Severance Pay in Japan: An Employer’s Guide for 2026

Understanding severance pay in Japan can be confusing for international employers because Japanese law does not establish a general statutory severance payment that every employee automatically receives when dismissed. Instead, an employer's financial obligations can depend on a range of factors like dismissal notice requirements, employment contracts, company work rules, retirement allowance systems, and negotiated termination agreements. A PEO in Japan can employ and pay your staff there on your behalf.

This distinction is particularly important because no statutory severance does not mean an employee can easily be dismissed in Japan. Both due to a work culture that seeks to avoid such direct conflict, but also because Japanese employment law provides significant protection against unjustified dismissal, employers need to consider the reason for termination, the process followed, available alternatives, and the potential consequences of an employment dispute.

These protections have practical and legal consequences for employers as well as financial ones. According to Japan's Ministry of Health, Labour and Welfare (MHLW), its labor authorities handled nearly 1.2 million general labor consultations in FY2025, while applications for conciliation involving dismissal increased 12.6% year on year to 892 cases, reinforcing the importance of following a defensible termination process rather than treating severance as the only potential cost.

For international companies hiring or restructuring teams in Japan, understanding these rules before taking action can substantially reduce compliance and financial risk.

Is Severance Pay Mandatory in Japan?

No. Severance pay is not generally mandatory in Japan simply because an employer terminates an employee.

Unlike countries that establish statutory redundancy or severance formulas based on salary and length of service, Japan does not impose a universal statutory severance calculation. However, this does not necessarily mean an employer has no severance obligation.

An employee may be entitled to a payment if severance or a retirement allowance is established through other agreements such as:

• An employment contract
• Company work rules
• A retirement allowance or severance scheme
• A collective bargaining agreement
• Another binding company policy or agreement
• A negotiated termination or voluntary resignation agreement

Employers should therefore review all relevant employment documents before assuming that no severance payment is required.

Severance and Termination Payments at a Glance

Employers should therefore distinguish between severance pay, retirement allowances, outstanding wages, and dismissal notice allowances, dealing with each in turn as each can have different legal and tax consequences.

Severance Pay vs. Dismissal Notice Pay in Japan

One of the most important distinctions for foreign employers is between severance compensation and dismissal notice pay.

Japan may not generally require statutory severance, but employers are subject to statutory dismissal notice requirements.

Japan's 30-Day Dismissal Notice Rule

Under Article 20 of Japan's Labor Standards Act, employers generally need to give an employee at least 30 days' advance notice before dismissal.

If the employer does not provide the full notice period, it generally needs to pay the employee average wages for all missing days.

This means notice and payment can be combined.

However, this payment is not statutory severance pay.

It is compensation for failing to provide the complete statutory dismissal notice period.

Employers should also be aware that limited exceptions to the advance notice requirement exist. They should not assume that serious misconduct automatically allows an employee to be dismissed immediately without following the applicable procedures.

How Much Is Severance Pay in Japan?

There is no universal statutory formula for calculating severance pay in Japan.

Where severance is payable, the amount will therefore depend on the source of the employee's entitlement or the terms negotiated between the parties.

This makes Japan significantly different from countries where employers can calculate statutory severance simply by multiplying salary by years of service.

Example of a Negotiated Severance Package

Suppose an employee earns JPY 600,000 per month and the employer and employee agree on a voluntary resignation package equal to six months of salary.

The additional compensation in this example would be:

JPY 600,000 × 6 = JPY 3.6 million

Retirement Allowances vs. Severance Pay in Japan

Another source of confusion for international employers is the Japanese concept of a retirement allowance, or taishokukin (退職金).

Traditional Japanese employment practices have often included retirement allowance systems under which employees receive a lump-sum payment when leaving the company after a qualifying period.

However, a retirement allowance is not the same thing as universal statutory severance, as a company's retirement allowance rules typically occur at the natural end of an employee’s service and may consider factors such as:

• Years of service
• Final or average salary
• Employee grade
• Reason for leaving
• Retirement age
• Voluntary resignation
• Company-initiated termination

Whether an employee qualifies and how much they receive therefore depends largely on the employer's applicable scheme.

Although Japan does not impose a universal statutory severance entitlement, employer-provided retirement benefits remain widespread. The MHLW's latest comprehensive survey found that 74.9% of companies with 30 or more regular employees maintained a retirement benefit system, rising to more than 90% among companies with at least 1,000 employees.

When Can an Employer Dismiss an Employee in Japan?

The absence of statutory severance does not provide employers with unrestricted termination rights.

Under Japan's Labor Contract Act (労働契約法, Rōdō Keiyaku-hō), a dismissal that lacks objectively reasonable grounds and is not considered appropriate in general societal terms may be treated as an abuse of rights and therefore invalid.

