Employer of Record in Japan: Everything You Need to Know

With its vibrant economy and rich cultural heritage, Japan presents several opportunities for businesses looking to expand internationally. However, navigating the complexities of the Japanese government and the job market can be difficult.

However, for your business, it can be made easier with the help of an Employer of Record.

This guide will discuss complete details of Japanese work culture and how an EOR service can support it.

Let's start!

Key Takeaways

• Get insights into the Japanese government and laws for foreign companies.
• Learn what an Employer of Record is and how it can help Japanese companies.
• Discover the 4 top benefits of using an EOR for Japanese companies.
• Understand what services an EOR should provide to Japanese employees and companies.
• Learn about the requirements for a Japan work permit and the different visa types for each job category.

About the Japanese Work Culture and Job Market

Japan's job market welcomes a good number of expatriates, with approximately 2.93 million foreign residents contributing to various sectors of the economy. 

Expats seeking employment opportunities in Japan can explore dedicated job websites such as Career Cross, Yolo Japan,  and Daijob to search for jobs individually.

What is an Employer of Record?

An Employer of Record (EOR)is a third party employed by an organization to streamline its human resource tasks, particularly focused on international expansion. The Employer of Record is responsible for various obligations such as employee payroll, tax compliance, and adherence to local labor laws.

Leveraging an Employer of Record in Japan allows your organization to focus on its core operations while the Employer of Record ensures conforming to Japanese regulations. Ultimately, their main function is to ease the complexities tied to your organization's expansion into the Japanese market.

How an Employer of Record Operates in Japan

The working of an Employer of Record in Japan revolves around compliance with local regulations and employment laws.

Since these can be complex and regularly updated, the Employer of Record will ensure your organization remains compliant and avoids legal pitfalls.

Adherence to Japanese Tax Laws

An Employer of Record ensures your organization complies with Japan's tax regulations, which include employee income tax, company tax, and consumption tax.

Complying with Japanese Labor Laws

Japan has comprehensive labor laws that help protect employee rights. An Employer of Record ensures that your organization is well-versed in and adheres to these laws, reducing the risk of potential labor disputes.

Payroll Management for Many Japanese Firms

Managing payroll in a foreign country can be challenging and prone to errors. An Employer of Record is instrumental in smooth payroll operations and accommodates the unique aspects of the Japanese market.

This detailed understanding of Employer of Record operations in Japan is key to using their potential and ensuring a seamless expansion strategy. By outsourcing these complex HR tasks, companies can concentrate more on their core business operations.

4 Benefits of Using an Employer of Record in Japan

Here are some benefits of using EOR for jobs in Japan and creating employment options.

1. Ease of Hiring and Managing Japanese Employees

An Employer of Record considerably simplifies hiring employees in Japan. Navigating the complexity of Japan's stringent labor laws and workplace regulations can take time and effort for businesses unfamiliar with the local terrain. 

An EOR manages the entire recruitment pipeline–from sourcing to onboarding, providing local HR expertise, and ensuring legal compliance. This not only saves precious time but also allows the businesses to focus on strategic activities.

2. Simplified Payroll and Tax Compliance

Japan's complex tax system and evolving payroll landscape require expert knowledge. An Employer of Record is the legal entity responsible for all payroll and compliance functions.

This includes filing tax returns, managing pension funds, and following all tax laws.

3. Reduced Legal Risks and Liabilities

Entrusting an experienced EOR with regulatory compliance significantly reduces potential legal risks and liabilities. From executing service contracts to managing employee terminations, EORs shoulder all legal burdens, ensuring compliance with Japanese labor laws.

This translates into fewer legal disputes, minimized risk exposure, and enhanced predictability for businesses operating in Japan.

4. Sustainable Growth

EOR services allow you to expand your business into the Japanese market without the hassles of setting up a legal entity. They help businesses grow sustainably by providing a legal, compliant, cost-effective solution to hiring and managing staff in a foreign country.

