What Employers Need to Know Before Hiring in Japan

people crossing the street in japan

Talent is at the very heart of enterprise growth. Only when the right people with the right talent are brought on board can a business build the muscle needed to innovate, grow and scale new target markets. Japan, ranked by the World Economic Forum as a top economy for technology adoption and consistently named the top country for innovation by US News & World Report, is one such economy where bourgeoning companies can tap into a highly educated, innovative workforce.

But in working with clients in Japan, we’ve observed that recruitment consistently rises to the top as a business priority. With the ‘war for talent’ becoming increasingly competitive, hiring talent in Japan comes with numerous challenges, and there are many nuances multinational companies (MNCs) must be aware of.

Understanding the ‘Deemed Overtime’ System

It is common to see language around ‘deemed overtime’ in employment contract in Japan. In this system, annual compensation is inclusive of deemed overtime of certain hours. For example, if this figure is determined to be 45 hours, overtime payment will not be necessary unless employees work more than 45 hours of overtime. Managers and above are generally not eligible for overtime unless they work late-night hours which is defined as any time between 10 p.m. and 5 a.m.

Across the board, overtime rates are calculated as follows:

  • Overtime work up to 60 hours per month: 25% of the hourly base pay.
  • Overtime work exceeding 60 hours per month: 50% of the hourly base pay.
  • Late-night pay (work performed between 10 p.m. and 5 a.m.): 25% of the hourly base pay.
  • Holiday pay (work performed on the legal holiday): 35% of the hourly base pay.

Determining Non-exempt Vs. Exempt Employees

Staff in positions of management and supervision, as well as those who handle confidential administrative work in close involvement with management, are considered exempt employees.

Whether an employee is regarded to be exempt is comprehensively judged by the following factors:

  • Whether the decision-making process of his or her labor conditions and labor management are closely involved with management.
  • Whether he or she is given the practical authority and business status of a manager or supervisor, regardless of his or her business title.
  • Whether there is a strict limitation for working hours, such as set office hours.
  • Whether he or she is given the appropriate financial treatment of a manager or supervisor, such as salary, allowance and bonus.

Issuing Notice Periods and Severances 

Termination of employment in Japan is bound to regulations. Namely, an employer must extend an employee at least a 30-day notice of dismissal or provide payment in lieu of such notice. Unlike many other Asian countries, severance payment is not required by law in Japan. However, MNCs should consider that it is a common business practice for Japanese companies to offer severance as part of the termination process. The typical amount is one month of salary for every year of service, plus the required 30-day notice of dismissal or alternative payment.

Administering Statutory and Supplemental Benefits

Japan’s social insurance system is comprehensive and very high in quality, comprising pension insurance, children’s fund, health insurance, long term care insurance (over 40 years old), unemployment insurance and worker’s compensation.

Because of Japan’s high baseline of benefits, we’ve observed that many MNCs provide just the required statutory benefits to their employees even if they purchase supplemental benefits in other Asian countries where they operate.

Circumventing Pitfalls and Streamlining Talent Strategy

In addition to the regulatory compliances and required statutory benefits, MNCs operating in Japan must navigate a host of cultural norms and unique business practices that impact hiring and talent management. As a global professional employer organization, GoGlobal’s Employer of Record (EOR) solutions help MNCs circumvent pitfalls and streamline talent strategy so they recruit the best that Japan has to offer.