Understanding Corporate Responsibility and Risk Management through the Three Tiers of Japan's Workers' Compensation System

In corporate activities, the occurrence of work-related accidents is one of the unavoidable management risks. All companies operating in Japan must accurately understand the legal system in place to address this risk and take appropriate measures. The Japanese Workers’ Accident Compensation Insurance System is not a single mechanism but consists of three major layers. Firstly, there is the government-managed compulsory insurance system based on the Japanese Workers’ Accident Compensation Insurance Law, known as “Workers’ Accident Compensation Insurance (Labor Insurance).” Secondly, there are “claims for damages” where companies are held directly responsible under Japanese Civil Law for damages that exceed the coverage of this public insurance. Thirdly, there is the “Labor Accident Excess Liability Insurance System,” which is a voluntary insurance to manage the civil liability risk. These three layers are interrelated, each constituting a company’s legal obligations, financial risks, and strategic options. This article systematically explains the overall structure of this complex system from the perspective of corporate executives and legal affairs personnel, clarifying the scope of a company’s responsibility for work-related accidents in Japan and practical risk management methods.

Overview of the Japanese Workers’ Accident Compensation Insurance (Workers’ Compensation Insurance) System

The Japanese Workers’ Accident Compensation Insurance system, commonly known as “Workers’ Compensation Insurance,” is a public insurance system managed by the government based on the Japanese Workers’ Accident Compensation Insurance Law. Its purpose, as defined in Article 1 of the Japanese Workers’ Accident Compensation Insurance Law, is to provide prompt and fair protection to workers who suffer from occupational accidents, injuries, diseases, disabilities, or death due to work-related reasons or commuting. Through this system, necessary insurance benefits are provided to the affected workers and their bereaved families, promoting the workers’ social reintegration and stabilizing their livelihoods.  

One of the most important features of this system is its mandatory application. Article 3 of the Japanese Workers’ Accident Compensation Insurance Law stipulates that any business employing at least one worker is subject to the system as a mandatory application business, regardless of the type or size of the business, or whether it is a corporation or an individual enterprise. The term “worker” here includes not only full-time employees but also part-time and temporary workers. Therefore, as soon as a company employs even one worker in Japan, it has a legal obligation to enroll in the Workers’ Compensation Insurance.  

From a financial perspective, unlike health insurance or welfare pension insurance in Japan, the entire premium for Workers’ Compensation Insurance is mandated to be borne by the employer, with no contribution from the workers. The premium amount is calculated by multiplying the total wages paid to all workers by the Workers’ Compensation Insurance rate set for each type of business. This rate is set higher for industries with higher risks, based on past accident occurrences and other factors.  

If a company neglects this enrollment obligation, it faces significant disadvantages. In the event of an occupational accident during a period of non-enrollment, the government will not only collect the insurance premiums for the past two years and a surcharge (10%) retroactively but may also collect the full amount (100%) of the insurance benefits paid to the affected worker in cases of intentional non-compliance, or a portion (40%) in cases of serious negligence. Furthermore, intentionally failing to report an occupational accident, known as “Workers’ Compensation concealment,” is an act subject to penalties under the Japanese Industrial Safety and Health Law and is dealt with severely.  

Work-Related Accidents Covered by Workers’ Accident Compensation Insurance in Japan

Under Japanese law, specifically Article 7 of the Workers’ Accident Compensation Insurance Act, work-related accidents covered by workers’ accident compensation insurance are primarily classified into two categories: “work accidents” and “commuting accidents.” These two are distinguished by the circumstances of their occurrence, and the criteria for recognition differ.  

A “work accident” refers to an injury, illness, disability, or death of a worker that occurs in the course of employment. For an accident to be recognized as a work accident, it generally must meet two requirements: “work-relatedness” and “causation by work.” Work-relatedness means that the accident occurred while the worker was under the control and management of the employer. This includes not only the time spent performing the designated work but also breaks, as well as time spent preparing for work or cleaning up afterwards. On the other hand, causation by work refers to the realization of inherent risks in the work, that is, the existence of a reasonable causal relationship between the work and the injury or illness. For example, injuries sustained while operating machinery in a factory or traffic accidents during business trips are typical work accidents.  

