The Japanese market is host to a wealth of enticing, stable, and scalable business opportunities for international companies looking to hire in Japan. In 2022, Japan was named the third-largest economy in the world, with a GDP of just under $5 trillion.
Sectors such as information technology, healthcare, automotive, and environment play a key part in propelling Japan’s large economy. Thanks to growing sectors such as these, foreign companies from across the world are being welcomed to collaborate with local experts and leverage Japan’s vast market base.
To hire in Japan, however, there are certain things that German companies will need to consider. Aside from compliance with the Japanese legal system, it’s also important to adhere to employment regulations on payroll, employee benefits, taxes, statutory working hours, an employee's salary, cultural and language barriers, and more.
In this guide, we’ll cover the details of how a German company can hire Japanese skilled workers. We’ll also explore what German companies need to know if partnering with a global Employer of Record (EOR) to oversee the legalities and potential costs of hiring in Japan.
Can a German Company Hire in Japan?
Yes, a German company can hire in Japan. There are no rules or regulations that prohibit German companies from hiring employees in Japan.
However, there are many legalities and local regulations that must be taken into consideration to ensure that you are following Japanese employment laws.
Below are some things to keep in mind when hiring in Japan and a few ways in which a German company might go about employing skilled workers in Japan.
3 Ways German Companies Can Hire in Japan
1. Hire Japanese Skilled Workers as Contractors
Opting for contract staffing within Japan might be the most straightforward choice. Still, there are specific factors that German companies need to consider in order to ensure compliance with all local labor requirements.
In Japan, independent contractors are individuals who operate as self-employed entities. They render their services to the company while having the freedom to choose their own work hours and schedules. Similar to Germany, contractors in Japan are treated distinctly from the company’s internal staff.
These independently engaged contractors do not receive a predetermined salary and are responsible for their own work tools and equipment.
This approach grants companies a higher degree of adaptability and cost efficiency, particularly when enlisting specialized services or embarking on one-off projects.
Independent contractors may also be employed by a company over a prolonged period of time. However, if your company is considering engaging an independent contractor, you must be aware of potential legal complications associated with incorrectly categorizing these contractors as full-time employees. Such misclassification could potentially lead to tax penalties and other legal complications.
2. Establish a Foreign Entity in Japan
Another avenue for German companies to consider when hiring Japanese skilled workers is to establish a foreign entity. The creation of a foreign entity allows German companies greater control over the recruitment of local talent, and facilitates payroll operations and setting up a local branch.
Depending on the nature of your business, it might be necessary to acquire appropriate authorization or licenses from local authorities in order to ensure the company’s operations are compliant with all labor laws within Japan.
Choosing to establish a foreign entity is often a favorable choice among companies looking to hire multiple employees or establish a more sustainable corporate presence.
However, this process can require significant financial resources and a considerable amount of investment. It also required familiarity with Japan's legal, corporate, and payroll regulations.
If your company is contemplating this option, it is advised that you engage with local legal experts or institutions for insights and guidance throughout the process.
3. Partner With an Employer of Record in Japan (EOR Japan)
The third, and arguably easiest option, is to engage employer of record services (EOR) to hire, pay, and manage your Japanese skilled workers.
An EOR or professional employer organization (PEO) is already set up as a legal entity within Japan. So, they will help ensure that your company is in alignment with local labor laws and requirements when you hire local talent and build your global team.
An EOR Japan partner will act as the legal employer for your staff in Japan. It will offer global payroll solutions for company employees, as well as taking care of tax deductions and other mandatory contributions including pension and health insurance.
Ultimately, an EOR in Japan is the easiest hiring option and will help streamline everything from employee onboarding to the payroll process. Meanwhile, it will also protect your company against any legal mishaps so you can focus on growing and expanding your business — headache-free!
Things to Consider When You Hire Employees in Japan
Although it’s easy enough for German companies to hire in Japan, there are many legalities and government requirements that will affect both the company and the individual employee.
Local Employment Laws and Employment Contracts
The average national minimum wage in Japan is ¥961 per hour. However, the minimum wage can vary by region and industry and ranges from ¥761 to ¥1,072 per hour.
The legal recommendation for working hours in Japan is 40 hours per week. However, Japan is notorious for having some of the longest working hours in the world. Even so, the maximum legal overtime in Japan is five hours per day, 45 hours per month, and 360 hours per year.
According to local laws, employers in Japan are required to pay an additional 25% for weekdays, and 35% of the employee's salary for weekends and holidays.
In reality, many Japanese employees work over 80 hours of overtime a month and are often unpaid. Putting in overtime hours at the office is an expectation of many employees and has become a normal part of corporate culture in Japan.
This practice is one of the major cultural differences between the East and the West. Foreign companies are not expected to uphold the same practices, though it is something that your company will have to understand and be aware of.
Employment contracts should clearly outline job responsibilities, compensation, and other terms of employment, including any expectation of overtime work from the employer.
An employment contract in Japan is typically highly detailed and may include non-compete clauses and mandatory retirement ages. It's important that your employment agreement aligns with both the country's local laws and your company's needs.
Cultural Differences and Language Barriers
Understanding and respecting cultural differences is crucial for German companies doing business in Japan. Japan has a unique business culture that emphasizes hierarchy, politeness, and teamwork. You should familiarize yourself with the basics of Japanese business etiquette, communication styles, and social norms before looking to hire in Japan.
