Sep 16, 2020 | Markets, News | Asia | Arden

Japan Labor Laws

Japan is ranked #29 in the 2020 report issued by the World Bank for ease of doing business. There are a number of compelling reasons for companies to consider expanding into Japan. Notably, Japan is third globally in terms of gross domestic product (GDP), has a rich culture of innovation and offers well-established labor and intellectual property laws. In fact, marketers and western-based business are increasingly recognizing Japan’s potential as an attractive test market due to its large, savvy consumer base.

Learn more about Japan.

However, before investing and hiring in Japan, it is important to understand the employment landscape.

Japan Labor Laws: General Framework

Certain fundamental employment rights are guaranteed in Japan’s Constitution. These include the right and duty to work, bans on child labor and the right to organize and act collectively within a union. With respect to work conditions, there are three major Japan labor laws: Labor Standards Act (LSA), Labor Union Act (LUA), and the Labor Relations Adjustment Act (LRAA).

The first purpose of the LSA  regulates working conditions and deals with workplace health and safety, while the LUA guarantees rights to organize and engage in collective bargaining. The process for labor disputes is outlined in the LRAA. These acts impact private sector workers and represent a clear framework within which employment policies can be developed. This structure should encourage investors as the presence of established acts makes business operations much more straightforward.

Most Japan employees are also unionized, although the collective agreements are typically drawn up between the enterprise trade union and the respective employer. Any employer with ten or more employees is required to develop and implement “work rules.” These rules outline working conditions in tandem with the trade unions and are part of employment contracts, which must be filed with the Labor Standards Inspection Office.

An Aging Workforce

Japan’s workforce is in a transitionary phase. Currently, society is aging rapidly and producing fewer children, skewing the mean age and productivity of existing workers. This situation has resulted in issues around part-time employment, inflexible workstyles, and lower employment mobility. Former Prime Minister Shinzo Abe made it a priority to reform Japan labor laws this year, however, to address working condition issues. His plans included developing a legal system to ensure equal pay for equal work and limiting overtime on working hours.

Some issues within the Japanese labor force stem from the manner in which employees are classified and paid. Those categorized as ‘Non-Regular Employees’, for example, make up about 40% of Japan’s labor force. Japanese employers have a tendency to pay these workers lower wages, with few incentives or planned salary increases. Younger workers tend to fill these roles, meaning they are stuck in a job with low pay and little opportunities for advancement. As a result, they may likely forego having children — compounding the aging crisis in Japan. Other workers are frequently women who have had children but have since been pushed out of regular work.

The government is now aiming to raise the salary of these employees to put them on par with ‘Regular Employees’. This should encourage younger people to accept this type of work, reduce gender inequality and hold off some of the aging concerns. As well, it would reduce the trend of hiring irregular workers which has become popular given the ease of hiring and firing. With these reforms, businesses would be expected to reduce the number of irregular workers in their organizations, which will support more secure, equitable employment across these classes.

Overtime & Working Conditions

Japan historically has the unfortunate reputation of expecting punishingly long hours from its workforce and its workers endure some of the longest, standard working weeks in the industrialized world. Stories in the news of ‘karoshi’ or death and illness from overwork are becoming too commonplace.

Currently, Japanese employment laws require a maximum 40-hour working week, at a maximum of 8 hours each day. Japan labor laws also require at least one day of rest each week. Employers that require employees to work on prohibited days, or in excess of these hours, face both civil and criminal penalties. However, employers often get around this mandate by entering into an agreement to permit overtime work with the union representative.

Regrettably, a 2016 government study found extensive overtime is still the norm for one in four employees. Almost 11 percent put in between 80 and 100 hours of overtime a month and another 11.9 percent put in over 100 hours.

Consequently, new Work Style Reform legislation went into effect in 2019 capping overtime to 45 hours per month or 360 hours per year under the “Basic Limit Rule.”

Nonetheless, Japan’s work culture remains rooted in a seniority system. The more time an employee works the better their chances of advancement. Spiritual value is also placed on effort and sacrifice. Even though the government is actively trying to reduce overtime, many employees still work more than 40 hours per week.

Japanese work culture differs greatly from the North American workplace. Open plan offices, teamwork, and at least two meetings a day are the norm. Teams strive for consensus before presenting ideas for approval and workers are reluctant to take time off as it would be frowned on by the team.

Work-Life Balance

The government’s commitment to healthier work-life balance, as well as addressing the country’s aging crisis, would suggest that new parents obtaining maternity or paternity leave would be welcomed. Currently, by law, mothers and fathers are entitled to take child leave at the same time, for up to one year, although this excludes fixed-term contractors.

Payroll and Compensation

The payment of wages, overtime, commissions, and bonuses is normally on the 25th of the month.

Employers must deduct social insurance premiums from an employee’s monthly salary. Social insurance includes health and pension as well as employment insurance which covers unemployment and worker’s accident compensation.

Unemployment also encompasses childcare and family care leave allowances. Employers pay Social insurance monthly, while labor insurance is paid a year in advance.

