How to hire employees in Japan through an employer of record (EOR) [2024]

Doing business in Japan and tapping into local expertise is an exciting opportunity, but navigating the country's complex employment and labor laws can be overwhelming. 

For instance, worker classification in Japan is based on their relationship with the direct employer, not their nationality. There are also several laws in place to protect employees from discrimination and unfair practices. But let's face it, top talent isn't going to wait around for you to get a firm grasp on the country's legal nitty-gritty.

Luckily, there's an efficient and cost-effective solution to help expedite your expansion process without the stress: partnering with an employer of record (EOR). 

An EOR service handles all the legal requirements of employing and hiring in Japan on behalf of your company, making it an excellent alternative to direct hiring. With this service, you can avoid the time and expense of setting up a legal entity, hiring staff, and navigating complex laws and can focus on what really matters—getting started quickly and growing your business. 

Learn more about What is an Employer of Record (EOR)?

Ready to learn more about how to hire through an EOR in Japan? Check out our step-by-step guide and expand your business in the land of the rising sun.

Step by step: How to hire through an employer of record in Japan

Step #1: Decide between a Japanese EOR and a legal entity

When expanding your operations in Japan, you're faced with a critical decision: establish your own entity or hire employees through an EOR.

The choice you make significantly affects your company's growth, resource utilization, and overall success in the market. So, take a moment to weigh your options and consider the size of your enterprise, the resources at your disposal, and your plans for expansion. 

Let's break down your two choices for expanding your business in Japan.

• Establishing a legal entity in Japan. This involves a series of tasks, including navigating the complex process of registering with local authorities and opening a local bank account. You may also need to enlist the help of local experts to ensure you're in compliance with all the tax and labor laws. 

All this makes setting up a legal entity time-consuming, but if you're looking for full control of your business, it's the way to go.

• Japanese EOR. An EOR is a third-party service that becomes the legal employer on behalf of foreign companies, allowing owners to skip the legal entity setup altogether. 

With an EOR, you can hire full-time Japanese employees while leaving all the legal requirements to the provider. The latter takes care of everything, from payroll and labor contracts to benefits and taxes, so you can focus on growing your business without getting bogged down in compliance minutiae.

Step #2: How to choose the best EOR for your business

Before you choose a platform, consider the services you'll need, and how much you plan to grow your global hiring presence.

• Is the EOR active in the countries in which you need to hire? The first, and perhaps most obvious consideration when choosing an EOR for global expansion.
• Does the EOR own its entities in the countries it services? If the EOR does not own the entities, it means they are partnering with a local or third-party provider.
• How does the EOR protect your sensitive and confidential information? It is vital that your EOR has the appropriate data protections in place, as well as secure technology that eliminates potential disclosures of private information.
• Does the EOR offer automated solutions? You may want to look for an EOR that automates the busy work like onboarding and benefits enrollment and other common human resources and IT tasks.
• What is the EOR’s support model? Your EOR must have support staff that is both easy to contact and experts in the regulations of the countries in which you're hiring.

Get the full checklist in our guide: What is an EOR?

Step #3: How to hire and onboard your Japanese employees

Hiring employees in Japan can be a complex process, given the country's unique employment laws and cultural practices. 

For instance, according to Japan's Labor Standards Law, every employee must receive a written employment agreement or offer letter, along with a copy of the company's 'Work Rules' (shuugyou kisoku), outlining the following details: 

• Work hours (Japan has a standard working week of 40 hours)
• Holidays
• Wages and compensation in Japanese yen (not USD)
• Employee benefits
• Termination of employment

Moreover, if you end up employing more than ten workers, you must also file these Work Rules with the Local Labor Standards Inspection Bureau.

But here's the good news: once you've picked an employer of record service that works in Japan, you can outsource this complexity to them. 

An EOR acts as the legal employer of your Japanese workforce, making them responsible for ensuring compliance and handling tax filing. And as the hiring company, your primary responsibility will be to manage your new employees' day-to-day activities, build strong relationships, establish expectations, and assign tasks. 

Step #4: Run payroll

In Japan, employers need to follow a monthly payroll cycle, with payment dates set on the 25th of every month. In addition, they're expected to pay out summer and winter bonuses in June and December, respectively.

Also, as a customary practice in Japan, employees can look forward to a 13th-month pay at the end of each year, which is a welcome addition to their usual salary.

For the A-to-Z on global payroll, read our comprehensive guide to running international payroll for employees in Japan.

After collecting the new employees' information and finalizing the employment agreements, an EOR takes care of payroll tasks. This includes paying employees in Japanese yen while withholding legally required taxes from salaries. 