Conversely, a “commuting accident” refers to an injury, illness, disability, or death suffered by a worker during their commute. According to Article 7, Paragraph 2 of the Japanese Workers’ Accident Compensation Insurance Act, “commuting” is defined as the worker traveling between their residence and workplace by a reasonable route and method in relation to employment. If the worker deviates from this “reasonable route” or interrupts their commute for purposes unrelated to commuting, the movement during and after such interruption is not generally considered commuting. However, if the interruption involves acts necessary for daily life, such as purchasing groceries, and is done for unavoidable reasons within a minimal scope, the protection as commuting resumes once the worker returns to the reasonable route, excluding the period of interruption.  

The distinction between these two types of accidents is legally significant. For work accidents, the employer’s liability for accident compensation is established under Chapter 8 of the Japanese Labor Standards Act, and workers’ accident compensation insurance plays the role of substituting for this employer’s liability. However, for commuting accidents, there is no direct compensation liability of the employer stipulated under the Japanese Labor Standards Act. Therefore, the compensation for commuting accidents is primarily the responsibility of the workers’ accident compensation insurance system.  

Types and Details of Compensation Provided by Workers’ Accident Compensation Insurance in Japan

When a work-related accident is recognized, the injured worker or their bereaved family can receive various types of insurance benefits from Workers’ Accident Compensation Insurance. The names of the benefits are “〇〇 Compensation Benefit” for work-related accidents and “〇〇 Benefit” for commuting accidents, but the content of the benefits is essentially the same.

The main insurance benefits include the following:

Medical (Compensation) Benefits cover the costs of treating injuries or illnesses caused by work-related accidents. When receiving treatment at a designated Workers’ Accident Compensation hospital or medical institution, there is no out-of-pocket expense until recovery (when symptoms stabilize).

Absence (Compensation) Benefits are provided when a worker is unable to work and earn wages due to medical treatment, and the absence extends beyond four days. Starting from the fourth day of absence, 60% of the daily benefit base amount (an amount corresponding to the average wage of the three months immediately before the accident) is paid for each day.

Disability (Compensation) Benefits are paid when a certain level of disability remains after the injury or illness has healed. Depending on the degree of disability, which is determined by the designated disability grade (from grade 1 to grade 14), a pension is provided for severe disabilities from grade 1 to grade 7, and a lump sum is paid for disabilities from grade 8 to grade 14.

Bereavement (Compensation) Benefits are provided to secure the livelihood of the bereaved family when a worker dies. A pension or a lump sum is paid depending on the number of surviving family members.

In addition, there are Funeral Expenses (Funeral Benefits) that cover the cost of funeral services when a worker dies, a Sickness (Compensation) Pension that is paid instead of Absence (Compensation) Benefits when the injury or illness does not heal after one and a half years, and Care (Compensation) Benefits that are provided when severe disability necessitates care.

It is particularly noteworthy that there is a system called “Special Lump Sum Payments.” In addition to the main insurance benefits mentioned above, various special lump sum payments are provided as part of projects to promote social reintegration. For example, an Absence Special Lump Sum Payment equivalent to 20% of the daily benefit base amount is added to the Absence (Compensation) Benefits, resulting in a total compensation of 80% of the daily benefit base amount. Legally, these special lump sum payments are intended to enhance the welfare of the injured workers and are not interpreted as compensatory in nature. This legal positioning has a very important meaning when considering the civil liability for damages of companies, which will be discussed later.

Civil Liability for Damages Beyond Workers’ Accident Compensation Insurance in Japan

The Japanese Workers’ Accident Compensation Insurance system provides swift compensation to injured workers, but it does not cover all damages incurred. Notably, compensation for mental anguish resulting from work-related accidents is not covered by this insurance. Additionally, in cases of lost earnings due to absence from work or residual disability, the amount provided by the insurance may not fully cover the actual damages. For these uncovered damages, the injured workers or their bereaved families can claim civil damages from the company.  

