Hiring Employees in Japan: The SME Guide to Payroll, HR Tools, and Compliance

What happens when you hire your first employee in Japan

The moment you hire employee #1, you trigger a cascade of legal requirements that must be completed within specific timeframes. Missing these deadlines can result in penalties and backdated obligations.

Here's what must happen within the first month:

1. Register with Hello Work (公共職業安定所). You must register for 雇用保険 (employment insurance) within 10 days of the hire date. This also triggers registration for 労働保険 (workers' accident insurance) if you haven't already registered.
2. Enroll in health insurance and pension. If you have a corporation, the employee must be enrolled in 健康保険 (health insurance) and 厚生年金保険 (employees' pension) through the Japan Pension Service. Sole proprietorships may be exempt depending on employee count and industry.
3. Collect My Number (マイナンバー). You're legally required to collect the employee's My Number and the My Numbers of their dependents for tax and social insurance purposes. This must happen within the first month of employment.
4. Set up income tax withholding. Register as a withholding agent with the local tax office and begin withholding income tax from salary based on National Tax Agency tables.
5. Issue payslips (給与明細). Every month, you must provide a detailed payslip showing gross pay, deductions, and net pay. This becomes a legal document for the employee's tax filing.

The registration process typically requires forms in Japanese and can take 2–4 weeks to complete fully. Many SMEs hire a 社労士 (SR consultant) to handle the initial setup rather than navigate the bureaucracy themselves.

The four components of Japan payroll

Japanese payroll is more complex than simple base salary. Understanding what goes into each payslip is crucial because many components affect social insurance calculations and tax withholding.

1. Base salary (基本給)

The contracted monthly amount specified in the labor contract. In Japan, this is almost always expressed as a monthly figure, not hourly or annual. Base salary is the foundation for calculating overtime pay and social insurance premiums.

2. Allowances (各種手当)

Japanese companies commonly pay various allowances on top of base salary:

• Housing allowance (住宅手当): Common allowance to offset Tokyo rent costs
• Commuting allowance (通勤手当): Reimbursement for train/bus costs, up to ¥100,000/month tax-free
• Position allowance (役職手当): Additional pay for management responsibilities
• Family allowance (家族手当): Additional support for employees with dependents

Important: Most allowances count toward social insurance calculations, increasing both employee and employer contributions.

3. Social insurance deductions (社会保険料)

Employees pay approximately 15% of their gross salary for social insurance, which includes:

• Health insurance (健康保険): ~5% of gross
• Employees' pension (厚生年金): ~9% of gross
• Employment insurance (雇用保険): 0.5% of gross
• Workers' accident insurance (労災保険): Employer-paid only

The employer pays a matching ~15% on top of salary. Total social insurance cost is approximately 30% of gross salary.

4. Income tax and resident tax

Income tax withholding (源泉徴収): Monthly withholding based on NTA tables, reconciled during 年末調整 (year-end adjustment) each December.

Resident tax (住民税): Collected via 特別徴収 (payroll deduction) starting in June of the year following employment. First-year employees pay resident tax directly to their municipality.

HR and payroll SaaS tools for Japan

The Japanese HR SaaS market is mature and specialized for local compliance requirements. Most international HR tools can't handle Japanese payroll calculations, social insurance, or 年末調整 (year-end adjustment) processes.

freee HR (freee人事労務)

Native Japanese HR platform that integrates tightly with freee accounting software. Handles payslip generation, social insurance calculations, 年末調整, and My Number management.

• Cost: ¥3,000–¥5,000/month starting tier
• Best for: Existing freee accounting users who want integrated workflow
• Strengths: Deep integration, good for simple payroll
• Weaknesses: Limited approval workflows for larger teams

Money Forward HR (MFクラウド給与)

Strong payroll calculation engine with better workflow management than freee. Integrates with Money Forward Cloud accounting.

• Cost: ¥2,800/month starting tier
• Best for: Companies needing approval workflows and multi-location support
• Strengths: Robust payroll calculations, good workflow management
• Weaknesses: Less user-friendly than freee for basic use cases

SmartHR

HR process automation focused on onboarding, social insurance enrollment, and document management. Not a payroll calculator — designed to integrate with separate payroll tools.

• Cost: ¥600/user/month
• Best for: Teams of 10+ with complex onboarding/offboarding flows
• Strengths: Excellent for automating administrative processes
• Weaknesses: Doesn't handle payroll calculations

KING OF TIME

Attendance management (勤怠管理) system for time tracking, shift management, and overtime calculation. Feeds data into payroll tools.

