Employment and employee benefits in Japan: overview

A Q&A guide to employment and employee benefits law in Japan.

The Q&A gives a high level overview of the key practical issues including: employment status; background checks; permissions to work; contractual and implied terms of employment; minimum wages; restrictions on working time; illness and injury; rights of parents and carers; data protection; discrimination and harassment; dismissals; redundancies; taxation; employer and parent company liability; employee representation and consultation; consequence of business transfers; intellectual property; restraint of trade agreements and proposals for reform.

To compare answers across multiple jurisdictions, visit the Employment and Employee Benefits: Country Q&A tool.

The Q&A is part of the global guide to employment and employee benefits law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employment-guide.

Contents

Scope of employment regulation

1. Do the main laws that regulate the employment relationship apply to:
  • Foreign nationals working in your jurisdiction?

  • Nationals of your jurisdiction working abroad?

Laws applicable to foreign nationals

The main laws regulating the employment relationship for Japanese nationals also generally apply to foreign nationals working in Japan, although the employer and employee can agree to apply a different law to the employment relationship (Law on the General Rules of Application of the Law). However, certain mandatory provisions may not be contracted out of (for example, the provisions concerning dismissal and overtime).

Japan has entered into social security agreements with a number of countries, including Germany, the UK, the US, Belgium, France, Canada, Australia, South Korea, Brazil, India and The Netherlands. Individuals insured under pension and social security schemes from one of these countries may be exempt from enrolling in Japan's pension scheme and paying social security insurance premiums, depending on the scope of the bilateral agreement.

Laws applicable to nationals working abroad

The employment relationship can be governed entirely by a foreign law.

 

Employment status

2. Does the law distinguish between different categories of worker? If so, what are the requirements to fall into each category, the material differences in entitlement to statutory employment rights and are there any maximum time periods for which each category of worker can be engaged?

Categories of worker

An independent contractor is distinguished from an employee and the relationship is governed by contract law. In certain cases, the borderline can be thin (factors to be considered are generally similar to those considered in other jurisdictions). One of the consequences of misclassifying an employee as an independent contractor is that the contractor can avail himself of the protection of labour laws.

In principle, a representative director of a joint stock company cannot be an employee of the company he is managing. As such, a contract for services or an entrustment agreement is advisable to clarify his rights and obligations. Directors are otherwise regulated by the Companies Act.

Regular employees are hired under an indefinite contract, while fixed-term contracts are used for non-regular employees and temporary workers (although they can be used for long-term employees). Part-time workers can have fixed-term or indefinite contracts, and their working hours are shorter than those of regular full-time employees. Part-time workers that are categorised as arubaito can be hired by the day or hour.

Entitlement to statutory employment rights

In principle, fixed-term employees/part-time employees must be treated at least the same as comparable permanent/full-time employees in relation to the terms and conditions of their employment (for example, job descriptions, level of responsibilities and human resources management systems in relation to changes to job descriptions and reassignment).

Time periods

Fixed-term contracts cannot exceed either three or five years, depending on the circumstances. Employers need not renew fixed-term contracts. However, if a contract has been renewed several times and the employee can reasonably expect renewal, the courts can require the employer to justify a refusal. The Employment Contract Law provides that, unless the employer has objective and socially acceptable reasons, it cannot refuse to renew a fixed-term employment contract which has been repeatedly renewed, as refusal may be construed as termination of an indefinite contract. The same applies where the employee can reasonably expect his contract to be renewed. A fixed-term contract renewed for more than five years (starting from April 2013) can be converted into an indefinite contract at the employee's request.

Under the Worker Dispatch Law (see Question 15), if a temporary agency staff contract with a temporary staffing agency is in breach of the law (for example, the agency is not licensed, an employee has been dispatched beyond the maximum statutory term or there is a disguised outsourcing arrangement), the employee will be deemed to be directly employed by the host company as a regular employee.

 

Recruitment

3. Are any grants or incentives available for employing people? Does any information/paperwork need to be filed with the authorities or given to new employees when employing people?

Grants or incentives

There are specific government grants and incentives, including incentives to hire disabled staff and elderly workers, youngsters who have had difficulty in finding permanent employment and temporary workers hired as regular employees. Social security insurance contribution exemptions may apply to specific very short-term contracts.

Filings

On employing an employee, the following registrations must be made:

  • Registration with the tax authorities for withholding tax.

  • Registration with the Japan Pension Service for social insurance (health insurance, pension, and long-term care insurance).

  • Registration with the Public Employment Security Office (Hello Work) for unemployment insurance.

  • Registration with the Labour Standards Supervision Office for workers' accident insurance.

Hello Work must be informed when a foreign national employee is hired.

Information

Employees must be provided with key employment terms and conditions (for example, relating to salary, place of work and working hours) in writing when they are hired. These can be contained in the contract or in work rules to be delivered at that time.

 

Background checks

4. Are there any restrictions or prohibitions on carrying out background checks in relation to applicants?

Employers cannot access criminal records. They can check social media accounts to check information on references, past convictions or any trouble with the law. Drug screening is possible but unusual. Employers can inquire about an applicant's medical history, provided that inquiries are consistent with the purpose of the interview. Medical examinations may be performed during initial hire and at least yearly. The immigration status of foreign national employees must be checked, as it is a criminal offence to employ someone who is subject to immigration control without the appropriate permission to work in Japan. A few background checks are prohibited, such as checking whether a prospective employee belongs to the burakumin community (who were treated as pariahs in the past).

 

Permission to work

5. What prior approvals do foreign nationals require to work in your country? What information/paperwork needs to be kept or filed with the authorities when they start work?