Employers should therefore establish a legitimate reason and appropriate process before dismissing an employee, as the resulting forms of termination will affect what is necessary:

Ordinary Dismissal (普通解雇, Futsū Kaiko)

Ordinary dismissal, or futsū kaiko (普通解雇), is a dismissal based on reasons relating to the employee's ability, performance, suitability for the role, or other circumstances that may justify ending the employment relationship.

It may involve circumstances such as persistent performance problems or an inability to perform the employee's role.

However, poor performance does not necessarily provide an employer with an immediate right to dismiss an employee.

Depending on the circumstances, employers may need evidence showing that problems were identified and that reasonable measures were taken before dismissal.

Documentation can therefore be extremely important when an employer seeks to demonstrate that an ordinary dismissal was objectively reasonable.

Disciplinary Dismissal (懲戒解雇, Chōkai Kaiko)

Disciplinary dismissal, or chōkai kaiko (懲戒解雇), is generally one of the most serious disciplinary measures available to an employer.

Serious employee misconduct may justify disciplinary action and potentially dismissal.

Possible grounds could include serious fraud, theft, harassment, significant breaches of company rules, unauthorized disclosure of confidential information, or other serious misconduct.

However, employers should avoid assuming that labeling a dismissal "disciplinary" automatically eliminates all notice or procedural requirements.

Encouraged Resignation (退職勧奨, Taishoku Kanshō)

Rather than proceeding directly to unilateral dismissal, an employer may use encouraged resignation, or taishoku kanshō (退職勧奨).

Under this approach, the employer proposes that the employee voluntarily resign in an attempt to promote peaceful separation rather than unilaterally terminating the employment relationship.

The employer and employee may negotiate the conditions of departure, potentially including additional compensation, an agreed departure date, treatment of bonuses or benefits, or other terms.

However, a taishoku kanshō is not itself a dismissal. The employee must ultimately agree to resign.

Redundancy and Economic Dismissal (整理解雇, Seiri Kaiko)

Economic or redundancy dismissal is generally known as seiri kaiko (整理解雇) in Japan.

Economic difficulties, restructuring, or a desire to reduce headcount do not automatically give an employer the right to dismiss employees.

Japanese courts have traditionally assessed seiri kaiko by considering factors commonly associated with the four-factor framework for economic dismissal (整理解雇の四要素, seiri kaiko no yon yōso):

1. Necessity of workforce reduction (人員削減の必要性) – Whether there is a genuine business need to reduce the workforce.
2. Efforts to avoid dismissal (解雇回避努力) – Whether the employer took reasonable steps to avoid compulsory dismissals.
3. Reasonableness of employee selection (人選の合理性) – Whether the criteria used to select employees for dismissal were reasonable and appropriately applied.
4. Appropriateness of the dismissal procedure (解雇手続の相当性) – Whether the employer provided appropriate explanations, consultations, and procedures.

Employers considering seiri kaiko should therefore first assess alternatives such as reducing recruitment, limiting overtime, redeployment, transfers, voluntary departures, or other measures before relying on compulsory dismissal.

Example Cases

The distinctions that separate Seiri Kaiko for other forms of termination are more than technical terminology. MHLW dispute data recorded 26,616 disputes concerning ordinary dismissal, 3,356 concerning disciplinary dismissal, and 25,234 concerning encouraged retirement over 20 years, illustrating how termination procedures can become a significant source of employment disputes.

Recent large-scale restructurings demonstrate how these principles operate in practice. In 2025, Panasonic announced plans to reduce its global workforce by around 10,000 positions, including approximately 5,000 in Japan, as part of a restructuring expected to cost around ¥130 billion. The measures included offering early retirement to employees in Japan, illustrating how voluntary departure programs can form part of major Japanese workforce restructurings.

Furthermore, the restructuring environment may continue to evolve. In August 2026, Japan was reported to be considering new tax incentives encouraging companies to divest non-core businesses and reinvest the proceeds in growth areas. Japanese-related M&A activity had already reached a record $353 billion in 2025, highlighting the increasing importance of understanding the employment consequences of acquisitions, divestitures and restructuring.

Why Is Dismissing an Employee Difficult in Japan?

Japan's dismissal rules make an important distinction between the employer's contractual power to terminate employment and whether exercising that power is legally acceptable.

Certain dismissals are also specifically restricted by Japanese employment legislation, including dismissals based on protected circumstances.

The Ministry of Health, Labour and Welfare highlights restrictions concerning matters such as pregnancy, maternity leave, childcare and family care leave, workplace injury, union membership, and employees reporting certain Labor Standards Act violations.

This creates an important distinction for international employers in that Japan may not require universal statutory severance, but terminating an employee can still carry significant legal and financial risk.