• Cost: ¥300/user/month
• Best for: Any company that needs accurate time tracking
• Strengths: Comprehensive time tracking, integrates with most payroll tools
• Weaknesses: Additional cost and complexity for very small teams

Recommended stack by company size

Labor contracts in Japan: what you must include

Japan's Labor Standards Act (労働基準法) requires a written 雇用契約書 (employment contract) or 労働条件通知書 (working conditions notice) that specifies minimum terms. Verbal agreements are not sufficient.

Required contract elements

1. Term of employment. Specify whether this is fixed-term (有期雇用) with an end date or indefinite term (無期雇用). Fixed-term contracts can only be renewed a limited number of times before creating indefinite employment rights.
2. Work location and job description. Be specific about where the employee will work and what they'll do. Vague descriptions like "office work" may not be sufficient.
3. Working hours and break time. Standard is 8 hours/day, 40 hours/week with at least 45 minutes break for 6+ hour days. Overtime requires a 36 agreement (サブロク協定) filed with labor standards office.
4. Days off and paid leave. Specify weekly rest days and how 年次有給休暇 (paid leave) accrues. Employees earn 10 days after 6 months, scaling up over time.
5. Salary structure. Base salary, any allowances, payment method, and pay cycle (typically monthly on the 25th). Must specify overtime calculation method.
6. Termination conditions. How either party can end employment, notice periods, and any severance arrangements.

The 無期転換 (indefinite conversion) rule

Fixed-term contracts that are renewed repeatedly create a right to convert to indefinite employment. The threshold is typically:

• Contracts renewed 3 or more times, OR
• Total employment period exceeding 5 years

If you intend to use fixed-term contracts long-term, plan for this conversion right. Many companies manage this by limiting renewals or offering permanent positions proactively.

Paid leave (年次有給休暇) requirements

Japan's paid leave law is strict and frequently misunderstood by foreign employers. Non-compliance can result in penalties and employee complaints to labor standards offices.

Accrual schedule

• After 6 months: 10 days of paid leave
• After 1.5 years: 11 days
• After 2.5 years: 12 days
• After 3.5 years: 14 days
• After 4.5 years: 16 days
• After 5.5 years: 18 days
• After 6.5+ years: 20 days

The 5-day minimum rule (2019 law change)

Since 2019, employers must ensure that employees with 10+ days of paid leave entitlement actually take at least 5 days per year. This is an employer obligation, not just an employee right.

Penalties for non-compliance: Up to ¥300,000 per employee who doesn't take the minimum 5 days. The labor standards office can audit this.

Managing paid leave compliance

• Track each employee's leave entitlement and usage
• Actively encourage leave usage, especially in Q4
• Consider mandatory company-wide shutdown days to ensure compliance
• Document that employees were given opportunities to take leave

Most HR software tools (freee HR, Money Forward HR, SmartHR) include paid leave tracking and alerts to help ensure compliance.

When to hire a 社会保険労務士 (SR consultant)

A 社労士 (sharo-shi) is a licensed social security and labor consultant — essentially the Japanese equivalent of an employment attorney combined with an HR compliance specialist. They handle the intersection of labor law, social insurance, and tax requirements.

When you need a 社労士

• First employee hire. If you're unsure about the registration process with Hello Work, pension service, and tax office, a 社労士 can handle all initial setup and ensure you don't miss deadlines.
• Disciplinary action or dismissal. Japan labor law strongly protects employees. Before taking any serious disciplinary action or considering termination, consult a 社労士 to understand your options and risks.
• Employment rulebook (就業規則). Companies with 10+ employees must establish formal employment rules covering working conditions, disciplinary procedures, and company policies. This requires filing with the labor standards office.
• Complex visa situations. If you're hiring foreign nationals with unusual visa situations, visa changes, or work restrictions, a 社労士 can navigate immigration compliance alongside employment law.
• 年末調整 (year-end adjustment). If you're not using HR software that handles this automatically, a 社労士 can process the required year-end tax reconciliation for all employees.

Typical costs and engagement models

• Ongoing retainer: ¥20,000–¥60,000/month for small companies
• Setup-only: ¥100,000–¥200,000 for initial registration and contracts
• Hourly consultation: ¥15,000–¥25,000/hour for specific questions
• 年末調整 service: ¥5,000–¥10,000 per employee annually

For most SMEs, the decision comes down to: Do you want to learn Japanese HR compliance yourself, or pay a professional to handle it? The cost of mistakes — penalties, employee complaints, labor disputes — often exceeds the cost of professional help.

Frequently asked questions