Premiums for pension and health coverage are calculated as a percentage of standard salary, while unemployment and workers’ accident compensation are based on a percentage of actual compensation.

Employers are also responsible for tax deductions, reporting, and remittances.

Hiring Foreign Nationals

Japan introduced two new visas in 2019, both requiring company sponsorship and Japanese language ability.

The first visa covers workers with limited skills within 14 industries. Workers can stay up to five years with the option to renew, but they cannot bring family members.

The second visa applies to skilled workers and allows families, under certain circumstances. However, this visa has led to criticism as many believe it will increase permanent residence for foreigners.

Employment Contracts in Japan

Employers must present an offer letter and employment contract to the potential employee. They must also maintain a set of Work Rules (shuugyou kisoku) and file them with the Labor Standards Inspection Office if they employ 10 or more workers.

These rules stipulate employment terms such as compensation, hours, leave, termination, and disciplinary protocols. If there is a discrepancy between the rules and the employment contract, whatever favors the employee takes precedent.

Employment contracts should spell out the employee’s compensation in yen, benefits, and termination requirements. Sales commission structures should also be included in the compensation package.

Family and Sick Leave in Japan

Generally, employers are not required to grant paid leave, unless the employee’s work rules or employment contract include it. However, as of September 2020, employees can take unpaid leave in the following cases:

  • Maternity/Paternity leave – within 6 weeks of the expected delivery date and 8 weeks after birth
  • Family care leave – up to 93 days per family member
  • Childcare leave – after maternity/paternity leave until the child is one year old (two years old, under certain conditions)

Vacation Leave in Japan

In Japan, vacation leave is based on seniority with the company. As of September 2020, ten (10) days leave is awarded at six months if the employee has worked more than 80 percent of the year’s working days.

Leave then increases one day per year for the next two years, and then 2 days per year up to a maximum of 20 days per year. Employees can bank up to a maximum of 23 days, but after two years, banked days expire.

Taxes in Japan

Japan has income tax and resident tax (equivalent to federal and state taxes in the U.S.). Income tax uses a progressive rate based on the individual’s income. Resident tax is levied at a flat rate set by local authorities.

Most employers must submit employee withholding tax on the 10th of the following month. However, companies with less than 10 employees can request twice yearly submissions.

Employee income tax withholdings are reported in an annual withholding tax report filed in January. Employees must have taxable income from the previous year and be a resident of Japan on January 1.

Local tax withheld from an employee’s monthly salary is submitted along with tax payment slips to the local tax office in June.

Health and Other Benefits in Japan

Japan labor laws mandate health care coverage, pension, unemployment insurance and other benefits for all employees.

Health and welfare pension plan payments are split between the employer and employee and directors also qualify. Individuals can collect if they have paid into the system for at least ten years once they reach 65 years of age.

Employers pay 100% of workers’ compensation premiums and more than half of unemployment insurance premiums.

Japan labor laws also require employers provide annual physicals and checkups for all employees, and stress evaluations in some cases.

Holidays in Japan

Japan has 16 public holidays granting employees the day off. It is not a legal requirement of Japan labor laws to grant time off on public holidays, but a closely followed tradition.

In all cases except New Year’s Day, employees can take off Monday if the holiday falls on a Sunday:

  • New Year’s Day
  • Coming of Age Day
  • Foundation Day
  • The Emperor’s Birthday
  • Vernal Equinox Day
  • Showa Day
  • Constitution Memorial Day
  • Greenery Day
  • Children’s Day
  • Marine Day
  • Mountain Day
  • Respect for the Aged Day
  • Autumnal Equinox Day
  • Health and Sports Day
  • Culture Day
  • Labor Thanksgiving Day

Termination/Severance in Japan

Japan labor laws include very detailed termination requirements and employees have very high legal protection. As a result, many companies rely on probation periods (typically 3 – 6 months, but no more than 1 year) to evaluate employee performance. Probation periods can’t be extended unless this is included in the work rules and/or employment contract.

Once hired, the right to dismiss an employee is much more difficult. Generally, the grounds for termination for cause, are:

  • Violence
  • Theft
  • Serious, shocking insubordination
  • Ongoing, seriously poor performance documented through formal warnings and only after the company has exhausted all available corrective measures
  • Proof of fraud regarding submitted skills or background that directly impact performance or fulfillment of duties

Employees must receive at least 30 days’ notice of termination, or their average total salary (basic and allowances) in lieu of notice.

Exciting Changes in Japan

Governmental efforts and societal change is driving the momentum in the process of implementing timely updates in legislation and regulation to modernize and continually enhance the employment conditions in Japan. This will prove an exciting time for employers and businesses that want to develop and influence a healthy employment ecosystem and capitalize on the economic promise and market potential within Japan.

The team at Blueback Global makes it our mission to be in the know about employment-related developments around the world – including in Japan – and our advisory practice can guide your internal HR practice and policies.

Connect today and find how our depth of knowledge and proven in-market experience can elevate your results in Japan and around the world.