Labor Law Risks Should Be Reviewed at the Hiring Stage After Establishing a Japanese Entity
Once a Japanese entity has been established and the company begins hiring local employees, it should review the employment agreement, written notice of employment conditions, work rules, Article 36 Agreement, and overtime allowance structure together.
Japanese labor law may appear structurally similar to Korean labor law, but in practice, principles of employment protection and the obligation to clearly state working conditions are applied strictly.
If Korean-style HR practices are applied without adjustment, companies may later face disputes involving:
- unpaid overtime;
- invalid dismissals; or
- renewal of fixed-term employment agreements.
Key Takeaways
When entering into an employment agreement in Japan, major working conditions must be provided in writing, and the scope of mandatory items was expanded from April 2024.
Where employees are required to work beyond statutory working hours, the company must execute an Article 36 Agreement and submit it to the competent Labor Standards Inspection Office.
Overtime allowances must also be managed separately in accordance with statutory premium rates.
Dismissals require objectively reasonable grounds and must also be considered socially acceptable, making procedures and documentation particularly important.
1. Employment Agreements and Work Rules Should Be Designed Separately
In Japan, an employment agreement and work rules serve different purposes.
An employment agreement or written notice of employment conditions sets out the individual employee’s working conditions.
By contrast, work rules establish HR and labor standards that apply across the workplace.
An employment agreement should clearly specify matters such as:
- contract term;
- place of work;
- job duties;
- working hours;
- wages;
- resignation; and
- dismissal.
Since April 2024, additional matters have also become subject to mandatory disclosure, including:
- scope of possible changes to the place of work and job duties;
- limits on renewal of fixed-term contracts; and
- opportunity to apply for conversion to indefinite-term employment and the applicable working conditions after conversion.
Workplaces that regularly employ 10 or more employees are generally required to prepare work rules and file them with the competent Labor Standards Inspection Office.
If dismissal grounds, disciplinary rules, working hours, wages, holidays, and leave standards are not clearly stated in the work rules, the company may have difficulty defending its actions in a later dispute.
Accordingly, before beginning local hiring in Japan, companies should ensure that the employment agreement, written notice of working conditions, and work rules are consistent with one another.
2. Requiring Overtime Without an Article 36 Agreement May Violate the Law
Japan’s statutory working hours are generally:
- 8 hours per day; and
- 40 hours per week.
If employees are required to work beyond these limits or on statutory holidays, the employer must first enter into an Article 36 Agreement (36協定) with the employee representative or majority labor union and file it with the competent Labor Standards Inspection Office.
Even where an Article 36 Agreement has been executed, overtime is subject to statutory limits.
As a general rule:
- overtime should not exceed 45 hours per month or 360 hours per year;
- even where special provisions apply, overtime must remain within 720 hours per year;
- overtime and holiday work combined must generally remain below 100 hours in any single month; and
- average monthly overtime over a period of 2 to 6 months should generally remain within 80 hours.
Overtime premiums must also be managed separately.
Statutory premium rates may include:
- at least 25% for overtime work;
- at least 50% for overtime exceeding 60 hours in a month;
- at least 35% for work on statutory holidays; and
- an additional 25% premium where qualifying night work applies.
Even where the company uses a fixed overtime allowance similar to a Korean inclusive wage structure, additional payment obligations may arise where actual working hours exceed the hours covered by the fixed allowance.
3. Fixed-Term Contracts Require Review of the Five-Year Rule and Renewal Expectations
Fixed-term employment agreements can be useful for maintaining workforce flexibility.
However, companies should also review the risk of conversion to indefinite-term employment.
Where fixed-term employment contracts with the same employer are repeatedly renewed and the total contract period exceeds five years, the employee may acquire the right to request conversion to an indefinite-term employment contract.
In principle, the employer cannot refuse a valid conversion request.
Even before reaching the five-year threshold, repeated renewals or circumstances giving the employee a reasonable expectation of renewal may create a legally protected expectation of renewal.
In such cases, refusal to renew solely because the contract term has expired may be reviewed under standards similar to dismissal.
When using fixed-term agreements, companies should therefore clearly reflect the following in the employment agreement and work rules:
- contract term;
- renewal criteria;
- maximum number of renewals or total renewal period; and
- information relating to indefinite-term conversion.
4. Dismissals Are Strictly Reviewed in Japan
Under Japanese labor law, a dismissal may be invalid where it lacks objectively reasonable grounds and is not considered socially acceptable.
For this reason, it is generally difficult to dismiss an employee immediately based only on:
- poor performance;
- organizational restructuring; or
- work attitude issues.
Before dismissal, companies should usually review procedural and evidentiary measures such as:
- giving the employee an opportunity to improve;
- issuing warnings;
- maintaining interview and meeting records;
- considering reassignment or changes in duties; and
- accumulating objective performance records.
For disciplinary dismissal, the company should have clear disciplinary grounds in its work rules.
The following may also be reviewed:
- seriousness of the misconduct;
- proportionality of the disciplinary action; and
- whether the employee was given an opportunity to explain.
For redundancy or operational dismissal, courts may review matters such as:
- necessity of workforce reduction;
- efforts to avoid dismissal;
- reasonableness of employee selection criteria; and
- consultation and explanation provided to employees.
Providing 30 days’ advance notice or paying 30 days’ average wages in lieu of notice is generally a minimum procedural requirement.
It does not mean that a dismissal automatically becomes valid merely because the notice requirement has been satisfied.
5. Applying Korean HR Practices Directly Can Increase Dispute Risk
One recurring issue for Korean companies operating Japanese subsidiaries is the direct application of Korean headquarters’ HR practices to local Japanese employees.
Typical risks include:
- issuing only a Korean-language employment agreement without a Japanese version;
- inconsistencies between the employment agreement and the written notice of working conditions;
- requiring overtime without an Article 36 Agreement;
- using a fixed overtime allowance without managing actual overtime hours;
- classifying an employee as a manager or supervisor based solely on job title;
- carrying out disciplinary or dismissal procedures based only on internal manuals without properly established work rules; and
- immediately dismissing an employee because performance targets were not met.
In particular, under Japanese law, an employee does not become exempt from overtime requirements simply because they are called a “manager” or “department head.”
Whether the employee qualifies as a statutory manager or supervisor (管理監督者) is determined comprehensively based on matters such as:
- actual duties;
- authority;
- discretion over working hours; and
- compensation level.
Even where an employee qualifies as a manager or supervisor, separate rules concerning night-work premiums may still apply.
DECENT Insight
Local hiring in Japan involves much more than preparing a single employment agreement.
The following elements should be designed as one integrated HR framework:
- employment agreements;
- written notices of working conditions;
- work rules;
- Article 36 Agreements;
- overtime allowance structures;
- renewal standards for fixed-term contracts;
- disciplinary procedures; and
- dismissal procedures.
The point at which a newly established Japanese entity hires its first employees is often the best time to establish an appropriate HR and labor law framework.
If the initial documentation and operating standards are unclear, issues such as unpaid overtime, indefinite-term conversion, and invalid dismissal disputes may arise simultaneously as the company grows.
DECENT Law Firm’s Global Business Practice Team advises on:
- Japan local hiring structures;
- employment agreement review;
- work rules;
- Article 36 Agreements; and
- HR management systems between Korean headquarters and Japanese subsidiaries.
If your Japanese entity is preparing to hire local employees, it is advisable to review the employment and HR documentation before recruitment begins.