What Happens When You Use an EOR Service in Japan?

Introduction

Once a company decides to use Japan EOR Service, the next question is rarely asked clearly enough: what exactly does “the EOR handles compliance” mean in practice?

It means the EOR is the registered legal employer. Social insurance, payroll, the Article 36 overtime agreement, work visa sponsorship, and the December year-end adjustment all sit with the provider. The foreign company doesn’t step back from the employment relationship. Day-to-day work direction, performance management, compensation decisions, and termination rationale all sit with the client. In Japan specifically, several compliance items look like they belong to one side but actually involve both, and getting those wrong creates problems that are harder to untangle after the fact.

What Japan EOR Services Are Inclusive Of

When a company engages Japan EOR Service, the provider takes on everything that requires a registered Japanese entity to execute.

Social Insurance Enrollment

Four schemes are covered: health insurance (kenko hoken), employees’ pension insurance (kosei nenkin), employment insurance (koyo hoken), and workers’ accident compensation insurance (rousai hoken). Health and pension enrollment must be completed within five days of hire; employment insurance within ten days.

Payroll and Tax Withholding

Monthly income tax withholding runs under the gensen choshu system. The EOR also calculates and remits juminzei (inhabitants’ tax) through special collection, and runs the nenmatsu chosei (year-end tax adjustment) in December, which settles any gap between monthly withholding and actual annual liability.

Article 36 Agreement Filing

Before any overtime beyond statutory working hours (8 hours/day, 40 hours/week) can be required, an Article 36 agreement must be filed with the Labour Standards Inspection Office. The EOR files it as the registered employer.

Work Visa Sponsorship

Only a registered legal employer in Japan can sponsor a Certificate of Eligibility (COE) for a foreign national. The EOR handles the application, immigration bureau processing, and renewals.

Rules of Employment (Shugyo Kisoku)

Companies with 10 or more employees must file rules of employment with the Labour Standards Inspection Office. Filing sits with the EOR as the employer of record.

The EOR’s role is to hold the statutory obligations that require a registered Japanese entity to fulfill. The foreign company’s role is to make the decisions that determine what those obligations look like in practice.

What Stays With the Foreign Company in Japan

Who Directs the Employee’s Day-to-Day Work

The EOR’s name goes on the employment contract, but the foreign company runs the actual work. Tasks, project assignments, reporting lines, deadlines, and daily priorities are all set by the client. Without input from the client, the EOR has no visibility into how the employee performs against those expectations.

Japan’s Labour Contract Act gives employees strong security of employment, which means any action the client takes that might affect employment outcomes (changing a role materially, reducing responsibilities, adding burdens that weren’t in the original role) can have legal implications that run through the EOR. Those consequences originate with the client’s decisions, not the EOR’s.

Performance Documentation Stays With the Client

Performance improvement processes, written feedback, and documented underperformance discussions are the client’s responsibility. Since the EOR doesn’t observe the employee’s work, it cannot generate the documentation that a disciplinary or performance process requires. If a termination for cause is ever needed, it starts with the client’s records, not the EOR’s.

Japanese courts assess whether a dismissal has reasonable grounds using factors that include the severity of the cause, whether the employer made genuine efforts to improve the situation before terminating, and whether the penalty fits the conduct. That effort and documentation have to come from the client.

Compensation Above Statutory Floors

Salaries must meet Japan’s minimum wage requirements, set prefecturally and reviewed annually, which the EOR monitors. Tokyo’s minimum wage reached ¥1,163 per hour from October 2024. Beyond that floor, salary levels, bonus structures, and any additional benefits are the client’s decisions. What the client sets, the EOR administers.

The Decision to Terminate

Under the Labour Contract Act, dismissal requires objectively reasonable grounds and what Japanese courts call “social reasonableness” (meaning the dismissal must make sense given the overall employment context, not just be technically justified). Procedural execution of any termination sits with the EOR: notice periods, severance where applicable, and social insurance deregistration. Business rationale and supporting documentation come from the client.

Japan-Specific EOR Items That Involve Both Parties

The Article 36 Agreement and Actual Overtime

The EOR files the Article 36 agreement as the legal employer. But the overtime limits set in that agreement are informed by the client’s actual operational requirements. A client that routinely expects 60-hour weeks is operating outside what a standard Article 36 agreement covers. The EOR, as the registered employer, carries the legal exposure for any violation.