Can an Employee Challenge a Dismissal in Japan?

Yes, employees who believe that their dismissal was invalid can challenge their employer through Japan's labor dispute resolution system.

Japan's Labor Tribunal system provides a specialized procedure for resolving individual employment disputes.

A dispute may ultimately result in outcomes including settlement or, depending on the legal process and circumstances, findings concerning the validity of the dismissal.

This matters because an employer's potential financial exposure is not limited to severance.

If a dismissal is found invalid, the employment relationship may be treated as continuing, potentially creating substantial financial consequences.

Employers should therefore assess the validity of the dismissal itself, rather than treating additional compensation as an automatic substitute for proper termination procedures.

How Is Severance Pay Taxed in Japan?

The tax treatment of severance and termination payments in Japan depends on the nature of the payment.

Certain qualifying payments made because of an employee's retirement or departure may be treated as retirement income rather than ordinary salary income for the purposes of tax.

Employers should also review their reporting procedures following recent tax changes. From January 1, 2026, the reporting obligation for retirement income withholding statements was expanded so that payers of retirement allowances must submit the relevant statement for all resident recipients, rather than only resident corporate officers under the previous rule.

What Must Employers Pay When an Employee Leaves Japan?

Severance is only one potential element of an employee's final compensation.

Depending on the circumstances, an employer may need to calculate several separate amounts.

These may include:

Employers should calculate each category separately rather than referring to the entire final payment as "severance." Doing so makes it easier to apply the correct employment, payroll, and tax treatment.

Japan Termination Checklist for Employers

Before dismissing an employee in Japan, employers should consider the following steps:

1. Establish the reason for termination. Determine whether the issue concerns performance, conduct, redundancy, incapacity, or another legitimate reason.
2. Review the employment contract. Check termination provisions, notice requirements, and any promised benefits.
3. Review company work rules. Confirm that the proposed grounds and procedures are consistent with the company's established rules.
4. Check collective agreements. Determine whether a union or collective bargaining agreement creates additional obligations.
5. Check retirement and severance policies. Identify any contractual or company-specific payment entitlement.
6. Assess whether the dismissal is legally justified. Consider whether the reason is objectively reasonable and the dismissal proportionate.
7. Review supporting documentation. Performance reviews, warnings, correspondence, meeting records, and other evidence may be important.
8. Consider alternatives. Depending on the situation, these might include training, reassignment, redeployment, voluntary resignation, or other measures.
9. Determine the notice period. Generally provide at least 30 days' notice or calculate the applicable dismissal notice allowance.
10. Calculate final compensation. Separate salary, notice allowance, retirement benefits, contractual severance, and negotiated compensation.
11. Consider a negotiated departure. Where appropriate, determine whether mutually agreed resignation offers a more predictable solution.
12. Review tax and payroll treatment. Different termination payments may receive different treatment.
13. Document the termination. Maintain clear records of the reason, process, dates, payments, and agreements.
14. Complete offboarding requirements. Coordinate final payroll, benefits, social insurance procedures, certificates, and company property.

Because the validity of a dismissal depends heavily on the facts of the individual case, employers should obtain appropriate local professional advice before proceeding with complex or disputed terminations.

Hiring and Managing Employees in Japan Through an Employer of Record

Japan presents employers with an unusual combination of strong dismissal protections and severe labor shortages. A 2025 Reuters survey found that 66% of Japanese companies considered labor shortages to be having a serious or fairly serious impact on their businesses, while 59% were responding by extending retirement ages or rehiring retired workers. Employers considering redundancies should therefore weigh immediate cost reductions against the potential difficulty and expense of rebuilding their workforce later.

International businesses entering Japan need to manage employment contracts, payroll, benefits, social contributions, HR administration, and eventually employee offboarding in accordance with Japanese requirements.

Setting up a Japanese legal entity solely to hire a small number of employees can add significant time, expense, and administrative complexity.

An Employer of Record (EOR) in Japan provides an alternative.

Through an EOR arrangement, companies can hire employees in Japan without first establishing their own local entity. The EOR acts as the legal employer and manages key employment administration, while the client company directs the employee's day-to-day work.

An EOR can support areas including:

• Compliant employment contracts
• Payroll processing
• Statutory contributions
• Benefits administration
• HR support
• Employee onboarding
• Employment documentation
• Offboarding administration
• Local compliance support

However, using an EOR does not remove Japanese employee protections. Instead, International companies are able to work closely with their EOR before taking action involving an employee's performance, redundancy, discipline, or termination and benefit from in-depth local legal expertise.

To learn more about how this workforce solution can offer enhanced employer liability coverage in Japan, speak to our expert advisors today.