Here's a rundown of the payroll-related services an EOR offers:

• Setting up new employees: The EOR takes care of all the paperwork and processes needed to get your new hires up and running.
• Social insurance contributions: The EOR handles all the necessary contributions to Japan's social insurance programs on your behalf, ensuring your employees are covered and compliant with the law.
• Income tax declarations: The EOR prepares and files all individual income tax declarations for your employees in Japan, ensuring they pay the correct tax to avoid potential issues with the tax authorities.
• Expense declarations: The EOR handles the reporting and reimbursement process, allowing you to stay on top of your finances and ensure your employees are reimbursed promptly and accurately.
• Payslip provision: The EOR generates payslips for your employees, providing them with clear and concise information on their salary, taxes, and other deductions.
• Support for employment documents: The EOR will also provide you with support and guidance on standard employment documents (for example, employment contracts and work rules), to ensure compliance with Japanese employment laws and regulations.

Frequently asked questions about hiring through an EOR in Japan

How much does an EOR cost?

When it comes to pricing structures, EORs usually offer two options: 

• A fixed monthly fee per employee; and
• A percentage of payroll plus applicable taxes.

Both methods may come with additional administrative fees, onboarding charges, and other supplemental costs. Also, you don't necessarily have to use an EOR for your entire workforce. You can choose to segment services and only pay for the employees you hire through the EOR.

What is the difference between an EOR and PEO?

An international PEO and an EOR generally differ in the scope of their available services. 

A professional employer organization or PEO co-employs a company’s workforce and provides administrative services like paying employees, handling compliance, and filing payroll taxes. The company and PEO are jointly responsible for the workforce. A PEO does not, however, allow you to hire in other countries where you haven’t set up a local entity. 

On the other hand, an EOR is the sole legal employer of the portion of your workforce you use it for, and assumes all the associated liabilities. An EOR allows companies to work with employees in other countries without setting up a legal entity. 

In Japan, there’s very little difference between the two. You can work with a Japan PEO who acts as the EOR for a Japanese employee in a legally compliant manner, covering as many HR services as expected of the original employer.

Does an EOR protect your sensitive and confidential information?

Outsourcing payroll management to an EOR is a great way to save time and reduce compliance risks. However, sharing sensitive data with companies that use third-party vendors can expose you to data breaches through manual uploads.

This makes it crucial to seek out EORs that prioritize data protection, including:

• Compliance with industry-standard privacy regulations in different countries
• Secure infrastructure with around-the-clock maintenance
• Carefully vetted personnel

To ensure that your data is handled with the utmost care, consider establishing a data processing agreement (DPA) with your payroll service. This agreement mandates sound privacy practices and provides legal protection, giving you peace of mind that your data is in safe hands.

What’s the difference between an employer of record in the USA and Japan?

A Japanese EOR and an American EOR are the same, except the difference is the country from which the EOR hires and onboards workers.

In both cases, the provider agrees to bear the liability of your employment arrangement and take up the responsibility of critical administrative back office tasks like employee benefits, payroll, termination, and onboarding.

Does an EOR help you with Japanese tax filings?

An EOR can automatically calculate and file your taxes in Japan. 

Rippling, for instance, is a reliable payroll provider that can deduct certain costs from your Japanese employee's paychecks, including income tax, pension contribution, workers' compensation insurance, and unemployment insurance.

Here are the applicable income tax rates for different income brackets in Japan:

What are the mandatory employee benefits for Japanese employees?

Japanese employees are entitled to certain guaranteed benefits, including health benefits, holidays, and annual leaves. This includes:

• Social security benefits like healthcare coverage, unemployment insurance, pension, and workers' compensation.
• Although not legally bound to give time off on the 16 public holidays, it’s a widely accepted tradition in Japan.
• Annual paid leave of a minimum of 10 days on completing six months of service, after which the leave entitlement increases for up to 20 days per year depending on the number of years of service.
• Mandatory maternity leave and childcare leave.
• No termination without cause or compensation.

To learn more, check out our comprehensive guide to offering employee benefits in Japan.

What are the employer costs for full-time employees in Japan?

Employers deduct social insurance premiums from their employees' paychecks. This contribution is then paid into Japan's social security system, providing crucial support for benefits such as maternity leave, sick leave, health insurance, and retirement.

In addition to social insurance premiums, employers should also withhold taxes for labor insurance that covers unemployment and workers' compensation. 

Note that the premium amount is calculated based on the employee's salary, ensuring fair and accurate contributions. Here's a breakdown of employer costs:

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.