You can focus more on strategic issues rather than spending time on admin and compliance.

What Services Should Your EOR Provide?

EOR services in Japan transcend the traditional hiring and payroll management roles to include comprehensive support such as employee onboarding, benefits administration, ensuring legal compliance, and more. 

With an EOR, you can maintain a lean organization while ensuring efficient operation and control of your Japanese workforce.

Let’s explain exactly what you gain when partnering with a Japanese EOR.

Employee Onboarding and Maintenance

Aside from sourcing and hiring credible talent, EOR manages its entire journey.

This includes drafting contracts, setting up insurance, onboarding, maintaining HR records, and exit management.

Tax and Insurance

An EOR shoulders the responsibilities for tax and insurance Dedicated teams handle all the procedures to ensure accurate calculations, on-time payments, and precise filing.

This reduces the possibility of your business encountering non-compliance or regulatory breaches litigation.

Risk Management

With the help of EOR, your company can operate within Japan's legal framework while avoiding common pitfalls. It reduces financial risks associated with tax mismanagement and non-compliance.

How to Obtain Work Permits to work in Japan

As the first step, any foreign worker looking to work in Japan must secure a legitimate Japan work visa in compliance with regulations set forth by the Immigration Authority.

Importantly, these work permits are only valid when sponsored by a locally licensed and incorporated entity, ensuring legality and adherence to employment laws.

Types of Japan Work Visa

Various types of Japanese work visas cater to different purposes, with some of the most common ones being:

1. Specified Skilled Worker Visa: Issued to foreign workers, filling employment gaps in specific sectors.
2. Specified Skills Visa 1 (SSV1): This visa is designed for skilled shipbuilding, agriculture, and nursing care workers. Applicants must pass Japanese language and technical exams.
3. Specified Skills Visa 2 (SSV2): Allows visa holders to renew indefinitely and sponsor family members to join them in Japan. Holders of SSV1 can upgrade to SSV2 after gaining higher expertise.

Requirements for a Japan Work Permit

Individuals entering Japan for purposes other than tourism must obtain a Certificate of Eligibility (COE) before acquiring a Japan work visa or permit.

The COE serves as proof of eligibility for work, family, or other valid reasons for entry into Japan and is a prerequisite for the visa application process.

General requirements for Japanese work permits include the following:

• Job offer from a Japanese company
• Valid passport
• Completed visa application form
• Recent photograph (not older than six months)

To be more specific, the application process for obtaining a Japan work visa involves several steps:

• Certificate of Eligibility (COE) Application: The employer (sponsor) in Japan applies for the COE on behalf of the employee at the local immigration office. The COE issuance takes approximately three months and remains valid for three months.
• Japan Work Visa Application: Once the COE is granted, the employee can proceed with the Japan work visa application form. The required documents may vary depending on the type of visa being applied for.
• Specified Skills Visa Application: For specified skills visa tests, applicants must submit a points calculation based on their skills, with a minimum score requirement of 70.
• Employer's Documentation: The employer must provide certain documents for the visa application process, including:

1. a letter of guarantee, 
2. an official invitation letter issued to the candidate, 
3. a list of visa applicants, 
4. essential company details, 
5. and a detailed itinerary (tickets, place of stay, etc.) for Japan.

With these clear steps, most foreign workers can navigate the Japanese work permit application process efficiently and legally establish their presence in the Japanese job market.

However, to go through the process without hassle or incomplete steps, we recommend working with an EOR service that can ensure certainty and a smooth application process.

Legal Compliance with an Employer of Record in Japan

In Japan, the EOR assumes legal responsibility for employees. This includes handling tax filings, payroll, human resources, and, most importantly, ensuring adherence to labor laws. By doing this, the EOR mitigates the risk of non-compliance and its potential consequences, such as hefty penalties and damaged reputation.

An EOR service also significantly reduces the administrative burden. Instead of hiring a full-time suite of HR and payroll professionals, the EOR handles these tasks, leaving your team to focus on company growth.

