With over 3 million freelancers in Japan, working with contractors is a great way to streamline operations in the country. However, Japan is well-known for having complex and very pro-worker employment regulations. This means it’s more important than ever to know how to safely manage and pay contractors in Japan.
In this article, we discuss Japan’s independent contractor regulations. We also look at 4 different ways to pay contractors in Japan and what you need to do to protect all parties involved.
What are the Differences Between Independent Contractors and Employees in Japan?
Defining what makes an independent contractor in Japan is harder than in many other countries. This is because Japan does not have an explicit definition for this worker type. Instead, all workers in Japan are categorized into 3 separate types:
– permanent employees (seisha-in 正社員)
– contract employees (keiyakusha-in 契約社員)
– contracted employees (hakensha-in 派遣社員)
The first refers to full-time employees, the second to fixed-term temporary employees, and the third to temporary staff, usually contracted through a staffing agency. None of these would be classed as an independent contractor status in other countries.
All workers types above are employees in the traditional sense. They are subject to the management and organizational structure of their company and paid regular wages.
Independent contractors in Japan are currently not affected by any of the country’s labor laws or protections. In many cases, contracting may even be done through verbal agreements, although this is changing. In general, work is currently underway to rectify and clarify the situation which should help companies to hire and pay contractors in Japan.
Instead, a contractor in Japan should be hired through an explicit work agreement, or independent contractor agreement (gyomu itaku keiyaku 業務委託契約 ). The agreement is made between the client company and the contractor’s company. This would likely be a sole proprietor (kojin jigyo or 個人事業) which they set up when they begin contracting.
This agreement sets out the work expected from the contractor, the project deadlines or work period, compensation expected, and defines them as outside the chain of command and responsibility of the company.
From the perspective of the client company, this agreement clearly states that the contractor is not eligible for the same protections or benefits as their employees.
Which Employment Laws or Benefits Relate to Contractors in Japan?
As independent contractors are not technically “workers” according to Japanese law (Japanese Civil Code and the Labor Standards Act), they aren’t eligible for any of the benefits or protections of an employee lie company subsidized health insurance. Instead, a contractor-client agreement functions as a relationship between companies.
As a result, companies do not manage tax or social security contributions for the contractor. Instead, they simply pay the contractor for the work performed they provide as laid out in their independent contractor agreement.
Because they are not employees of a company, contractors cannot be obliged to work for a single client company. However, the law is less clear than in other countries about whether a contractor must work for multiple clients or may receive a certain percentage of their income from a single source.
On the other hand, Japanese law is clear on the risks associated with misclassifying a worker. Should a freelancer be found to be treated as an employee (i.e. managed or paid as an employee, or working according to company-organized schedules or using their workspace/tools) the worker is seen to be losing the benefits that come with employee status.
As a result, the company could be subject to a fine of up to JPY 300,000, and back payment of employer social security contributions with the possibility of criminal charges.
How Do Japanese Taxes and Other Payroll Costs Relate to Contractors in Japan
When client companies pay contractors in Japan, they are not responsible for deducting, managing, or paying either tax or social security contributions as with employees. They are also not responsible for paying employment taxes or a separate employer contribution to social security funds.
As a result, these costs should not be factored into expected compensation when paying contractors in Japan.
Freelancers in Japan file their taxes and make contributions to their social security fund independently or through an umbrella company.
How to Hire and Pay Contractors in Japan
Contractors can be found in a number of ways in Japan, notably through a recruitment agency in Japan or through online platforms. There are several specialist options like Crowdworks and Lancers, or even Indeed in Japan. However, fluency in Japanese will be a minimum requirement for success.
A contractor work agreement is made between a client company and a sole proprietor (or small limited company in some cases) so it’s a good idea to ensure the contractor has properly set up their trading entity before beginning.
The contractor can then be engaged directly or through a third-party organization such as an umbrella company or Employer of Record (EOR) service provider. A third party will help to arrange a safe way to pay contractors in Japan without fear of misclassification errors during the payment process, so they are a good choice for those unfamiliar with the Japanese language or law.
If engaging a contractor directly, the client company draws up an independent contractor work agreement (also called an outsourcing agreement or contract). This lays out the details of the work that the contractor will provide, the period of time expected for the project, and the pay expected by the contractor.
The client will then pay contractors in Japan directly according to the terms of this agreement. Importantly, these payments should be made separately and distinctly from employee salary payments to avoid any suspicion of misclassification.
4 Different Ways to Pay Independent Contractors in Japan Safely
1. Direct Deposits
Despite the fact that direct deposits are typically used to pay employees, they can also be used to pay contractors in Japan once or regularly depending on your work agreement and payment schedule.
When doing this, take care to keep contractor payments separate from other payments provided to regular employees. Furthermore, bear in mind that you shouldn’t make deductions in the same manner as you would for employees.
The majority of contractors used to prefer checks as their preferred form of payment, but they are now far less common. Checks are less reliable due to their increasing scarcity and bounce risk. They take longer to process than electronic payments and are more prone to loss.
3. PayPal or Other Online Payment Systems
Due to a rise in companies that exclusively accept electronic payments online as well as relatively high fees, PayPal has experienced significant declines in popularity over time. When paying independent contractors all around the world, these Internet payment methods are still quick and easy.
4. Guaranteed Payroll Services
Payroll partners and outside services are specifically designed to pay contractors in Japan on time and in accordance with the law. These could be an umbrella company that does payroll administration or a PEO that is legally allowed to handle payroll through HR outsourcing services.
What You Can Do If You Want to Convert an Independent Contractor into an Employee in Japan
Due to their specialist skills, the cost required to pay contractors in Japan may make long-term relationships inefficient. As a result, you may want to find a way to retain their skills while lowering overall labor costs. One way to do this may be to transition that contractor into an employee.
As independent contractors in Japan are not classed as a separate form of workers, should the opportunity arise to convert a contractor into an employee, then they simply have to sign an employment contract just as with any other hire.
However, the difficulty may lie in convincing the freelancer to give up the independence they have enjoyed to that point in exchange for the security and benefits of an employee.
They may also have to be convinced of the usefulness of an employment contract with a single employer as opposed to working with multiple clients as before. As a result, they may have to be offered additional incentives to be convinced.
International companies wishing to hire contractors as employees in this way will have to either have their own company structure in Japan or work with a Professional Employer Organization (PEO) or EOR to manage HR for their new employees.