Visa

Procedure for obtaining approval. Foreign national workers must satisfy immigration requirements to work in Japan. Visa requirements do not apply to nationals of countries with which Japan has reciprocal exemption arrangements. Foreign nationals who wish to work in Japan must select their residence status based on their circumstances and qualifications. A foreign national worker's residence status is the basis on which that worker can stay in Japan and carry out the activities listed in the Immigration Control and Refugee Recognition Act (for example, investor, business manager, engineer, humanities or international services specialist or skilled labour).

Visas are applied for and received at Japanese diplomatic missions abroad. The Immigration Bureau in Japan screens applications to determine whether the intended activities correspond to the visa conditions. In the affirmative, a Certificate of Eligibility is issued. If this certificate is presented to a Japanese diplomatic mission abroad together with a visa application, a visa will be issued. There are variations depending on the circumstances.

There are no quotas, but in practice nationals from certain countries may be treated more favourably. Based on a point system, preferential treatment can be given to highly skilled professionals (for example, those engaged in advanced specialised technical activities or advanced business and management activities).

Cost. There is no filing fee to obtain a Certificate of Eligibility.

Time frame. It usually takes about one to three months to obtain a Certificate of Eligibility. A foreign national wishing to continue the same activities in Japan beyond the permitted period of stay must apply for an extension. Applications for extensions may be submitted from around three months before the expiration date if the period of stay is at least six months. There is no need to travel abroad in the process.

Sanctions. Under the Immigration Control Law of Japan, the employer may be liable to a fine up to JPY3 million and/or be subject to a term of imprisonment (up to three years).

Permits

Procedure for obtaining approval. Resident cards are issued to foreign nationals residing legally in Japan for the mid- to long-term who have resident status under the Immigration Control Act when they are granted a residence-related permit, such as landing permission.

Foreign nationals newly arriving in Japan must go to their competent municipal office to notify their place of residence within 14 days of establishing a place of residence.

Cost. There is no cost for a residence-related permit. Where a re-entry permit is needed, revenue stamps of JPY3,000 or JPY6,000 are payable.

Time frame. At Narita, Haneda, Chubu, Kansai, Shinchitose, Hiroshima and Fukuoka airports, in addition to the seal of landing verification stamped in their passports, mid- to long-term residents will be issued with a resident card. At other ports of entry, a resident card will be issued after a mid- to long-term resident follows the residency procedure at a municipal office, and will be mailed by the Regional Immigration Bureau to the reported place of residence.

Sanctions. Not applicable.

 

Restrictions on managers and directors

6. Are there any restrictions on who can be a manager or company director?

Only limited restrictions apply to directors (for example, the statutory auditor of a company cannot be a director at the same time, and a representative director cannot be an employee of the company he is heading). There are no age restrictions.

Nationality restrictions

There are no nationality restrictions.

Other restrictions

The Companies Act lists a number of cases where a person is disqualified from acting as a director (including certain past convictions and jail sentences) (see also Question 2).

 

Regulation of the employment relationship

7. How is the employment relationship governed and regulated?

Written employment contract

Contracts can be made orally or in writing. A written contract or an employment letter is advisable. They can be minimal if supported by work rules. Work rules are specific rules for the workplace. They set out working conditions, including in relation to wages, working hours, holidays and the rules with which employees must comply, including disciplinary procedures.

Employers with ten or more employees at a given workplace must adopt work rules and file them with the local Labour Standards Inspection Office. Employers with fewer employees can do so on a voluntary basis.

Implied terms

In general, contracts cannot remove statutory employee protections. Case law protects employees in particular with regard to dismissals. Implied terms are found in the relevant laws and regulations. In addition, where they exist, work rules are considered to be incorporated in employment contracts. Contract provisions (except for more favourable terms) are considered invalid if they do not align with the work rules. They cannot lower the standards outlined in the work rules. Terms that are favourable to the employee in the work rules or the law will override less favourable terms in the contract.

Where an employee is treated in the same manner repeatedly and continuously for a long period of time, that treatment may be regarded as an implied term of the employment.

Collective agreements

Collective agreements between an employer and a labour union may be incorporated (expressly or impliedly) into the employment terms.

Enterprise-based bargaining is more frequent than industry-based bargaining. Collective agreements between employers and labour unions regulate matters such as:

  • Working conditions.

  • Pay.

  • Bonuses.

  • Fringe benefits.

  • Working hours.

  • Health and safety.

  • Dispute resolution procedures.

  • Redundancies or secondments.

  • Re-employment of elderly employees.

Collective agreements may also regulate the relationship between employers and unions. They may require labour-management consultation before certain decisions are made (for example, concerning redundancies, closures or business transfers).

Labour-management agreements are designed to exempt employers from criminal penalties under the Labour Standards Law (for example, the obligation to make and file an agreement to have the right to request overtime) or deal with the special treatment of employees (for example, restrictions on care leave eligibility).

 
8. What are the main points to consider if an employer wants to unilaterally change the terms and conditions of employment?

This depends on the changes and the structure of the employment terms (for example, whether they are contained in a contract or the work rules). Employers and employees can agree to changes. An agreement between a labour union and employer can affect individual agreements without the employee's consent, but this is unusual. In principle, salary cannot be reduced unilaterally. However, employers generally have a right to make changes to job descriptions and positions and reassign employees (except for restricted permanent employees). These rights are often supported by the work rules. Such decisions must consider the employee's circumstances.