Japan's Business Environment and the Importance of Legal Compliance

Legal compliance forms the bedrock of Japan's robust business environment. Essential for both domestic and international companies, it ensures fair play, aligns with Japan's corporate ethos, and promotes healthy competition.

Penalties for non-compliance can be steep, enforcing a culture of diligence. Every business activity is legislated, from statutory filings to employee contracts, and non-compliance can lead to financial penalties that can significantly impact a company's bottom line.

A robust compliance commitment helps foster trust among stakeholders, from employees to shareholders. An EOR becomes a bedrock for companies to navigate and stay aligned with Japan's legal landscape and business environment.

Getting to Grips with Japan's Employment Laws

Japan's employment laws are unique and complex, emphasizing employee protection. Paying attention to the minutiae of these laws is critical in maintaining a harmonious and legally compliant working environment.

Wages, working hours, safety and health, and securing employment stability are pillars of Japanese labor laws. For instance, the law limits the number of overtime hours and mandates extra pay for additional work hours.

An EOR service with a deep understanding of these laws safeguards your company while ensuring your employees in Japan are treated lawfully. By entrusting an EOR with HR responsibilities, companies can be confident that they are compliant, even as laws and regulations evolve.

Employee Benefits in Japan: Common Practices

To get into some detail, below are statutory benefits and common practices employers must adhere to:

1. Overtime Compensation

In Japan, the standard workday is eight hours long, with a workweek totaling 40 hours.

Any additional hours worked beyond this eight-hour per standard are considered overtime and are compensated at 125% of the base hourly rate. Higher rates apply for longer hours and for night time hours and weekends. Legislative reforms have recently capped overtime hours for Japanese employees at 45 hours per month or 360 hours annually.

2. Leave and Holiday Entitlements

Leave entitlements in Japan are determined by the length of an employee's tenure with the company.

Employees accrue paid vacation days based on the following tenure milestones:

• Six months: 10 days
• 1.5 years: 11 days
• 2.5 years: 12 days
• 3.5 years: 14 days
• 4.5 years: 16 days
• 5.5 years: 18 days
• 6.5 years and above 20 days

While compensating employees for work on public holidays is not mandatory, it's a common practice in Japan, which recognizes 16 national bank holidays.

3. Insurance Coverage

Employers in Japan are obligated to contribute to state insurance schemes. They must enroll employees in the Health Insurance for Employees scheme and contractors in the National Health Insurance scheme. 

These programs offer basic coverage, including high-cost medical care and loss-of-income insurance due to medical reasons. Additionally, Japanese workers are entitled to Workers’ Compensation, Employment Insurance, unemployment benefits, and various old-age-related insurance schemes.

4. Minimum Wage

Minimum wage rates in Japan vary by prefecture to align with local living costs. Hourly wages range from ¥790 (approximately $6) to ¥1,040 (around $8), with industry standards influencing minimum wage determinations.

In cases where prefectural and industrial minimum standards differ, the higher rate typically applies.

Cost of Using an Employer of Record in Japan

Hiring employees in Japan involves understanding Labor Law provisions, determining the total employment cost of a full-time job, including all benefits, and figuring out how best to manage the process. An Employer of Record simplifies this complex process, but how much does the service cost?

EOR fees vary but can be based on a percentage of the employee's gross salary or per-employee pricing. This fee includes service management, payroll administration, and statutory costs. The cost is often negotiable, especially for larger employee groups.

Cost estimation

To estimate the actual cost of using EOR, you must consider factors beyond the straight salary. Include payroll taxes, benefits provision, statutory costs, and possibly expense management. The EOR firm will provide a detailed cost overview to help you plan your budget.

Employer Payroll Contribution Rates in Japan vary based on different insurance schemes and are mandatory for employers. 

