Payroll Options in Japan: Employer of Record (EOR) vs. Japanese Entity

Expanding into Japan presents extraordinary opportunities but also comes with unique challenges. Japan's robust economy, highly skilled workforce, and strategic position in Asia make it an attractive market for international companies. However, the country's complex regulatory environment, distinct business culture, and stringent employment laws create significant barriers to entry.

For foreign companies looking to hire employees in Japan, two primary paths exist: using an Employee of Record (EOR) service or establishing your own Japanese legal entity. Each approach offers distinct advantages and tradeoffs in terms of cost, speed, control, and long-term viability.

This comprehensive guide examines both options in detail, comparing costs, timelines, compliance requirements, and business implications. Whether you're hiring your first employee in Japan or planning to scale to dozens of team members, understanding these alternatives will help you make the right strategic decision for your business.

What is an Employee of Record (EOR) in Japan?

An Employee of Record (EOR) is a third-party service that legally employs workers on behalf of your company. In the Japanese context, the EOR provider becomes the official employer of record for your team members, taking on all legal responsibilities associated with employment while you retain full operational control over day-to-day work activities.

How EOR Services Work in Practice

When you engage an EOR provider in Japan, they handle the entire employment infrastructure. The EOR manages payroll processing, tax withholding, social insurance enrollment (including Health Insurance and Employees' Pension Insurance), compliance with the Labor Standards Act, employment contract administration, and even visa sponsorship support for foreign workers.

Your company maintains complete control over the employee's work assignments, performance management, and professional development. You decide what the employee works on, set objectives and deadlines, and manage their career progression. The EOR simply handles the legal and administrative aspects of employment.

Speed as a Key Advantage

One of the most significant advantages of using an EOR in Japan is speed to deployment. While establishing your own Japanese entity typically requires 1-3 months from start to finish, an EOR can enable you to hire employees in as little as 1-3 days. This rapid timeline makes EOR services particularly valuable when you need to hire quickly to capture market opportunities, secure key talent, or respond to urgent business needs.

Common Use Cases for EOR in Japan

Companies typically engage EOR services in Japan for several scenarios: market testing with initial hires before committing to a full entity setup, hiring specialized talent without establishing local infrastructure, managing remote employees in Japan while your primary operations remain elsewhere, or rapidly scaling teams without the administrative overhead of entity management.

Employee of Record Providers in Japan: Deel, Globalization Partners, and Remote.com

How to Choose an EOR Provider in Japan

The EOR market in Japan features several established players, but not all providers are created equal. The most critical distinction lies in entity ownership. Premium EOR providers own and operate their own legal entities in Japan, giving them direct control over payroll processing, compliance management, and employment relationships. This ownership model typically results in better cost stability, stronger data security, and more reliable service delivery.

Other providers operate through outsourced partnerships with local Japanese firms, which can introduce additional complexity and potential service inconsistencies. When evaluating EOR providers, verify their entity ownership status, review their compliance track record in Japan, assess their integration capabilities with your existing HR and payroll systems, and evaluate their cultural expertise specific to the Japanese business environment.

Pricing for EOR services in Japan typically ranges from $599 to $699 per employee per month among the leading providers. While cost is an important factor, it should be weighed against service quality, compliance reliability, and the provider's depth of expertise in navigating Japan's unique employment landscape.

EOR Japan Comparison

Deel

Deel operates as a global leader in the EOR space, maintaining its own wholly-owned Japanese legal entity. This direct ownership enables Deel to provide consistent service delivery and maintain tight control over compliance and payroll operations.

Pricing: $599 USD per employee per month

Key Strengths:

• Competitive pricing at the lower end of the premium EOR market
• Robust technology platform with real-time compliance monitoring
• Global reach across 150+ countries, useful for companies with multi-country hiring needs
• Transparent pricing structure with no hidden fees
• Strong user ratings (4.8/5 on G2) indicating high customer satisfaction

Best For: Mid-size to enterprise companies, particularly those with a technology focus or multi-country hiring requirements. Deel's platform approach makes it especially suitable for organizations that value automation and self-service capabilities.