If an employer has established work rules, individual employment contracts need not include the employee's working conditions (that is, wages, working hours and breaks, holidays and disciplinary procedures). However, altering the rules is not a simple process. Under the Employment Contract Law, unless agreed with the employee, an employer cannot make detrimental changes to the working conditions set out in an employee's employment contract by changing the work rules. However, changes to an employee's working conditions will be permitted if both:

  • The employer informs the employee of the changes.

  • The changes are reasonable and consider:

    • any disadvantage to the employee;

    • the need for the change;

    • the appropriateness of the revised rules;

    • the status of any negotiations with labour unions or the like; and

    • any other relevant circumstances.

This does not apply to individual contracts, and provisions that the employer and employee have agreed cannot be amended by revising the rules.

 

Minimum wage

9. Is there a national (or regional) minimum wage?

The Minimum Wage Law provides for a minimum wage. Wages differ per region and industry and the minimum hourly wage in Tokyo is JPY932 (as at October 2016).

 

Restrictions on working time

10. Are there restrictions on working hours? Can an employee opt out on either an individual or collective basis?

Working hours

The statutory working week is 40 hours per week or eight hours per day, excluding breaks. There are a number of business-related exceptions, under which 44-hour working weeks are acceptable. Employers must file a labour management agreement (called an "Article 36 agreement") with the Labour Standards Inspection Office if they wish employees to work over the statutory working hours or on statutory days off. Strictly speaking, there is no legal limit on the extension of working hours (except for hazardous work) provided that an Article 36 agreement has been filed.

Certain standards contained in the Labour Standards Law (LSL) are designed to moderate overtime work (although an Article 36 agreement will prevail over the standards). The standard overtime work limits are:

  • One week: 15 hours.

  • Two weeks: 27 hours.

  • Four weeks: 43 hours.

  • One month: 45 hours.

  • Two months: 81 hours.

  • Three months: 120 hours.

  • One year: 360 hours.

Employees working over the statutory working hours, on statutory days off or late-night hours (between 10pm and 5am) must receive overtime pay. Managers are not subject to the regulations on working hours, breaks and days off (except for late-night work), but the definition of "manager" in this context is very narrow.

Flex-time schemes are permissible under the LSL, provided a labour-management agreement is made covering eligible employees, designated working hours, core time and so on. The working-hours averaging system is another collective scheme, also subject to a labour-management agreement or work rules, under which the employer may ask employees to work more than eight hours a day or 40 hours a week without overtime pay if the average number of prescribed hours does not exceed the weekly legal standards within a given period. Individual schemes include discretionary working hours, deemed working hours, working at home and similar matters.

Rest breaks

Employees are entitled to at least a 45-minute break for six hours of work and a one-hour break for eight hours. In practice, one-hour breaks are often provided even if an employee works less than eight hours. In principle, rest periods must be provided to all employees at the same time (exceptions can be made through a labour management agreement).

Shift workers

The LSL permits irregular working hours systems. Shifts can be organised where the working-hours averaging system (see above, Working hours) unit period is one month or less, or one year or less. The employer must prepare a shift schedule to be notified to the employees together with other basic information before the start of the next shift unit period (30 days in advance where the unit period is one year or shorter).

 

Holiday entitlement

11. Is there a minimum paid holiday entitlement?

Minimum paid holiday entitlement

Employees who have been employed continuously for six months and worked at least 80% of all working days are entitled to ten days of annual leave. Holiday entitlements increase over time in proportion to the length of service (after one-and-a-half years of service, employees are entitled to 11 days, after two-and-a-half years, 12 days and so on). After six-and-a-half years and onwards, the entitlement is 20 days. Employers can be more generous. Employees can take annual paid leave on an hourly basis up to a number of hours equivalent to five days, where a labour-management agreement has been concluded. Most Japanese companies grant additional paid leave for weddings, the death of close relatives and when a spouse has given birth to a child.

There is no statutory unpaid holiday entitlement.

Public holidays

Japan has designated 16 national holidays, partly to force employees to take holidays. Employers do not necessarily have to give a day off to employees on a national holiday, although this is common.

 

Illness and injury of employees

12. What rights do employees have to time off in the case of illness or injury? Are they entitled to sick pay during this time off? Who pays the sick pay and, if the employer, can it recover any of the cost from the government?

Entitlement to paid time off

Employees are generally covered by workers' accident insurance in the case of injury, illness, disability or death resulting from an employment-related cause or commuting. In the case of work-related accidents, insurance benefits include, among other things:

  • Medical compensation benefits.

  • Temporary disability compensation benefits (60% of the average wage paid after three days of absence from work).

  • Permanent disability compensation.

  • Injury and illness compensation.

  • Pension.

In principle, employees absent from work due to non-work related sickness or injury are not entitled to pay from their employer. Under national 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 up to a period of 18 months. If the employer offers any wage during this period, the allowance is reduced accordingly.

Entitlement to unpaid time off

The employee will be covered by health insurance or workers' accident compensation insurance (see above, Entitlement to paid time off). If the employee is unable to offer his services due to a physical or mental condition unrelated to work, the employer is allowed to terminate the employment relationship (the work rules often provide for a certain period of unpaid time off to allow the employee to recover and resume work). Employees on leave due to a work-related injury or illness cannot be dismissed during medical treatment and for 30 days after that treatment. If the period exceeds three years, the employee can be dismissed (set compensation is then payable).

Recovery of sick pay from the state

The employer will typically not pay sick pay.

 

Statutory rights of parents and carers

13. What are the statutory rights of employees who are:
  • Parents (including maternity, paternity, surrogacy, adoption and parental rights, where applicable)?

  • Carers (including those of disabled children and adult dependants)?

