Wage Protection under Japanese Labor Law: Explaining the Fundamental Principles Managers Must Follow

The payment of wages is a fundamental obligation for employers and forms the cornerstone of labor contract relations in Japan. For businesses operating in Japan, adhering to the strict legal framework governing wage payments is an essential part of risk management. This area is primarily regulated by two laws. One is the ‘Japanese Civil Code,’ which establishes the reciprocal relationship between labor and ‘remuneration’ based on the principle of freedom of contract. The other is the ‘Japanese Labor Standards Act,’ a special law that imposes mandatory regulations to protect workers, assuming an imbalance of bargaining power between employers and employees. In particular, the provisions regarding ‘wages’ set forth in the Labor Standards Act take precedence over the general principles of the Civil Code and have a direct impact on corporate activities. This article provides a detailed explanation of the core legal principles of wage protection under the Japanese Labor Standards Act, focusing on the ‘Five Principles of Wage Payment’ stipulated in Article 24 of the Act, along with specific legal provisions and important case law. The aim is to assist corporate management, shareholders, and legal affairs personnel in accurately understanding these complex regulations, ensuring compliance, and effectively mitigating legal risks.

Wages Under Japanese Law: The Interplay between Civil Code and Labor Standards Act

In the Japanese legal system, the compensation for labor is governed by two different perspectives: the “Japanese Civil Code” and the “Japanese Labor Standards Act,” and understanding this distinction is extremely important.

Perspective Under the Japanese Civil Code: ‘Remuneration’ in Employment Contracts

Article 623 of the Japanese Civil Code defines an employment contract as one “whereby one party agrees to work for the other party, who in turn agrees to provide remuneration for the labor” . Here, ‘remuneration’ is considered a private obligation based on the agreement between the parties, i.e., based on the principle of freedom of contract. The Civil Code does not specify detailed rules for the payment of remuneration and generally stipulates that workers cannot claim their remuneration until they have completed the promised labor (Japanese Civil Code Article 624, Paragraph 1) . This means that in a world without the Labor Standards Act, the timing and method of payment would be entirely subject to the agreement of the parties.  

Perspective Under the Japanese Labor Standards Act: ‘Wages’ as a Right to be Protected

In contrast, the Japanese Labor Standards Act personalityizes itself as a public law that sets the minimum standards for labor conditions. Article 11 of the Act broadly defines ‘wages’ as “all payments made by an employer to a worker as compensation for labor, regardless of the name given to them” . As a special law in relation to the Civil Code, its provisions have imperative force. In other words, any agreement in an employment contract that does not meet the standards set by the Labor Standards Act is invalid in that respect under Article 13 of the Japanese Labor Standards Act, and the standards set by law are automatically applied .  

The relationship between these two laws is not just a matter of differing definitions. It reflects a philosophical shift in law, moving labor relations from the realm of private contractual autonomy to a public regulatory domain where the state intervenes to provide minimum protection. While the Civil Code assumes ‘agreement’ between equal parties, the Labor Standards Act presupposes structural inequalities in the power relationship between employers and workers and intervenes to protect the livelihood of workers. Therefore, even if individual consent has been obtained from workers regarding the method of wage payment, if the content of that consent violates the standards set by the Labor Standards Act, it is legally invalid. Misunderstanding this point can lead to serious compliance errors.

The table below summarizes the conceptual differences between ‘remuneration’ under the Japanese Civil Code and ‘wages’ under the Japanese Labor Standards Act.

The Five Principles of Wage Payment: Core Provisions of the Japanese Labor Standards Act

The Article 24 of the Japanese Labor Standards Act is a provision that forms the substantive core of wage protection, known as the “Five Principles of Wage Payment” . This article stipulates that “wages must be paid in currency, directly to the worker, and in full.” It also requires that “wages must be paid at least once a month on a fixed date” . These five principles are not independent of each other; rather, they work together as a comprehensive system to achieve the single goal of stabilizing the livelihood of workers. The principles of “payment in currency” and “direct payment” ensure that wages reach the hands of workers in a safe and accessible manner, while “full payment” protects the value of those wages. Moreover, “payment at least once a month” and “payment on a fixed date” secure the predictability of income. Understanding this overall purpose is essential when interpreting the exceptions to each principle.  

The Principle of Payment in Currency

As a principle, wages in Japan must be paid in cash in the currency that has legal tender status, namely Japanese yen . Payment in foreign currencies, checks, or in-kind such as goods is generally prohibited to protect workers from the inconvenience of conversion and the instability of value .  