Considerations: Some customers report that the platform's extensive features can feel overwhelming for smaller teams managing just a few employees. Additionally, some users have noted slower-than-expected support response times during peak periods and somewhat lengthy onboarding processes.

Globalization Partners (G-P)

Globalization Partners positions itself at the enterprise end of the EOR market, emphasizing white-glove service and AI-powered compliance tools. G-P has established a strong presence in Japan with deep local expertise.

Pricing: $699 USD per employee per month

Key Strengths:

• Premium enterprise-grade support with dedicated account management
• AI-driven compliance monitoring tools that proactively identify potential issues
• Extensive local expertise and established relationships in Japan
• White-glove service model with hands-on support throughout the employment lifecycle
• Strong focus on risk mitigation and compliance assurance

Best For: Large enterprises, companies operating in highly regulated industries, and organizations that require premium support and comprehensive compliance management. G-P is particularly well-suited for companies that need to demonstrate robust compliance frameworks to their stakeholders or operate in sensitive sectors where regulatory missteps carry significant consequences.

Notable Features: G-P's AI compliance monitoring represents a significant technological differentiator, continuously scanning for regulatory changes and proactively alerting clients to potential compliance gaps.

Remote.com

Remote.com operates its own Japanese legal entity, maintaining tight control over all employment and payroll processes. The platform's standout characteristic is its extensive integration ecosystem, making it particularly attractive for companies with complex HR technology stacks.

Pricing: Competitive mid-tier pricing, estimated at $600-750 per employee per month

Key Strengths:

• Extensive platform integrations including Workday, Xero, BambooHR, Greenhouse, and Zapier
• Robust API capabilities enabling custom integrations and workflow automation
• Owned entity infrastructure ensuring direct control over compliance and payroll
• Comprehensive compliance management across all aspects of Japanese employment law
• Strong focus on technology-enabled service delivery

Best For: Mid-market to enterprise companies that require deep integration between their EOR provider and existing HR, payroll, and recruiting systems. Remote.com is particularly valuable for organizations using tools like Workday or BambooHR that want seamless data flow between systems.

Considerations: Similar to Deel, some customers report slower onboarding timelines than initially expected, as well as occasional delays in customer support response during high-volume periods.

Notable Features: Remote.com's API access enables sophisticated customers to build custom workflows and automations, providing a level of flexibility not commonly available in the EOR space.

EOR Provider Selection Framework

When evaluating these three providers—or any EOR service—consider the following framework:

Entity Ownership Verification: Confirm that the provider owns and operates its own legal entity in Japan rather than outsourcing to a third party. Direct ownership typically correlates with better service quality and more reliable compliance management.

Compliance Track Record: Request references from existing clients and inquire about any compliance incidents or penalties the provider has encountered in Japan. A clean compliance record is essential.

Integration Requirements: Map out your existing HR technology stack and determine which integrations are critical. If you use systems like Workday, BambooHR, or specific payroll platforms, ensure your chosen EOR provider supports those integrations.

Support and Onboarding Expectations: Understand the provider's typical onboarding timeline, support response times, and account management structure. For time-sensitive hires, verify that the provider can meet your deadlines.

Cultural Expertise for Japan: Japan's business culture differs significantly from Western norms. Assess whether the provider has local Japanese staff who can navigate cultural nuances, business customs, and relationship-building with Japanese stakeholders.

EOR vs. Japanese Entity Setup: Head-to-Head Comparison

Japan Entity Setup Time vs. EOR Speed

Perhaps the most dramatic difference between these two approaches is the time required to begin hiring employees in Japan.