Maternity rights

Female employees are entitled to six weeks' unpaid maternity leave before giving birth (14 weeks for multiple pregnancies). In principle, employers cannot require a female employee to work for eight weeks after delivery.

Paternity rights

See below, Parental rights.

Surrogacy rights

Commercial surrogacy arrangements are illegal.

Adoption rights

See below, Parental rights.

Parental rights

Employees are entitled to unpaid leave until their child's first birthday (or until the child is 18 months, if certain conditions are met). An employee with a pre-school aged child or family member in need of full-time nursing is entitled to up to five days of unpaid leave (ten days for two or more children or family members) per year in order to nurse a sick or injured child. An employee may work reduced hours to care for his or her child under three years old. Employers may introduce limitations on eligibility under a labour management agreement. Also see below, Carers' rights.

Carers' rights

An employee with a family member in need of full-time nursing is entitled to up to 93 days of unpaid leave to provide care. Employers may introduce limitations on eligibility in a labour management agreement.

 

Continuous periods of employment

14. Does a period of continuous employment create any statutory rights for employees? If an employee is transferred to a new entity, does that employee retain their period of continuous employment? If so, on what type of transfer?

Statutory rights created

An employee has a right to paid holidays after six months' employment (see Question 11).

Consequences of a transfer of employee

Unless the employee is on secondment, the transfer of an employee generally implies a resignation followed by employment with a new employer, and the employee does not retain any past length of service (although this may sometimes happen in a business transfer context) (see Question 24).

 

Fixed term, part-time and agency workers

15. To what extent are temporary and agency workers entitled to the same rights and benefits as permanent employees? To what extent are part-time workers entitled to the same rights and benefits as full-time workers?

Temporary workers

The Ordinance for the Enforcement of the Law on Securing the Proper Operation of Worker Dispatching Undertakings and Improved Working Conditions for Dispatched Workers (Worker Dispatch Law) was drastically amended in 2015. For temporary staff agencies, a limit of three years per position for dispatch workers applies, which can be renewed for another three years, provided the client company "asks the opinion" of a majority labour union or a representative of the majority of its employees. Also, there is a maximum term of three years for dispatched workers within the same division/section, and calculation of the term starts over if a new dispatch worker comes as a replacement. Dispatch workers who have an unlimited term employment contract with their dispatch agency are exempt from these limits. In the event the client company does not comply with the law, the client company may be deemed to have hired the dispatch workers directly. The law has been introduced to ensure equal treatment between temporary staff and client company employees (if a temporary worker asks their dispatch agency for equal treatment with regular workers at the client firm, the agency's management must explain to the worker in detail what actions it has taken, including direct hire wage disclosure, and access to the same training and welfare facilities).

Temporary workers are entitled to health insurance, welfare pension and unemployment insurance depending on their working hours and length of service.

Agency workers

See above, Temporary workers.

Part-time workers

It is generally more difficult to terminate a fixed-term contract during its term (see Question 2). The merit for the employer can be the existence of a term.

 

Data protection

16. Are there any requirements protecting employee privacy or personal data? If so, what are an employer's obligations?

Employees' data protection rights

The Personal Information Protection Law (PIPL) regulates the collection, storage and use of employee information. The Ministry of Health, Labour and Welfare has issued guidelines on handling employees' personal data. Infringements of the guidelines can lead to fines, compensation claims from aggrieved employees or regulatory action. Sectoral guidelines have been issued.

The monitoring of employee e-mail, internet and telephone usage and closed-circuit television recording are permissible, provided that they are carried out in accordance with the PIPL. Express consent is not usually required but the Ministry of Economy, Trade and Industry's (METI) guidelines on the PIPL state that employees should be made aware of any monitoring that is being carried out, its purpose and to whom the data will be supplied. Employees must be informed if monitoring may result in disciplinary action.

No express statutory rules address the protection of social media passwords or employer monitoring of social media accounts.

Employers' data protection obligations

Under the PIPL, an entity handling personal information which has an employee handling personal information must exercise proper supervision over the employee to ensure data security. The PIPL requires employers to disclose the retained personal data it is keeping on an employee at the employee's request, unless there is a reason not to disclose the data which falls within one of the exceptions to disclosure (for example, disclosure may seriously impede the proper execution of the business).

The METI guidelines provide considerations for employers when monitoring employees. The purpose of the monitoring and the policy should be communicated to employees in advance. The manager in charge of the monitoring should be identified and the monitoring programme audited.

 

Discrimination and harassment

17. What protection do employees have from discrimination or harassment, and on what grounds?

Protection from discrimination

The Employment Measures Law prohibits discrimination based on age in connection with recruitment, except in certain circumstances. The Law Concerning the Stability of Employment of the Elderly addresses the employment of senior citizens. The Labour Standards Law (LSL) and the Constitution prohibit discrimination based on nationality or ethnic or national origin during employment and in relation to termination. Under the Law on Securing Equal Opportunity and Treatment between Men and Women in Employment (Equal Opportunity Law), disabled individuals should represent a certain percentage of an employer's workforce (hire or pay). The Law on the Elimination of Discrimination against Persons with Disabilities that came into force in 2016 prohibits administrative bodies and private businesses from unduly discriminating against people with disabilities. The Equal Opportunity Law and the Constitution prohibit discrimination based on gender in relation to recruitment and treatment (for example, in relation to assignments, promotions, training, housing loans and fringe benefits) and termination. Under the LSL, men and women must receive equal pay. The LSL and the Constitution prohibit discrimination based on social status, religion or political belief during employment and in relation to termination. No law expressly prohibits discrimination based on sexual orientation or medical condition. Discrimination on the ground of trade union membership is unlawful.