There are important exceptions to this principle that align with the realities of modern economic activities. The most common exception is the payment of wages into a bank account designated by the worker, provided that the worker’s explicit consent has been obtained . In this case, the worker’s consent alone is not sufficient; often, the conclusion of a labor-management agreement regarding the implementation of bank transfers is also required . In recent years, following amendments to the Enforcement Regulations of the Labor Standards Act, wage payments to accounts held with funds transfer service providers designated by the Minister of Health, Labour and Welfare (so-called digital payments) have become possible, assuming the worker’s consent . Additionally, with the worker’s consent, it is permissible to pay severance payments by check, and if stipulated by a labor agreement, to provide commuting allowances in the form of commuter passes .  

It is important to note that the ‘consent’ required for these exceptions to apply is not a one-time, irrevocable agreement. This was clarified by the Kochi Summary Court in its judgment on March 18, 1981 (the Mikuni Taxi case) . In this case, a worker who had initially consented to bank transfer later demanded payment in cash, which the employer refused. The court ruled that the employer’s response violated the principle of payment in currency. This precedent suggests that the principle of payment in currency is a fundamental right of workers, and that exceptions for convenience (such as bank transfers) do not permanently waive this basic right. Therefore, companies must maintain practical systems to pay wages in cash to workers who do not consent to, or who retract their consent for, bank transfers.  

The Principle of Direct Payment of Wages Under Japanese Law

To eliminate intermediary exploitation and ensure that the compensation for labor is securely transferred to the workers themselves, wages must be paid directly to the individual .  

Under this principle, even if a worker has appointed a representative, it is illegal to pay wages to that agent (voluntary agent) . Even if the worker is a minor, payment to their legal representative, such as a parent or guardian, is explicitly prohibited by Article 59 of the Japanese Labor Standards Act . Furthermore, even if a worker has financial debts, it is not permissible for an employer to pay wages directly to the creditor .  

The exception to this rule is payment to a person’s ‘messenger’ . A messenger is someone who only conveys or executes the individual’s decisions without having any discretionary authority. For example, a case where a family member comes to receive a sealed pay envelope on behalf of a worker who is hospitalized due to illness falls under this category. However, the distinction between an agent and a messenger can sometimes be ambiguous and carries legal risks; therefore, in practice, the safest method is direct payment to the individual or transfer to an account in the individual’s name, with their consent .  

A landmark case that demonstrates the importance of this principle is the Supreme Court decision on March 12, 1968 (Showa 43) . In this case, a worker transferred their right to receive severance pay (wage claim) to a third party. The Supreme Court ruled that while the contract of assignment of the claim might be valid between the parties (the worker and the assignee) under civil law, it does not affect the employer’s obligations under the Labor Standards Act. In other words, the employer still has the duty to pay the wages (in this case, severance pay) directly to the worker, and the assignee cannot demand direct payment from the employer. This judgment illustrates that public policy aimed at worker protection can intervene in the effectiveness of private transactions under civil law and even limit their legal effects, symbolizing the imperative nature of the Labor Standards Act. Therefore, companies must continue to pay the worker directly, ignoring any notice of assignment of wage claims from the worker’s creditors.  

The Principle of Full Payment of Wages Under Japanese Law

Under Japanese employment law, wages must be paid in full, and employers are generally prohibited from unilaterally deducting any amount from wages (known as “withholding”). This principle aims to ensure that workers receive the full amount of compensation promised to them, thereby securing the stability of their economic life.  

There are exceptions to this principle. Firstly, items that are mandated by law to be deducted, such as income tax, resident tax, and social insurance premiums, can be deducted from wages without any special agreement. Secondly, for non-statutory items such as company housing rent or union dues, a written agreement (labor-management agreement) must be concluded with a labor union representing the majority of the workers at the workplace (or a representative of the majority of workers if there is no union) to deduct these items from wages.  

A particularly complex legal issue arises when an employer seeks to offset its claims against a worker (for example, claims for damages or repayment of loans) against the worker’s wage claims. As a rule, such unilateral set-offs are in violation of the full payment principle and are not permitted. This was demonstrated in the Supreme Court decision on November 2, 1956 (the Kansai Precision Instruments case), where the court did not allow the employer to offset its claimed damages against wages.  

