Understanding Wage Regulation In Japan

Japan is the world’s third largest economy with a nominal GDP of USD5.6 trillion in 2020 and a member of the Group of Seven (G-7). Yet, it is ranked 29th out of 90 economies in the ease of doing business based on the latest World Bank ratings in 2019.

While Japan is globally recognised for its domestic competence, local help is still required in order for overseas ventures to succeed. One of the key factors include key payroll regulations. This guide sets out the key wage regulations and practices in Japan to help overseas organisations venturing into Japan.

MINIMUM WAGES
Japan has a minimum wage in place. However, different regions in the country have different minimum hourly wages. Tokyo has the highest minimum wage across the nation, at 1,013 Yen in 2020, while in other prefectures such as Okinawa, Saga, Kochi, and Akita, the figure stands at 792 Yen. The national average across the nation is 902 Yen.

Aside from the prefecture that the employee is located in, the minimum wage is also dependent on the industry that he or she is working in. If an employee meets varying criteria for minimum wages, they are entitled to receive a higher payout. Organisations who fail to pay an employee the minimum wage will face hefty penalties.

Minimum wages are just one aspect of an employee’s compensation package. Employers and HR professionals need to be aware of payments and salary components that are not considered part of the minimum wage. Overtime payments, holiday payments, and bonuses are just some of the salary components that do not go into a minimum wage.

SALARY INCREMENT
Salary increment in Japan typically occurs once a year, with employees receiving a raise on their base salary based on the salary structure within the organisation. Other factors that may impact the amount of salary increment also depend on the performance of the organisation, the employee’s individual performance as well as the employee’s seniority within the organisation. Some organisations also form a collective bargaining to determine the amount of salary increases. This typically happens when organisations in the same industry or similar type of business are part of a labour union, where the union decides on a fixed rate of increment to be adopted by all the organisations under the labour union.

BONUS PAYMENTS
A bonus payment is when there is surplus in profit based on the business performance or individual performance which is paid to the employee. In the majority of Japanese companies, bonuses are equivalent to an employee’s monthly salary, also known as “subsistence wage”. For unionised companies, the amount of bonus paid to employees is determined by the annual collective bargaining agreements. Similarly, the deciding factor in the collective bargaining on the bonus amount is dependent on the organisation’s economic performance.

Bonuses are typically paid twice a year, in summer (June or July) and winter (December). When paying bonuses, organisations also need to pay special attention to directors’ bonuses, which often have specific tax rules that apply to the amounts.

OVERTIME PAYMENTS
According to the Japanese Labor Law, employees are only allowed to work 8 hours a day or 40 hours a week. Employers are mandated to pay higher wages for each hour that an employee works beyond the stipulated working hours. This overtime rate is equivalent to 125% of the employee’s hourly rate. If the employee works in excess of statutory working hours exceeding 60 hours in a month, the overtime rate should be calculated as 150% of the employee’s hourly rate. For employees who are required to work on public holidays, they are entitled to an hourly rate that is equal to 135% of their hourly rate.

The overtime payment rate may be subjected to periodic review by the Japanese government. It is best to refer to the Japanese Labour Standards Act for the most updated legislation.

PRORATION OF SALARIES
Organisations with a legitimate reason to cut business costs can consider reducing pay instead of laying off workers. The first approach is to consider an across-the-board pay reduction. The organisation can either reach out to all the employees individually or approach the union to reach an agreement. The second approach is to reduce a poor-performing employee’s pay to match the employee’s lower position or title.

Regardless of the approach, there is a limit to how low organisations can reduce employees’ pay. While there are no absolute numbers, the upper limit for across-the-board cuts seems to be somewhere in the range of a 10-20% reduction, while the comparable figure for subpar employees is higher, betwee
30-40%.

Understanding the wage regulations in Japan is only a small aspect of payroll that HR professionals and organisations need to be aware of. Similar to managing payroll for other countries, there are other aspects that HR needs to be familiar with such as tax withholding, statutory contributions and employee insurance. By monitoring the HR and payroll landscape periodically, as well as working with an exte
al payroll vendor, this can help organisations who are new or unfamiliar with managing Japan’s labour market and payroll legislations.