The Worker Dispatch Law prohibits a recipient of dispatch services from cancelling a worker's dispatch contract on the basis of, among other things, a worker's:

  • Nationality.

  • Creed.

  • Gender.

  • Social status.

  • Involvement in legitimate labour union activities.

Fixed-term contract employees/part-time employees must be treated no less favourably in respect of their terms and conditions of employment than comparable permanent/full-time employees.

Protection from harassment

Under the Employment Contract Law and the Labour Safety and Health Law, employers must provide a safe and proper working environment. Sexual harassment and power harassment claims can have severe consequences for employers. Claims can be made based on:

  • Tort.

  • Breaches of the Equal Opportunity Law.

  • Breaches of the employment contract.

  • Workmen's Accident Compensation Law (which can include criminal penalties as well as civil claims).

Most cases are dealt with internally without legal action.

With regard to sexual harassment, the Equal Opportunity Law provides that employees should be able to have careers while raising children. Employers must ensure that appropriate measures are in place to:

  • Deal with sexual harassment allegations in the workplace.

  • Ensure employees suffer no disadvantage at work as a result of making allegations of sexual harassment.

  • Ensure no harm comes to employees as a result of sexual harassment in the workplace.

The Ministry of Health, Labour and Welfare (MHLW) issued guidelines in 2006 which set out the steps that employers must take if harassment allegations have been made, but internal rules and grievance procedures can be more robust and detailed than these guidelines.

An employer's duty to provide a safe and proper working environment also applies to bullying/power harassment. The MHLW has divided power harassment into categories, from physical abuse or assault to invasion of privacy. Employers must:

  • Have a clear message against power harassment.

  • Establish rules on bullying.

  • Educate the workforce.

  • Provide consultation services.

  • Conduct employee surveys.

Detailed internal rules and grievance procedures can be established to deal with these situations.

 

Whistleblowers

18. Do whistleblowers have any protection?

The Whistleblower Protection Act (WPA) protects those who expose corporate or government misconduct from unfair treatment and retribution (for example, dismissal, demotions or salary cuts). Under the WPA, a "public interest disclosure" involves the disclosure of relevant disclosure information by a worker to his employer, a government agency or official with relevant jurisdiction, or any other person, to prevent a matter from occurring or worsening. Disclosures cannot be made for illegitimate purposes. Relevant disclosure information means information regarding criminal conduct or statutory violations relating to the protection of consumer interests, the environment, fair competition and generally the life, body and property of the general public.

A recipient of dispatch services is prohibited under the WPA from cancelling a worker's dispatch contract on the basis of that worker's whistleblowing.

 

Termination of employment

19. What rights do employees have when their employment contract is terminated?

Notice periods

There is a minimum 30-day notice period before an employer can dismiss an employee under the Labour Standards Law. If the employer does not wish the employee to work any part of this notice period, it can pay the employee's salary in lieu of notice. Although this procedure is cumbersome and seldom applied in practice, no notice is required where the employer summarily dismisses the employee for serious misconduct, provided that it has obtained the local Labour Standards Inspection Office's consent. However, employers can only terminate an employment contract for just cause under the Employment Contract Law (the dismissal must be based on objectively reasonable grounds and must be socially acceptable).

Severance payments

There is no statutory entitlement to severance pay, and in the absence of just cause, the dismissal is invalid. Severance payments are generally a matter for negotiation and should be distinguished from other payments that may have to be made upon termination (for example, retirement allowance).

Procedural requirements for dismissal

In contrast with certain other jurisdictions, there are few procedural requirements. In the case of an individual dismissal, a discussion will generally take place with the employee, followed by dispatch or hand delivery of a termination notice. However, employers generally seek to obtain the employee's resignation before doing so.

 
20. What protection do employees have against dismissal? Are there any specific categories of protected employees?

Protection against dismissal

Employees in Japan generally have a high degree of legal protection and the standards for individual dismissal and redundancy are stringent. Employers must be cautious when terminating any employment relationship and ensure that they comply with the legal and contractual requirements regarding dismissal. Dismissed employees can claim reinstatement and salary based on the invalidity of the dismissal, or compensation for unfair dismissal, unless the employer can show that there was a serious and objective reason for the dismissal (for example, misconduct, incapacity, illegality, redundancy or some other substantial reason). Generally, an employee can only be dismissed if the dismissal is objectively reasonable and socially acceptable. The misconduct or breach of law must be serious to meet the standards set by the Japanese courts. Unless the employer's case is strong, a customary and safer alternative is for the employer to ask the employee to resign. Resignation offers at the company's request are made on an individual basis and employees need not accept them. Financial incentives are normally offered to encourage employees to resign. The arrangement is often documented in a separation agreement which contains details on the:

  • Severance package.

  • Applicable waivers and releases.

  • Applicable restrictive covenants.

An employee's length of service does not offer protection per se.

With regard to fixed-term employment contracts, the Employment Contract Law provides that an employer cannot dismiss an employee until the expiration of the term of the contract, unless there are unavoidable circumstances.

Protected employees

An employee cannot be dismissed while unable to work as a result of the fact that the employee is receiving treatment for a work-related injury or illness, and cannot be dismissed within 30 days from the date that treatment ceases. Special protection applies to dismissals connected with pregnancy and maternity, parental and family care leave, labour union membership or activities, and whistleblowing.

 

Redundancy/layoff

21. How are redundancies/layoffs defined, and what rules apply on redundancies/layoffs? Are there special rules relating to collective redundancies?

Definition of redundancy/layoff

The rules described in Question 20 also apply to redundancies. Redundancies are usually seen as a very last resort option and are therefore subject to strict conditions/criteria (see below).

