Your Guide To Managing Payroll In Japan

Japan, commonly referred to as “Land of the Rising Sun”, is the world’s third largest economy with a nominal GDP of USD5.6 trillion and a member of the Group of Seven (G-7). It is one of the world’s advanced countries, driven by the huge industrial boom of the Japanese economy after World War II. When it comes to technology and innovation, Japan is committed to being the first country to prove that it is possible to grow through innovation even when its population declines. As Japan moves toward “Society 5.0”, the ultimate goal of this new ultra-smart society is to create connectedness through IoT technology.

While it is seemingly rare for organisations to consider venturing into Japan, be it for startups with unicorn ambitions or to expand existing market share, with Japan being the third-largest market in the world, this represents a missed opportunity. However, Japan has also recognised the importance of embracing international solutions. Success stories that organisations can draw inspiration from include Apple, Dyson and Microsoft. For organisations that prefer to go against the norm, there are numerous market opportunities, partnerships to be forged and profits to be made. More importantly, organisations.

There are undoubtedly a number of key considerations to keep in mind when doing business in Japan. Legal entities, corporate assets, recruitment and supply chain processes are just some of the core functions that businesses need to get right. Most importantly, companies need to hire the right people to perform these tasks while ensuring they are well paid. This also means understanding and dealing with the complexities of wage management in Japan.

Here are the key wage treatments in Japan to take note of.

Compensation and bonuses

Minimum wages in Japan vary across the prefectures. In 2020, the national average was approximately 902 yen per hour. Wages are usually deposited into employees’ bank accounts around the 25th of each month. A large proportion of Japanese compensation is made up of bonuses. Bonuses are usually paid out twice a year – once in June or July, and the second payment in December. Aside from bonuses, key salary components also include overtime, sick pay, and transportation allowance.

All employees in Japan must be issued payslips, either in hardcopy or softcopy. Understanding the Japanese payslip can be extremely confusing and highly administrative for the HR department. However, the key items that the payslip needs to include are the wages earned and applicable allowances, subsidies, and deductions for that payroll month.

Mandatory employee benefits

Employees are entitled to receive certain benefits under Japan’s Employment Law. This includes paid leave (such as annual leave, maternity leave, and sick leave), healthcare and insurance, and pensions.

Organisations can also offer supplementary benefits to their employees at their own discretion. Common supplementary benefits include housing allowance, commission or discretionary bonuses, and additional pension schemes on top of the existing government pension schemes.

Social security contributions

There are five types of insurance schemes under Japan’s social security scheme: healthcare, nursing care, pension,  employment, and workmen’s accident compensation. The social security contributions by employee and employer are paid the following month they are due, so there is no contribution due for a new employee on the first month’s salary.

  • Health insurance

This insurance is used to pay for medical care benefits and allowances. Older employees typically have a higher contribution rate as they presumably may have a greater need for healthcare. These rates also vary depending on the prefecture that the employee is located in. With a health insurance card, employees only need to pay 30% of their medical fees at any facility.

  • Nursing care insurance

Nursing care insurance is typically used for the long term care of elderly or disabled employees. This insurance is only applicable for employees over the age of 40. The total employer and employee contributions is 1.57%, shared equally between both parties.

  • Employment Insurance

Sometimes also referred to as unemployment insurance, this insurance provides unemployment allowance as well as childcare and family care leave allowance in the event that the person is unemployed. The employee contribution is 0.3% while employer contribution is 0.6%. The duration in which the employee can receive employment allowance depends on various factors including age, reason for termination and period in which the employee has paid unemployment insurance premiums. This allowance is typically paid monthly if the person is able to prove that he or her is actively looking for a job.

  • Welfare / Pension Insurance

This insurance is mainly intended to fund the employee’s retirement and disability programme. All salaried employees under the age of 70 need to contribute to this insurance scheme. The employee’s and employer’s contribution is 9.15% each. The pension benefit is paid once the insured person is 65, unemployed, and if they have paid pension premiums for at least 10 years. The benefit amount depends on one’s total contribution.

  • Workmen’s accident compensation

The workmen’s accident compensation insurance provides medical care allowance for work and commuting related injuries, diseases and deaths, as well as compensation allowance for unpaid medical leave period which exceeds 4 days. The contribution rate depends on the employer’s industry type and can vary from 0.25% to 8.8%.

Act on the Protection of Personal Information (APPI)

The Act on the Protection of Personal Information (APPI) regulates privacy protection issues in Japan relating to personal information. The APPI was originally enacted in 2003 and was subsequently amended in 2017. In Jun 2020, the Japanese Diet approved a bill to further amend the APPI, which will come into force in early 2022.

Who does the APPI apply to?

The APPI applies to every person in Japan, whether a person or entity. Any business (for-profit or not-for-profit) that processes the personal information of Japanese residents falls under the jurisdiction of the law, regardless of where the entity or person is based. The current APPI also applies to non-Japanese entities that obtain Japanese resident data and process it in a foreign country, with the exception of certain provisions deemed inapplicable or unenforceable. There are limited exceptions for the media, professional writers and academics, religious groups and political parties.

The 2020 amendment also introduced the concept of pseudonymous information, which can only identify individuals when combined with other data. According to the regulation, anonymous information is exempt from restrictions imposed by some apps, including requirements to disclose and stop using personal data. Given that pseudonym information is meant for internal use only, it is not allowed to be shared with third parties without the consent of the individual or through the exit process.

Penalties for non-compliance

Any parties that fail to comply with corrective orders by the Personal Information Protection Commission (PIPC, sometimes abbreviated as just PPC) can be liable for criminal penalties of 1 year imprisonment or fines of up to 1,000,000 yen or up to 100 million yen if the party is a business entity In addition, the 2020 amendment allows PIPC to publish the names of operators that do not comply with the order.

For a business entity or employee who uses personal information for illegal profit purposes, such behaviour is considered a crime punishable by one year imprisonment or a fine of up to 500,000 yen or 10 million yen if the party involved is a business entity. Individuals can also sue the other party for loss of privacy, which could result in significant financial impact on organisations.

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