• In Tokyo, Health Insurance requires a 5% contribution, while Long-Term Care Insurance, applicable to employees aged 40 and above, demands 0.91%. 
• Welfare Pension Insurance necessitates a contribution of 9.15%, and the Child Allowance Premium requires 0.36%. 
• Unemployment Insurance requires 0.95%, while Work Injury insurance rates range from 0.25% to 8.8%, depending on the industry. 

Comparison of these costs with traditional hiring methods

Are EOR costs favorable in comparison to traditional hiring and training methods? Given Japan's intricate tax system and labor laws, hiring directly could expose your company to unexpected costs.

Direct hiring involves costs related to recruitment, setting up payroll, legal compliance, possible relocation, and ongoing HR management. Further, non-compliance with Japan's rigid labor laws could lead to litigation costs or fines.

Cost-Benefit Analysis of Using an Employer of Record

Conduct a thorough cost-benefit analysis to decide if engaging an EOR is cost-effective. This should consider not only financial factors but also operational aspects.

Financially, using an EOR might be lower when one considers the hidden costs of hiring in-house, such as statutory benefits, compliance, and administration expenses.

On the operational side, an EOR’s ability to quickly onboard staff can mean your business operations move faster. Additionally, outsourcing HR tasks to an EOR frees up your team’s time to focus on core business operations.

How to Choose the Right Employer of Record in Japan

Choosing the right Employer of Record requires a keen understanding of your company’s unique needs. The first step is to determine key logistical factors.

Does the EOR have a physical presence in Japan? Experience with Japan's labor laws and business culture can drastically streamline your expansion process.

Consider the extent of the EOR's offerings. Understanding the EOR's field of expertise will allow you to find a match that caters to your specific needs.

Ask about their customer service. Hiring overseas is complex, so having a reliable point of contact is crucial. Find out their availability, response time, and knowledge of international HR.

Transparent, open communication is key when working across borders with potentially different business habits and expectations.

Experience and Reputation: Seek a provider with a proven track record of success in Japan's market.

Range of Services: Ensure the EOR offers essential services such as payroll, taxes, and compliance management tailored to Japan's regulations.

Industry Expertise: Look for an EOR with knowledge, training, and experience in Japan's specific industries and an understanding of their unique laws and regulations.

Costs and Fees: Compare pricing structures and additional fees to ensure they align with your budget and requirements in the Japanese market.

Support and Communication: Prioritize open communication and prompt support from the EOR to address any issues or questions efficiently.

Compliance Track Record: Choose an EOR with a strong compliance track record in Japan to mitigate legal and financial risks effectively.

Technology and Systems: Opt for an EOR with advanced technology and systems that streamline processes and provide real-time updates tailored to Japan's requirements.

Cultural Understanding: Select an EOR familiar with Japan's local culture, language, and customs to facilitate quicker adaptation to the Japanese market.

Client Testimonials: Review feedback from current or previous clients to gauge the EOR's performance and customer satisfaction levels in Japan.

Flexibility: Look for an EOR that offers flexible solutions customized to meet your business's unique needs and requirements in Japan.

Global Network: Consider partnering with an EOR with a global network to access support and resources in Japan and other countries for future expansions.

Choose Knit for your Japanese EOR Services

The knowledge you gained here isn't just information—it's a powerful tool for effectively navigating Japan's complex business environment. By leveraging an EOR service, you'll save time, reduce risks, and gain a solid footing in the Japanese market.

So, why wait?

At Knit People, we've got all your expansion needs covered for Japan. Whether you need expert advice on employment laws or someone to handle the nitty-gritty of hiring and managing employees, we have the experience and expertise to guide you through it all.

Reach out to us today to learn more about how our EOR services can support your business's growth in Japan. Remember, a well-thought-out operation backed by expert support equals success!

Disclaimer: This article offers general guidance and should not be interpreted as financial, legal or tax advice. Regulations may evolve and differ based on geographical location and industry. You should seek assistance from certified advisors in Japan for personalized advice tailored to your business.