Procedural requirements

Streamlining a workforce is often a complicated and costly process. Employers can only make employees redundant for compelling reasons (for example, where the employer faces a significant economic necessity, or a reasonable operational necessity, and as a result a reduction in the workforce is unavoidable).

The Supreme Court has established the conditions/criteria that employers must meet to lay off employees in this context:

  • The employer must be in a poor financial situation, making the need to act imperative.

  • The employer must attempt to cut costs and expenses, and reassign employees to other positions within the organisation.

  • The employer must establish appropriate, objective and rational selection criteria.

  • Due process, in particular the employer must provide explanations to the employees concerned.

Where a company is liquidated, there is more flexibility with regard to dismissals, regardless of the employer's financial circumstances. However, the conditions above should still not be ignored.

When the above conditions are not met, employers can try alternative approaches (for example, voluntary resignation at the employer's request). Early retirement plans allow employers to offer financial packages to employees to encourage them to leave.

In one type of plan, employees are offered a financial package to encourage them to resign within a short period (for example, a couple of weeks). The key to success is to determine a proper package, target employees without discrimination and get the timing right. This can be a costly process. Packages vary depending on the industry, and the employee's rank, age and length of service. Compensation figures are published which can be used as a benchmark. As a simpler and cheaper alternative, individual voluntary resignation (at the employer's request) can be considered where the number of redundancies is limited.

Redundancy/layoff pay

Where the above Supreme Court conditions for redundancy are met, employers must provide the affected employees with a minimum of 30 days' notice (or payment in lieu of notice). There is no specific statutory provision which makes the payment of compensation mandatory. However, compensation payments are usually made as part of the process. Further, for employers that fail to meet the Supreme Court conditions for redundancy, making an incentive payment (which can sometimes involve hefty amounts) is often the only way that the employer can facilitate the redundancy process and obtain the necessary employee resignations.

Collective redundancies

Under the Employment Measures Law, if 30 employees or more are to be made redundant at a given workplace within one month, a new employment support plan must be prepared listing the employees and detailing the measures taken (or to be taken) by the employer to facilitate job searches. Any comments from the relevant labour unions (or, in the absence of a union, an employee representative) must be included. The employer must notify Hello Work of the proposed redundancies and submit the plan for approval before implementation.

 

Employee representation and consultation

22. Are employees entitled to management representation (such as on the board of directors) or to be consulted about issues that affect them? What does consultation require? Is employee consultation or consent required for major transactions (such as acquisitions, disposals or joint ventures)?

Management representation

There are at present no general formal requirements for employee participation in Japan (subject to certain exceptions, such as the adoption of, or changes to, the work rules). Employees are not statutorily entitled to representation at board level. There is no works council system.

Consultation

Certain obligations may arise with respect to consultation and the provision of information to appropriate representatives under a collective agreement (if any applies). These obligations can include the:

  • Disclosure of information to assist in a transaction.

  • Consultation with appropriate representatives in a collective redundancy context.

  • Provision of information to appropriate representatives upon a business closure or transfer.

A labour union can require an employer to hold a collective bargaining session on any issue, provided that such issue relates to the union itself or the economic status of the workers who are union members. The employer must accept and negotiate in good faith with the union. In relation to certain matters, such as the establishment of, or a change to, the employment rules, an employer must obtain the opinion of the labour union or the representative of a majority of the employees at the workplace.

Upon a transfer of a business, in order to obtain the employees' consent for their own transfer, the employer must typically provide sufficient information and consult with the employees through town hall meetings or individual discussion.

Major transactions

In the event of a business transfer where there is no collective agreement providing for information or consultation with employee representatives, the employer has no obligation to inform the employees of the proposed transfer (except to the extent that employee transfers or redundancies are contemplated). Even if an employer has consultation obligations under a collective agreement, there is generally no obligation to reach agreement. Consultation on a share deal is unusual. In the case of a corporate division (that is, the transfer of part of a business), the employer must consult with the employees engaged in the transferred business individually, and with the labour union that represents the majority of the employees, or a representative of the majority of the employees, under the Law on the Succession of Employment Contracts in a Corporate Division.

 
23. What remedies are available if an employer fails to comply with its consultation duties? Can employees take action to prevent any proposals going ahead?

Remedies

Where an employer does not hold collective bargaining negotiations in good faith with a labour union, the labour union can complain to the competent Labour Relations Commission about the employer's breach of duty to negotiate, and the Commission can direct the employer to resume negotiations. The labour union can also apply for a provisional injunction or start formal litigation before the courts. Likewise, the court can order the employer to negotiate.

Employee action

If the employer fails to consult with the employees before a corporate division, the employees can claim that the transfer of their employment contract is invalid (see Question 22, Consultation).

 

Consequences of a business transfer

24. Is there any statutory protection of employees on a business transfer?

Automatic transfer of employees

Upon a business transfer, employment contracts do not automatically transfer to the transferee. Employees can refuse to transfer while the transferee can cherry-pick the employees to be hired (although case law protects employees against an abuse of rights in cases of intra-group business transfers). If either the transferee or an employee refuses to give consent to the transfer, then the employment relationship between the transferor entity and the employee will not be succeeded by the transferee (or, rather, a new contract will not be made as happens in many cases, where the resignation of the transferor's employees is followed by a new employment relationship with the transferee of the business). However, there is a statutory exception to the absence of an automatic transfer in the case of a merger or corporate division (kaisha bunkatsu). In a share deal, the employer remains the same and there is generally no change to the terms and conditions of employment.

