Hiring in Japan: What foreign companies need to know before building their team

Japan's Labour Standards Act sets the foundational minimum standards for employment conditions, including working hours, rest periods, annual leave, and termination procedures. These standards apply to all employees working in Japan, regardless of the nationality of the employer.

Beyond the statutory framework, Japanese courts have developed a doctrine — known as abusive dismissal (kaiko-ken no ranyo) — that makes it extremely difficult for employers to terminate employees without objective and socially acceptable reasons. This doctrine has been codified in the Labour Contract Act and applies even where an employment contract contains termination provisions.

Foreign companies accustomed to more flexible employment regimes should approach Japan's termination landscape with particular care.

Indefinite-term contracts The standard form of employment in Japan, carrying the strongest protections under the Labour Contract Act. Employees on indefinite-term contracts enjoy the full benefit of the abusive dismissal doctrine.

Fixed-term contracts Fixed-term contracts offer greater flexibility and are commonly used by foreign companies entering Japan for the first time. However, they must be structured carefully:

• Under the Labour Contract Act, an employee employed on successive fixed-term contracts for a cumulative period exceeding five years has the right to request conversion to an indefinite-term contract
• This right cannot be refused by the employer
• Companies should maintain clear records of contract renewals and implement a deliberate strategy for managing the five-year threshold

All companies employing staff in Japan must enroll employees in the following schemes from the date of hire:

Social insurance:

• Health Insurance (Kenko Hoken) — covers medical expenses; employer and employee contributions are split approximately equally
• Employees' Pension Insurance (Kosei Nenkin) — Japan's earnings-related pension scheme; employer contributions are significant and should be factored into total employment cost modelling

Labour insurance:

• Workers' Accident Compensation Insurance — covers work-related injuries; premiums are borne entirely by the employer
• Unemployment Insurance — both employer and employee contribute

Registration must be completed promptly with the Japan Pension Service, the relevant health insurance association, the Labour Standards Inspection Office, and Hello Work.

Payroll in Japan involves several specific compliance obligations:

• Income tax withholding: Employers must withhold income tax from employee salaries monthly and perform an annual year-end adjustment (nenmatsu chosei)
• Residence tax: Assessed on the prior year's income and collected via payroll deduction from June each year

Mandatory and customary benefits: In addition to statutory contributions, employers are expected to provide commuting allowances.

Foreign nationals working in Japan require an appropriate visa status. The most common categories include:

• Engineer/specialist in humanities/international services — for professionals in technical, legal, accounting, and business roles
• Intra-company transferee — for employees transferred from an overseas office of the same company
• Business manager — for individuals managing a Japanese business, including representative directors

Visa applications are submitted to the Immigration Services Agency of Japan. Companies should build visa lead times into their hiring plans and ensure the sponsoring entity meets all eligibility criteria.

Based on the experience of foreign companies that have successfully established operations in Japan:

• of fixed-term contacts can make hiring more difficult; most candidates will expect indefinite-term contracts
• Invest in bilingual employment agreements that reflect both Japanese legal requirements and the company's global HR policies
• Engage a local payroll service provider to manage end-to-end payroll calculations and social & labor insurance compliance
• Map mandatory versus customary benefits before making offers to candidates
• Consider hybrid work arrangements, which have become an important factor in attracting bilingual talent in Japan's competitive labour market

Japan's employment landscape is one of the most distinctive aspects of operating in the country. Foreign companies that take the time to understand the legal framework, structure their employment arrangements carefully, and invest in local HR expertise are far better positioned to build a stable and motivated workforce.

Getting employment right from the outset is not just a compliance matter — it is a foundation for sustainable business growth in Japan.

Vistra's People & HR team supports foreign companies at every stage of their Japan employment journey — from workforce planning and employment contract drafting to payroll setup, social insurance registration, visa support, and ongoing HR compliance.

Our specialists combine deep knowledge of Japan's employment framework with Vistra's global HR capabilities, helping companies navigate the complexities of hiring in Japan with confidence.

Contact Vistra to discuss your Japan employment and HR requirements.