The legal basis for this claim is the violation of the company’s “duty of care.” Article 5 of the Japanese Labor Contract Law stipulates, “Employers shall take necessary care to ensure that workers can perform their work safely and without threats to their life or health,” thereby codifying the company’s duty of care. This duty has been established over the years through case law, with two Supreme Court decisions laying the foundation. One is the Supreme Court decision on February 25, 1975 (1975), in the case of a Ground Self-Defense Force member who died during official duties, which recognized for the first time the state’s duty of care based on the principle of good faith towards public servants (Ground Self-Defense Force Case). The other is the Supreme Court decision on April 10, 1984 (1984), in the case where an employee was killed during a night shift, which clarified that private companies also bear a duty of care as part of their labor contracts (Kawagi Case). If a company neglects this duty of care and as a result, a work-related accident occurs, the company may be held liable for damages based on breach of contract or tort.  

When a company is liable for damages, any workers’ accident compensation insurance benefits already received by the injured worker will be deducted from the compensation amount the company must pay. This is called “loss offset,” and it is an adjustment to prevent double compensation for damages. However, the nature of the aforementioned “special benefits” becomes important here. According to case law, special benefits are part of labor welfare projects and are not intended to compensate for damages, so they are not subject to loss offset. In other words, the amount of special benefits cannot be deducted from the compensation amount the company must pay, which effectively increases the company’s burden.  

In civil claims for damages, if the worker’s own negligence is recognized as contributing to the occurrence or expansion of the disaster, “negligence offset” may be applied, reducing the compensation amount according to the proportion of negligence. This is a significant difference from the workers’ accident compensation insurance system, which provides fixed benefits regardless of negligence.  

The main differences between workers’ accident compensation insurance and civil claims for damages in Japan are summarized in the table below.

Voluntary Workers’ Compensation Top-Up Coverage for Companies in Japan

As we have seen, companies in Japan face significant civil liability risks that are not fully covered by the mandatory workers’ compensation insurance. Particularly in cases involving fatal accidents or severe disabilities, compensation amounts, including solatium and lost profits, can easily exceed tens of millions to hundreds of millions of yen. To manage these financial risks, many companies utilize the ‘Workers’ Compensation Top-Up Coverage’ offered by private insurance companies.

This is an optional insurance that companies can subscribe to, which aims to prepare for the payment of damages (especially solatium) that are not compensated by the government’s workers’ compensation benefits. By utilizing this system, companies can cover the payment of compensation with insurance money in the event of an unforeseen situation, thereby avoiding a serious blow to their management.

The introduction of the Workers’ Compensation Top-Up Coverage system offers multiple benefits to corporate management, not just as a risk hedge. Firstly, establishing a comprehensive compensation system contributes to the enhancement of employee welfare benefits, providing a work environment where employees can work with peace of mind, which in turn helps to improve employee retention rates and secure talented personnel. Secondly, in certain industries such as construction, it is becoming more common for prime contractors to require their subcontractors to join the Workers’ Compensation Top-Up Coverage system as a condition of the contract. This is part of the overall risk management of the supply chain and being enrolled can potentially lead to expanded business opportunities. Thirdly, the premiums for this insurance are, in principle, fully deductible as expenses under the Corporate Tax Law, which also provides tax benefits.

Thus, the Workers’ Compensation Top-Up Coverage system is an important tool that contributes not only to the defensive aspect of legal liability but also to offensive business strategies such as business continuity, talent strategy, and strengthening trade relationships.

Summary

The Japanese Workers’ Accident Compensation Insurance System is based on the government-mandated “Workers’ Accident Compensation Insurance,” and for damages exceeding this coverage, companies face “civil liability for compensation.” To manage this risk, there is a “Workers’ Accident Compensation Top-Up System,” creating a three-tiered structure. Understanding this complex legal system accurately and taking appropriate measures according to the nature of one’s business and risks is an essential compliance requirement for conducting business in Japan, and it is also a significant management issue. Responding to work-related accidents involves core aspects of corporate management such as legal affairs, finance, and human resources, and requires careful judgment based on specialized knowledge.

Monolith Law Office has a wealth of experience in providing comprehensive labor law services, including the Workers’ Accident Compensation Insurance System discussed in this article, to numerous clients within Japan. Our firm employs several English-speaking attorneys with foreign legal qualifications, enabling us to offer deep understanding and support for the unique challenges faced by international companies operating in Japan. From risk assessment related to labor accidents and the establishment of internal regulations to support in the event of an incident, we provide comprehensive legal services to support your business activities.