Employee of Record Japan: 1-3 Days

Advantages:

• Extremely rapid deployment enables you to capture time-sensitive opportunities
• Minimal paperwork required from your company
• Provider handles all registration and compliance setup
• No need to navigate Japanese bureaucracy or language barriers
• Can hire critical talent before competitors who are pursuing entity setup

Disadvantages:

• Less control over employment terms and processes
• Dependency on the EOR provider's policies and procedures
• Limited ability to customize benefits packages or employment contracts
• Your company name doesn't appear on employment contracts (EOR is the legal employer)

Japanese Subsidiary Setup: 1-3 Months

Advantages:

• Complete control and autonomy over all employment and business operations
• Ability to fully customize processes, policies, and employee experiences
• Direct employment relationships strengthen employer brand and employee loyalty
• Full business presence demonstrates serious commitment to the Japanese market

Disadvantages:

• Requires 1-3 months before you can hire first employee
• Complex documentation requirements, all in Japanese language
• Requires identifying and appointing a Japanese resident as representative director
• Must navigate multiple government agencies and registration processes
• Hanko (corporate seal) registration adds cultural and procedural complexity

Cost of Employee of Record vs. Japanese Entity Registration

Cost considerations represent one of the most complex aspects of this decision. The optimal choice depends heavily on your employee headcount, growth timeline, and available capital.

Understanding Japanese Entity Setup Costs

Registration and Specialist Fees: ¥300,000-500,000

These one-time costs are relatively modest and cover all legal, notarization, and filing expenses. This is a true expense that represents the cost of setting up the entity.

The Real Cost: Initial Capital Injection (¥1M-10M)

The significantly larger consideration is the capital you must inject into the entity:

• GK (Godo Kaisha) minimum: ¥1 million legal requirement, but ¥3-5 million more typical for credibility
• KK (Kabushiki Kaisha) minimum: ¥1 million legal requirement, but ¥5-10 million common for serious operations

This capital remains your company's asset—it hasn't been spent or lost. However, it must stay locked within the Japanese entity. You can use it for legitimate business expenses like payroll, rent, equipment, and operations, but you cannot freely withdraw it back to your parent company. This capital lockup represents an opportunity cost—money that could otherwise be deployed elsewhere in your business.

Annual Operating Costs: ¥1M-3M

Maintaining a Japanese entity requires significant ongoing back-office expenditure:

• Accounting and bookkeeping services (¥400,000-2,400,000)
• Annual tax filing and compliance (¥200,000-600,000)
• Payroll administration (¥100,000-300,000)
• Legal and compliance monitoring (¥100,000-200,000)

These are purely back-office costs—they don't include employee salaries, benefits, office space, or other operational expenses. Crucially, these costs remain largely fixed whether you employ one person or ten, which is why entities become dramatically more cost-effective at scale.

EOR Japan Pricing Breakdown

Monthly Per-Employee Fees: $599-$699 (¥90,000-¥105,000)

EOR providers charge a monthly fee for each employee, which covers all compliance, payroll, benefits administration, and legal responsibilities:

• 1 employee: ¥1.08M-¥1.26M annually
• 5 employees: ¥5.4M-¥6.3M annually
• 10 employees: ¥10.8M-¥12.6M annually

Advantages:

• Zero upfront capital required: no need to inject millions into an entity
• Completely predictable monthly fees with no hidden costs
• Pay-as-you-go mode: costs scale proportionally with your team
• All compliance costs included in the monthly fee

Disadvantages:

• Significantly higher per-employee costs compared to entity at scale
• Costs scale linearly: 10 employees cost exactly 10x one employee
• No economies of scale as you grow your Japanese team

Japanese Entity Cost Model

Entity costs work fundamentally differently—high fixed costs but minimal marginal cost per employee:

• Setup costs: ¥300,000-500,000 (one-time)
• Capital requirement: ¥1M-10M (locked but still yours)
• Annual operating costs: ¥1M-2M (fixed regardless of headcount)
• Per-employee marginal cost: Minimal after setup (just their salary and benefits)

Advantages:

• Dramatically lower per-employee costs once you reach scale
• Capital remains your company asset (just locked in the entity)
• Fixed back-office costs create significant economies of scale

Disadvantages:

• Significant capital tied up in the entity (¥3M-10M typical)
• ¥1M-2M annual back-office costs regardless of whether you have 1 or 10 employees
• High fixed costs make small teams expensive on a per-employee basis

Break-Even Analysis: When Does a Japanese Entity Make Financial Sense?