Protection against dismissal

There is no specific protection against dismissal other than that mentioned above (see above, Automatic transfer of employees).

Harmonisation of employment terms

Insofar as employees often resign to take up new employment under the terms and conditions offered by the transferee, harmonisation is not an issue.

 

Employer and parent company liability

25. Are there any circumstances in which:
  • An employer can be liable for the acts of its employees?

  • A parent company can be liable for the acts of a subsidiary company's employees?

Employer liability

Article 715 of the Civil Code on vicarious liability holds employers liable for their employees' actions when the negligence or misconduct is committed within the scope of employment. There are exonerating circumstances (for example, where the employer can evidence that is has exercised due care in the appointment and supervision of the employee), but these are not easily recognised by the courts. Vicarious liability can also be used to hold an employer responsible for acts of sexual harassment or mobbing committed by an employee in the workplace.

Parent company liability

A parent company can be vicariously liable under Article 715 of the Civil Code if it acts as a de facto employer of the employee.

 

Employer insolvency

26. What rights do employees have on the insolvency of their employer? Is there a state fund which guarantees repayment of certain employment debts?

Employee rights on insolvency

In the case of bankruptcy or other insolvency proceedings, employees have priority rights. For example, in bankruptcy proceedings, the monthly remuneration of employees corresponding to the last three months prior to the commencement of the proceedings is treated as a claim over the estate.

State guarantee fund

The state can make payments on behalf of employers under the Wages Payment Security Law where an employer fails to pay salary and retirement allowances, subject to rates and caps.

 

Health and safety obligations

27. What are an employer's obligations regarding the health and safety of its employees?

Under the Employment Contract Law, the Labour Standards Law and the Labour Safety and Health Law (LSHL), employers must provide a safe and proper working environment. The main purpose of the LSHL is the prevention of work-related accidents and the safeguarding of employees' health and safety. Employers must arrange for medical check-ups for their employees. The LSHL lists the matters that must be considered in these check-ups. Employers must ensure that employees consult with a doctor when they have been working excessive overtime. Certain specific obligations also kick in when there are 50 or more employees at the workplace, including the:

  • Provision of rest areas.

  • Establishment of a health and safety committee.

  • Appointment of a health and safety manager and supervisors.

  • Designation of a company doctor.

  • Provision of stress medical checks.

Other duties and preventative measures relate to:

  • Equipment and machinery.

  • Dangerous substances.

  • Training.

  • Sanitation.

  • Emergency measures.

  • Temperature checks.

Other laws also supplement the LSHL.

 

Taxation of employment income

28. What is the basis of taxation of employment income for:
  • Foreign nationals working in your jurisdiction?

  • Nationals of your jurisdiction working abroad?

Foreign nationals

Individuals are taxed in Japan depending on their status of residence (that is, whether they are permanent or non-permanent residents). Residents are individuals who have had their residence in Japan for one year or more. Non-permanent (or temporary) residents are non-Japanese residents who have had their residence in Japan for five years or less within a ten-year period. Those with over five years' residence in Japan are classified as permanent residents.

Permanent residents are taxed on their worldwide income, regardless of where it is earned or paid. Non-permanent residents are taxed on Japan-source income and income earned outside Japan but paid to them in Japan (on a remittance basis). Non-residents are taxed on their Japan-source income. Any applicable double tax treaties will also need to be considered.

Nationals working abroad

The salary of non-resident nationals working abroad is not taxable in Japan as it is not considered to be Japan-source income (but any applicable double tax treaty will also need to be considered).

 
29. What is the rate of taxation on employment income? Are any social security contributions or similar taxes levied on employers and/or employees?

Rate of taxation on employment income

Income tax is charged at progressive rates, which range from 5% to 45%. Employers are responsible for withholding the applicable income tax for their employees, and making a year-end adjustment for employees who earn JPY20 million or less per year. Employees earning more than JPY20 million make the relevant year-end adjustment themselves. Certain payments (which are categorised as special income, such as retirement allowance and severance pay) are subject to concessionary tax treatment.

Non-residents who earn salary income which is paid for services rendered in Japan that are not subject to withholding tax in Japan must file a tax return and pay tax at a rate of 20.42% on that salary income.

Social security contributions

Employers must make contributions into the following insurance schemes:

  • The labour insurances, which comprise:

    • workers' accident compensation insurance (which covers work-related illness and accidents);

    • unemployment insurance.

  • The social insurances, which comprise:

    • health insurance and nursing care insurance (which cover medical and nursing care expenses);

    • pension (which covers old-age and welfare benefits in the event of death or disability).

Employers also pay child benefit contributions (that is, contributions to a social welfare child benefit system that is independent from the welfare benefits offered to workers).

The employee must also make contributions to the above insurance schemes, except to the workers' accident compensation insurance and child benefit contributions

Employers pay premiums by withholding the employees' portion and paying this, together with the employer's premiums, to the authorities.

 

Bonuses

30. Is it common to reward employees through contractual or discretionary bonuses? Are there restrictions or guidelines on what bonuses can be awarded, whether generally or in particular sectors?

There are no particular restrictions or guidelines governing bonuses. Contractual bonuses (which are performance based) and discretionary bonuses are both available. However, while a bonus scheme can provide that an individual is only entitled to a bonus at the discretion of the employer, that discretion must not be exercised in an unreasonable manner. It is quite common in Japan for employers to pay fixed bonuses during summer and winter (which is basically deferred salary, rather than a bonus strictly speaking).