Additionally, while many Japanese are skilled in the English language, it’s important to remember that miscommunication and misunderstandings may occur, particularly because Japan is a high-context culture while Germany is not.
Japanese Taxes and Social Security Contributions
Taxes in Japan are paid by both the employee and employer. Employers are responsible for withholding income taxes from employees' salaries. The primary taxes are income tax and resident tax.
In Japan, employers must contribute to the following insurance systems:
- 9.15% Pension contribution
- 4.905% Health insurance contribution
- 0.6% Unemployment insurance
- 0.25% - 8.8% Work accident compensation
- 0.36% Family allowance
Rates are often specific to districts within Japan, and rates for health insurance contributions may vary for workers between the ages of 40 and 65.
Worker’s accident compensation is paid solely by the employer. Employment insurance, health insurance, and employee pension insurance are paid by both the employer and employee.
Recruitment and Hiring Practices
Recruitment processes in Japan may differ from those in Germany. Common practice in Japan includes longer recruitment timelines, more emphasis on personal connections, and a focus on long-term commitment.
Consider using local recruitment agencies or consulting with a local Employer of Record (EOR Japan) who has a deeper understanding of the Japanese market.
Notice Period and Termination Process
Employee probation periods in Japan may vary from three to six months. After this time, employers are required to give a 30 days' notice of termination. Alternatively, employers can offer to compensate for the notice period if termination is immediate and without just cause.
The termination process in Japan is most commonly carried out by negotiating the terms of the employee's voluntary resignation.
Under the Japanese labor law, there are currently no severance requirements.
Common Employee Benefits in Japan
Your company should also ensure that all Japanese skilled workers are given appropriate paid time off and benefits as required by Japanese law.
Paid Time Off (PTO)
There are 16 publicly observed holidays in Japan. Most employees are entitled to take the following public holidays off with pay:
- January 1 (Observed on January 2): New Year’s Day
- January 9 (Second Monday in January): Coming of Age Day
- February 11: National Foundation Day
- February 23: Emperor’s Birthday
- March 21: Vernal Equinox
- April 29: Showa Day
- May 3: Constitution Memorial Day
- May 4: Greenery Day
- May 5: Children’s Day
- July 17 (Third Monday in July): Marine Day
- August 11: Mountain Day
- September 18 (The third Monday in September): Respect for the Aged Day
- September 23: Autumnal Equinox
- October 9 (Second Monday in October): Health and Sports Day
- November 3: Culture Day
- November 23: Labor Thanksgiving Day
Personal Leave Entitlements
Annual Statutory Leave
Full-time employees in Japan are entitled to ten to twenty days of leave per year. This number depends on how long the employee has been with their employer.
Parental Leave
Expecting mothers in Japan are legally entitled to a total of 14 weeks of paid leave at two-thirds of their salary. The weeks are divided into six weeks of maternity leave before childbirth, and eight weeks of leave after giving birth. Returning to work earlier (around six weeks post-childbirth) is allowed with a doctor's approval.
As of 2023, Japanese men are also entitled to four weeks of paternity leave paid at up to 80% of their salary.
Sick Leave
There are no paid sick leave rights for workers in Japan. Paid vacation days are typically used to take a leave of absence in the event of sickness. Foreign companies are known to grant sick leave to their employees as an additional benefit.
Common Risks for German Companies Hiring in Japan
As mentioned before, there are many things to consider when hiring in Japan. In this section, we will briefly discuss a couple of common risks for German companies to consider when hiring Japanese skilled workers.
Misclassification of Employees
When hiring a Japanese skilled worker for a contract position or for full-time work, you should ensure that they are classified correctly.
If improperly classified, your company may face fines, legal issues, and reputational damage. Such fines for labor law violations can amount to JPY 300,000 and/or imprisonment for up to six months.
To avoid such fines and legal complications, consider working with a legal expert, such as an employer of record (EOR) that can help your company avoid misclassification through proper contracts.
Potential Visa Requirements and Work Permits
Non-Japanese nationals require the appropriate visas and work permits to work in Japan. In the case that the prospective employee is not a Japanese national, your company must understand the visa requirements to assist your employee in obtaining the necessary documentation.
Incorrect Payroll Contributions and Deductions
German companies must consider legally required contributions such as health insurance contributions, unemployment insurance, work accident compensation, and other insurances outlined above.
Your company is required to calculate, deduct, and contribute the correct amount to Japanese authorities. Lack of deductions or incorrectness in deductions and contributions could result in legal complications or fines for the employer.
Possible additional tax penalties may include:
- An additional tax of 10% is added to the amount that was incorrectly deducted or contributed in addition to an interest rate of 2.4% per year. (Note: The interest tax rate is for the year 2022. Yearly changes based on the disclosed interest rate by the MOF (Ministry of Finance Japan) may occur.)
- For social security issues, your company can be fined up to JPY 500,000 or its legal representatives may face imprisonment for up to six months.
It’s best to consult with tax experts or engage employer of record services (EOR) to understand the tax implications for your company both in Japan and potentially in Germany.
As an established EOR, we can help you hire in 170+ countries, including Japan. Borderless is highly knowledgeable and experienced in assisting German employers looking to hire in Japan. Book a demo today to see how Borderless can help you hire quickly and efficiently.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
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