One of the most common questions foreign companies ask when entering Japan is:

When does it make more financial sense to set up a local entity instead of using an Employer of Record (EOR)?

The answer depends largely on employee headcount, operational goals, and how long you plan to operate in Japan. Many comparisons include initial capital requirements, but capital injection is not an operational expense, as it remains on your balance sheet. For a more realistic comparison, it's helpful to focus on ongoing operational costs.

Key Assumptions

1. EOR cost: approx. ¥75,000 per employee per month ($500 USD per month)
2. Japanese entity back-office costs: approx. ¥3M annually (accounting, payroll, compliance, filings, administration, coordination)
3. Initial capital excluded as an expense
4. Salary and benefits excluded (assumed equal in both models)

Below is a simplified break-even analysis based on typical market assumptions:

• 1 employee: EOR ¥0.9M vs Entity ¥3M (EOR significantly cheaper)
• 2 employees: EOR ¥1.8M vs Entity ¥3M (EOR cheaper)
• 3 employees: EOR ¥2.7M vs Entity ¥3M (roughly similar cost range)
• 4 employees: EOR ¥3.6M vs Entity ¥3M (entity begins becoming cheaper)
• 5 employees: EOR ¥4.5M vs Entity ¥3M (entity becomes financially advantageous)
• 6 employees: EOR ¥5.4M vs Entity ¥3M (entity clearly cheaper)
• 10 employees: EOR ¥9M vs Entity ¥3M (entity significantly cheaper)

Based on these assumptions, the break-even point is between 3 and 4 employees. The assumptions use a higher back office operational expense. On the other hand, if you include the overhead and time of managing an entity, the break-even point will likely fall between 3 and 5 employees in Japan.

The Key Question: Capital Availability and Growth Plans

The financial decision ultimately depends on two critical factors:

1. Do you plan on operating in Japan long-term? If not, EOR may be your only practical option regardless of headcount plans.
2. Will you scale beyond 3-5 employees? If yes, entity becomes cost-effective. If you'll stay at 1-5 employees indefinitely, EOR likely makes more sense.

At 3-5 employees, you reach the rough break-even point where entity and EOR costs become comparable in Year 1. Beyond this threshold, the entity's economics improve rapidly while EOR costs continue to scale linearly.

However, capital availability often matters more than headcount. If you have ¥5M-10M sitting in your bank account that could be deployed to Japan, and you plan to hire even 4-5 employees over 2 years, the entity will likely prove more cost-effective over your total time horizon. Conversely, if that capital is needed elsewhere in your business, the EOR's pay-as-you-go model may be worth the premium.

Japan Labor Law Compliance: EOR vs. Direct Employment

Employee of Record Compliance Management

Advantages:

• Provider handles all Labor Standards Act compliance requirements
• Social insurance enrollment (Health Insurance, Employees' Pension Insurance) managed automatically
• Tax withholding and year-end tax adjustments handled by provider
• Visa sponsorship support for foreign workers
• Provider stays current on regulatory changes and updates

Disadvantages:

• Still need basic understanding of Japanese employment law
• Provider dependency risk—if provider fails, you face disruption
• Co-employment considerations in certain situations
• Limited ability to customize compliance approaches

Japanese Entity Employment Compliance

Advantages:

• Direct control over all compliance processes and documentation
• Ability to build in-house expertise over time
• Can customize compliance approach to your specific needs
• No third-party dependency for critical employment functions

Disadvantages:

• Full responsibility for navigating complex Japanese labor laws
• Must manage social insurance registration and ongoing compliance
• Corporate tax filing and annual compliance obligations
• Risk of significant penalties for non-compliance
• Requires hiring or engaging local HR and legal expertise

Japanese employment law is notably employee-protective, with strict requirements around working hours, overtime compensation, paid leave, and termination procedures. The Labor Standards Act governs most employment relationships and provides strong protections that foreign companies must understand and respect.

