5% depending on the size of their taxable income each year. VAT is at 10%, except for food, non-alcoholic drinks and newspaper subscriptions where it is 8%.
There are five key elements of Japan’s social insurance system, with contributions as follows:
- Worker’s Accident Compensation Insurance: around 0.35% employer (rates vary by industry)
- Employment Insurance: 0.6% employer, 0.3% employee
- Health and Nursing Care Insurance: 4.95% each (5.735% each for workers aged 40 and over)
- Employees’ Pension Insurance: 9.15% each
- Child Benefits Contribution: 0.29% employer
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. In addition, expats being separately or offshore will need to file an annual Japanese tax return for this money earned.
Holidays and Leave
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. Unused paid leave can be rolled over to the next year, but no further than that. It should also be noted that due to Japan’s workaholic culture, many employees don’t use all of their holiday entitlement anyway.
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. Neither does Japan have any legal entitlement around sick leave or pay: employees tend to use annual leave if they get ill, although many foreign companies who are more accustomed to providing sick leave provide this to their workforce voluntarily.
Maternity leave entitlement is 14 weeks - six before the birth and eight after. 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.
Japan remains a popular destination for incoming investment from other developed economies. But as this guide demonstrates, many of its rules and regulations are complicated, from how employees are paid, through bonus entitlements, to the differences between Japanese and foreign employees. Add in the complexity of the Japanese language and it can be tough for new entrants into the country to establish and maintain compliance. This is where a global payroll solution and providing partner can be invaluable, delivering up-to-date local expertise that removes the stress from setting up in Japan and allowing you to focus on successful outcomes.
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.