The client needs to communicate realistic working hour expectations before the Article 36 agreement is filed, not after overtime issues surface.

The September Social Insurance Grade Revision

The September grade revision is filed by the EOR, but the contributions that result are determined by what the client actually paid in the April-June window. The client’s pay decisions in those three months drive the September outcome.

Every September, Japanese employers file a santei kiso todoke (the annual social insurance grade revision) based on actual pay from April, May, and June. The EOR handles the filing, but the new grade is determined by what the client actually paid in that window. Bonuses, allowances, and off-cycle increases in those three months all shift the grade and the contributions that flow from it.

The Five-Year Fixed-Term Conversion Rule

Under Article 18 of the Labour Contract Act, an employee on fixed-term contracts has the right to request conversion to an indefinite-term contract once they have accumulated five years of cumulative fixed-term employment with the same employer. In an EOR arrangement, the EOR is the contracting employer. Five years of cumulative fixed-term contracts with the same EOR can trigger this right.

In practice, both the client and EOR should track cumulative contract duration and factor the five-year threshold into renewal decisions before it becomes an issue.

Work Rules and Actual Working Conditions

The EOR files the rules of employment (shugyo kisoku) as the employer of record. But those rules must reflect the actual working conditions: working hours, leave entitlements, disciplinary procedures. The client’s operational setup determines what the rules should say. If the filed rules don’t match reality, the EOR is exposed to a compliance gap it didn’t create.

Frequently Asked Questions

1. What does an EOR in Japan actually cover?

Social insurance enrollment (health, pension, employment, and accident compensation insurance), payroll and income tax withholding, juminzei (inhabitants’ tax) remittance, the nenmatsu chosei (year-end tax adjustment), Article 36 agreement filing, employment contracts in Japanese, work visa sponsorship for foreign nationals, and rules of employment filing for companies with 10 or more employees.

2. What is the Article 36 agreement and why does it involve the client?

An Article 36 agreement is a filing under Article 36 of Japan’s Labour Standards Act that authorises overtime beyond the statutory 8-hour day and 40-hour week. The EOR files it as the registered employer. But the overtime limits in the agreement need to reflect the client’s actual operational requirements. A company that expects more overtime than the agreement covers is creating a compliance exposure for the EOR as the legal employer. Working hour expectations need to be set clearly before the agreement is filed.

3. Who handles the nenmatsu chosei in Japan?

The EOR handles the nenmatsu chosei (year-end tax adjustment) in December. This annual reconciliation settles the difference between what was withheld from each employee throughout the year and their actual tax liability. The EOR runs the calculation and issues any refunds or collects any shortfall. The client doesn’t need to be involved operationally, but should flag any income the employee received outside of EOR payroll if that’s relevant to the adjustment.

4. Can an employee on a fixed-term EOR contract request permanent employment?

After five years of cumulative fixed-term contracts with the same employer (the EOR, in this case), an employee can request conversion to an indefinite-term contract under Article 18 of the Labour Contract Act (the same law that governs dismissal standards). This applies to the EOR’s contracts with the employee, not the client’s arrangement with the EOR. It’s a planning consideration for any long-running EOR engagement, and something the client should discuss with their EOR provider before reaching that threshold.

5. Can EOR services in Japan sponsor a work visa?

Yes. Only a registered legal employer in Japan can sponsor a work visa, and the EOR fills that role. The EOR applies for the Certificate of Eligibility (COE) through Japan’s Immigration Services Agency on the employee’s behalf. This is one of the main practical advantages of EOR services in Japan for companies hiring foreign nationals without their own registered entity.

The handover in Japan is real: contracts, social insurance across four schemes, payroll and tax, the Article 36 overtime agreement, visa sponsorship, and the year-end adjustment all move to the EOR. What doesn’t move is the operational substance: who works on what, how they’re managed, and the rationale when employment decisions need to be made. Knowing where that line sits from the start prevents the kind of compliance gaps that are much harder to fix mid-engagement. Talk to the Galaxy APAC team about setting up Japan EOR correctly from day one.