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Getting Payroll Right In Japan

Updated: Aug 7, 2023


Getting Payroll Right In Japan

Business expansion into Japan is a herculean task for any organisation. You will need to be cognizant of local workplace cultures and hiring practices. This also includes being aware of the Japanese statutory and tax regulations as well as ensuring payroll processes comply with local employment laws.


Here's a detailed guide to help your organisation get started in setting up your payroll processes and hiring your first local employee.


Working hours

The statutory number of working hours in Japan must not exceed 8 hours a day (excluding breaks) or 40 hours per week. However, businesses that fall under retail and beauty services, cinemas, healthcare or restaurants with under 10 employees are allowed to have employees work up to 44 hours a week. This should still not exceed 8 hours a day.


Organisations are required to give employees statutory days-off, which may include at least one day off per week or four days off in any four-week period. Sundays or public holidays are not mandatory days off, and other days may be selected for off days as agreed between the employer and employees.


It is critical to clearly state the working hours and off-days in your employees' employment contract to avoid any miscommunication, particularly if your business falls under the selected industries, such as healthcare or retail services.


Overtime compensation

Overtime work is considered when employees work more than 8 hours a day or exceeding 40 hours per week. The amount of overtime working hours cannot exceed 5 hours per day or 45 hours per month. In total, it should not exceed 360 hours per year. However, employees holding managerial positions in Japan are expected to work overtime without any compensation for working longer hours


Organisations that require their employees to work in excess of the statutory working hours or on statutory days-off must submit a Notification of Agreement on Overtime and Work on Days Off to the chief of the relevant labour standards office. Should organisations fail to submit the notification documents, they may face heavy penalisation. Even if organisations were to submit the notification documents as required, there are still limitations for overtime work and work on days off.


For employees who work in excess of the statutory working hours, work on statutory days off or work late at night (defined as between 11pm and 5am), the overtime compensation rates are as follows:

  • Work in excess of statutory working hours: 25%

  • Work in excess of statutory working hours exceeding 60 hours in a month: 50%

  • Work on statutory days off: 35%

  • Work late at night (between 10pm and 5am): 25%

  • Work late at night in excess of statutory working hours: 50%

  • Work late at night in excess of statutory working hours exceeding 60 hours in a month: 75%

  • Work late at night on statutory days off: 60%

When setting up your payroll software, it is imperative to ensure that overtime compensation rates are accurately specified. This helps to minimise inaccurate calculation of overtime compensation should employees be required to work overtime.


Statutory time-off

Employees working in Japan are entitled to 10 days of paid time-off (PTO) annually. This is only eligible to employees who have served a minimum employment period of 6 consecutive months. The minimum number of PTO is dependent on the employment tenure of the employee as follows:

  • Six months tenure: 10 days of paid time-off

  • One and a half years tenure: 11 days paid time-off

  • Two and a half years tenure: 12 days paid time-off

  • Three and a half years tenure: 14 days paid time-off

  • Four and a half years tenure: 16 days paid time-off

  • Five and a half years of seniority: 18 days paid time-off

  • Six and a half years of seniority: 20 days paid time-off

Given that this PTO also counts towards an employee's compensation package, PTO should also be factored in during 0 payroll calculations.


Leave entitlement

Organisations keen to expand in Japan have to observe the leave entitlements for employees. It is a crucial aspect that cannot be missed during the initial business set up. From an employees' perspective, it is imperative for them to have time-off and leave days to attend to personal matters or emergencies. Likewise, employers have to plan operational strategies to account for these leave policies while ensuring the well-bring of their employees.


In general, there are no sick leave rights in Japan. Employees may opt to use their paid time-off to take leave of absence in the event they fall sick. Similarly, employers are not obligated to provide sick leave payment to employees. Some organisations grant paid sick leave to employees as a special benefit.


Expectant working mothers are entitled to up to 14 weeks of paid leave. They can leave a leave of absence 6 weeks prior to giving birth and 8 weeks after giving birth. Expectant working mothers are also eligible for maternity payment, which is being paid by Social Insurance based on the National Health Insurance rates. The maternity payment is currently JPY420,000 per child.


Employees with children younger than 1 years old can request paid leave, and the employer must approve the request. There is currently no limit on the number of paid leave that can be requested. Employers may deem employees who have worked with the company for less than one year to be ineligible for childcare leave. However, the employer must make the stipulation clear in the original employment agreement.


While there is currently no paternity leave, both female and male employees are eligible for child care leave. Child care leave starts from the day after the maternity leave ends (i.e. 8 weeks after the birth date), to the day before the child reaches the age of 1.


If the employee’s spouse is also on child care leave, the child care leave may be extended up to when the child reaches the age of 1 year and 2 months. The duration each parent may take child care leave should not, however, exceed one year.


Social security, pension fund & income tax

In Japan, full-time salaried workers are eligible to enter a system called “Shakai Hoken”, which translates into social insurance. This social insurance combines health insurance (Kenkou Hoken) and pension insurance (Kosei Nenkin) together. This comprehensive social insurance also covers pension, health, unemployment, and employees’ accident compensation.


Employers are expected to contribute to an employees' social insurance premium. This contribution is 14.355% of employees' monthly salary and bonuses. This percentage is broken down into 4.905% for health insurance (up to maximum of JPY 1,390,000 of wages per month), 9.15% for welfare pension (on a maximum of JPY 650,000 of wages per month), and 0.30% for unemployment insurance.


When it comes to income tax, employees in Japan are obliged to pay an individual income tax between 5% and 45% depending on their income bracket.


Termination

In Japan, the probation period for an employee typically lasts from 3 to 6 months. Employees who intend to resign must provide a notice period of 2 weeks to 1 month.

An employer is only allowed to dismiss an employee if there are objectively reasonable grounds for dismissal and dismissal is deemed to be appropriate in light of socially accepted ideas. Some reasonable grounds of dismissal include:

  • Voluntary resignation by the employee

  • Departing with mutual agreement

  • Employer’s unilateral decisions based on probation period, objective grounds, disciplinary dismissal, and unsuitable job performance

  • Contract of employee expiring

If an employee is dismissed, the employer must give the employee a notice period of 30 days or offer payment in lieu of the notice period.


Dismissal of an employee in Japan rarely occurs. In most cases, employers will try to have the employee resign before giving the termination notice or offer incentives for employees to resign. Employers are also not obligated to offer severance payments. However, it is up to the organisation's prerogative to negotiate severance terms with the employee and include it in their employment contracts.


Dismissing an employee can be a messy and even emotional affair for the employee. Hence, it is imperative to be aware of the termination policies and practices in Japan to be able to manage dismissal cases with tact and diplomacy.


Setting up a new business in Japan to hiring and paying your first employee is no easy feat. There are multiple local and employment legislations to be aware of. Compliance to these rules and regulations are mandatory in order to avoid hefty fines or penalisation on your organisation.


If you are unsure about the payroll processes and employment regulations in Japan, perhaps it is wise to engage an external payroll provider. Their team of experts are likely to be equipped with local expertise to help process your organisation's payroll and ensure local statutory compliance.


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