 

Intellectual property (IP)

31. If employees create IP rights in the course of their employment, who owns the rights?

Intellectual property created by employees in the course of their employment generally belongs to the employer. For patents, the right to register the patent belongs to the employer if an agreement, the work rules or any other contract provides that the employee invention belongs to the employer (in the absence of any such provision, the right to register a patent belongs to the employee). If the employer has the right to register a patent created by an employee, the employee inventor is entitled to receive a reasonable remuneration or other economic benefit for that patent.

Compensation payable to an employee inventor (often nominal compared to the huge profits that can be derived from the invention) can be a source of contention. It is therefore advisable for employers to clearly establish the applicable rules regarding these compensation payments.

 

Restraint of trade

32. Is it possible to restrict an employee's activities during employment and after termination? If so, in what circumstances can this be done? Must an employer continue to pay the former employee while they are subject to post-employment restrictive covenants?

Restriction of activities

Non-compete, non-poaching and confidentiality agreements are generally recognised and enforceable. Criminal penalties apply under the Unfair Competition Prevention Law (UCPL) in order to punish the disclosure of trade secrets by employees and officers. Amendments to the UCPL (which took effect on 1 January 2016) broaden the scope of the claims and remedies available to claimants, and increase the maximum fine that can be levied in cases involving the misappropriation of trade secrets. Although no express statutory rules govern confidential information, employees are bound by a general duty of good faith and also have a duty not to disclose the employer's confidential information. However, the extent of these duties is unclear.

Post-employment restrictive covenants

Non-compete agreements can generally be used to prevent an employee from competing with his employer both during and after employment. However, as post-termination restrictions can be considered to infringe an individual's freedom to work, they will generally only be enforceable if:

  • They have been expressly agreed.

  • They are reasonable in terms of their duration and territorial scope.

  • The employer is protecting a legitimate interest (for example, confidential information or trade connections).

No particular class of employees is targeted or exempted by law. However, in principle, it may be difficult to justify a non-compete agreement for a menial job or a job with no exposure to trade secrets, proprietary knowledge or specific know-how. At present, no compensation is formally required to enforce a non-compete agreement (although this can be a factor considered by the courts to validate a non-compete covenant).

 

Proposals for reform

33. Are there any proposals to reform employment law in your jurisdiction?

Managers are generally not paid for overtime, although in this context the term "manager" should be very narrowly interpreted. The issue has been considered for some time, but the government is still considering whether to relax the rules on overtime and extend the white-collar exemption to workers who meet all the following criteria:

  • They have a clear scope of duties.

  • They earn over JPY10 million per year.

  • They are engaged in a highly specialised activity (provided that some close healthcare/medical supervision is organised).

In order to further reduce the status inequalities between the various categories of worker (regular employees, contract workers/non-permanent contract staff and temporary work agency staff workers), the government is expected to issue guidelines clarifying the methodology and rules on what types of different treatment are permissible between these categories of workers.

 

Contributor profiles

Shinya Tago, Partner, Head of the International Practice Committee

Iwata Godo

T +81 3 3214 6205
E stago@iwatagodo.com
W www.iwatagodo.com/english/lawyers/

Professional qualifications. Attorney at Law, admitted in Japan and New York

Areas of practice. M&A; general corporate/commercial; labour law: HR strategy and organisational change, including business transfers, redundancies and restructurings; litigation; labour union, industrial relations and collective bargaining; whistleblower schemes; hiring of employees; health and safety issues; disciplinary and grievance issues; negotiating departures and settlement agreements; and employee benefit schemes.

Languages. Japanese, English

Hiroki Fujiwara, Counsel

Iwata Godo

T +81 3 3214 6205
E hfujiwara@iwatagodo.com
W www.iwatagodo.com/english/lawyers/

Professional qualifications. Japan, Attorney at Law

Areas of practice. HR strategy and organisational change, including business transfers, redundancies and restructurings; litigation; labour union, industrial relations and collective bargaining; whistleblower schemes; hiring of employees; health and safety issues; disciplinary and grievance issues; negotiating departures and settlement agreements; and employee benefit schemes.

Recent transactions

  • Acting for a leading European group in relation to employee transfers, redundancies and early retirement plans.

  • Acting for one of the largest EU-based industrial groups in relation to the structuring of the international secondment of employees to Japan from a tax and employment standpoint.

  • Setting up whistleblower hotlines around the world allowing employees to report to Japanese parent companies.

Languages. Japanese, English

Publications. Contributed articles to a number of employment law guides and legal magazines. In 2016, co-authored the "My Number" Q&A Handbook (Social Security and Tax Number System), and Labour law review: recent court cases (reporting and analysis), labour law case studies (Q&A series).

Landry Guesdon, Member of the International Practice Committee

Iwata Godo

T +81-3-3214-6205
E lguesdon@iwatagodo.com
W www.iwatagodo.com/english/lawyers/

Professional qualifications. Attorney-at-law, admitted in France and Japan as Gaikokuho Jimu Bengoshi (French law)

Areas of practice. M&A; general corporate/commercial; labour law: HR strategy and organisational change, including business transfers, redundancies and restructurings; litigation; labour union, industrial relations and collective bargaining; whistleblower schemes; hiring of employees; health and safety issues; disciplinary and grievance issues; negotiating departures and settlement agreements; and employee benefit schemes. (Before joining Iwata Godo, Landry was a member of the employment practice group of the Tokyo office of a Magic Circle firm.)

Recent transactions

  • Acting for a leading European group in relation to employee transfers, redundancies and early retirement plans.

  • Acting for one of the largest EU-based industrial groups in relation to the structuring of the international secondment of employees to Japan from a tax and employment standpoint.

Languages. Japanese, English, French, German

Publications. Contributed articles to a number of employment law guides and legal magazines.


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