However, case law has recognized two limited exceptions. One is “adjustment set-off,” which refers to the act of settling overpayments that occurred due to wage calculation errors during subsequent wage payments. The Supreme Court decision on December 18, 1969 (the Fukushima Prefecture Teachers’ Union case) allowed such adjustments, provided that the time of the overpayment and the time of settlement were reasonably connected and the amount offset was small enough not to threaten the worker’s economic life. However, cases such as offsetting half of a bonus without prior notice have been judged illegal, even as adjustment set-offs (Tokyo High Court decision on April 9, 2008).  

The other exception is set-off based on the worker’s “free will and consent.” The Supreme Court decision on November 26, 1990 (the Nisshin Steel case) is a leading case on this point. In this case, the worker voluntarily requested to repay a loan from the employer with their severance pay, and there was no coercion from the employer in the decision-making process, making the set-off between the severance pay and the loan valid. This case illustrates that mere formal consent, such as a signature on a consent form, is insufficient; it is strictly examined whether the consent was truly based on free will, unaffected by the unequal power relationship inherent in the employment relationship. Considering the high threshold for the “quality of consent,” it can be said that the safest choice for companies is to adopt a policy of not offsetting against wages as a general rule.  

The Principles of Monthly Payment and Fixed Payday in Japan

These two principles function together to bring regularity and predictability to workers’ income.  

The “Principle of Monthly Payment” requires that there be at least one payday within a calendar month (from the 1st to the last day). This rule applies even if an annual salary system is adopted, necessitating the division of the annual salary into at least 12 installments to be paid monthly. For example, combining a few days’ wages of a worker who joined at the end of the month with the following month’s wages and paying them in the subsequent month would violate this principle.  

The “Principle of Fixed Payday” demands the specification of the exact payday. Stipulations such as “the 25th of every month” or “the last day of every month” are legal, but allowing a range like “between the 20th and 25th of every month” or setting a variable date such as “the third Friday of every month” is illegal because the payday is not specified.  

Exceptions to these principles are provided for under the proviso of Article 24, Paragraph 2 of the Japanese Labor Standards Act. Wages paid on an ad-hoc basis (such as marriage allowances), bonuses, and other allowances paid according to work performance over a period exceeding one month, which by their nature are difficult or inappropriate to pay on a fixed monthly date, are excluded from the application of these principles.  

The Risks of Non-Compliance with Legal Regulations in Business Management

Violating any of the five principles of wage payment stipulated in Article 24 of the Japanese Labor Standards Act can result in criminal penalties, including fines of up to 300,000 yen (approximately $2,800 USD) under Article 120 of the same act. In Japanese labor law, not only the individual responsible for the violation but also the corporation itself is often subject to punishment under dual liability provisions, meaning that companies cannot escape responsibility.

At first glance, a fine of 300,000 yen might seem insignificant, especially for large corporations. However, this direct penalty is often just the beginning of a much larger business risk. Investigations by the Labor Standards Inspection Office can extend beyond the initial violation, potentially leading to a comprehensive audit of a company’s overall labor management. This can result in corrective recommendations that force changes in business operations. Moreover, public disclosure of legal violations can significantly damage a company’s social credibility, negatively impacting recruitment activities, transactions with customers, and even fundraising efforts. Therefore, adherence to the principles of wage payment should not be seen merely as a way to avoid fines but as a critical issue at the core of corporate governance, supporting the sustainable growth and stability of a company.

Summary

The five principles of wage payment defined by the Japanese Labor Standards Act, namely “payment in currency,” “direct payment,” “full payment,” “at least once a month payment,” and “payment on a fixed date,” are not merely administrative guidelines but are strict and mandatory legal requirements backed by strong public policy for worker protection. These principles cannot be altered or waived by private agreement with workers. For all companies operating in Japan, deeply understanding these rules and establishing an internal system to ensure compliance is an essential duty to build stable labor-management relations and avoid legal risks. Monolith Law Office has a proven track record of providing extensive advice on complex issues related to Japanese labor law, especially on compliance with wages and salary calculations, to a diverse range of domestic and international clients. Our firm boasts multiple English-speaking attorneys with foreign legal qualifications, in addition to being well-versed in Japanese legal affairs. This combination of language proficiency and legal expertise across multiple jurisdictions uniquely enables us to support foreign-affiliated and multinational companies in aligning their global HR policies with Japanese regulatory requirements. From reviewing and assessing your company’s labor management systems to representing you in the event of a dispute, we offer specialized legal services. Please do not hesitate to consult us for professional legal support. The source used in this report can be found here[ja].