Hiring in Japan: Employment Flexibility and Scalability

EOR Japan Flexibility

Advantages:

• Extremely easy to scale up or down based on business needs
• Perfect for testing the Japanese market with 1-2 initial hires
• No exit complications if you decide to leave the market
• No capital requirement allows you to preserve cash for other uses
• Can quickly pivot hiring strategy without entity constraints

Disadvantages:

• May complicate long-term employee relationships and retention
• IP assignment and confidentiality agreements can be more complex
• Employee perception issues—some candidates prefer direct employment
• Potential limitations on certain types of employment arrangements

Japanese Subsidiary Direct Hiring

Advantages:

• Direct employment relationships typically strengthen employee loyalty
• Easier to manage permanent operations and long-term teams
• Stronger employer brand and market presence
• More attractive to senior-level candidates who value stability

Disadvantages:

• Japanese labor law makes termination extremely difficult
• Severance obligations can be substantial
• Hard to exit the market once entity is established
• Capital locked in entity limits financial flexibility
• Scaling down is significantly harder than scaling up

The challenge with direct employment in Japan is that the country's employment culture and legal framework strongly favor permanent employment. The concept of "lifetime employment" (shūshin koyō) while less universal than in the past, still influences expectations. Terminating employees requires demonstrating objective, reasonable grounds and following proper procedures, or you risk significant legal liability.

Japan Business Credibility: Local Entity vs. EOR

EOR Business Presence in Japan

Advantages:

• Quick market entry allows you to start building relationships immediately
• Focus resources on business development rather than administrative setup
• No capital requirement preserves financial flexibility
• Can test market viability before committing to full entity

Disadvantages:

• May appear less committed to Japanese partners and clients
• Limited banking options—cannot open full corporate bank accounts
• Your company name doesn't appear on employment contracts
• May be disadvantaged in enterprise sales where clients prefer local entities
• Cannot issue invoices from a Japanese entity

Japanese Entity Business Presence

Advantages:

• Local bank accounts essential for domestic transactions
• Stronger relationships with Japanese B2B partners
• Critical for enterprise client contracts and government procurement
• Full business presence demonstrates long-term commitment
• Capital injection visible to stakeholders shows serious intent
• Ability to issue invoices from Japanese entity
• Better positioned for partnerships with traditional Japanese companies

Disadvantages:

• Takes 1-3 months to establish full presence
• Building banking relationships can take additional time
• Capital tied up in entity

In Japan's consensus-driven business culture, perceived commitment matters enormously. Japanese companies often prefer working with partners who demonstrate long-term commitment through local entity establishment. This is particularly true in enterprise sales, government procurement, and partnerships with traditional Japanese corporations.

EOR vs. Entity Decision Framework: Choosing the Right Path for Japan Expansion

When to Use an Employee of Record in Japan

Choose EOR if you meet several of these criteria:

• Hiring 1-5 employees initially without immediate plans to scale beyond this
• Testing the Japanese market for the first 12-18 months before committing long-term
• Need to hire quickly within days or weeks to capture opportunities
• Don't have ¥3M-10M available for capital injection into an entity
• Prefer keeping capital liquid for other business needs and priorities
• Lack local legal/HR/accounting expertise and don't want to build it
• Short to medium-term commitment (1-2 years) to the Japanese market
• Want to minimize administrative burden and focus on core business
• Uncertain about scaling timeline in Japan and want maximum flexibility

When to Set Up a Japanese Entity (KK or GK)

Choose entity setup if you meet several of these criteria:

• Planning to hire 8+ employees within 18-24 months
• Long-term commitment to Japan market (3+ years minimum)
• Have ¥3M-10M available for initial capital injection
• Need local bank accounts for domestic transactions and vendor relationships
• Want full operational control over employment and business processes
• Selling to enterprise Japanese clients, especially government or large corporations
• Building physical office presence in Japan
• Can absorb ¥1-2M annual back-office costs
• ROI calculation shows break-even within 12-18 months based on headcount

Hybrid Approach: EOR to Japanese Entity Transition

Many successful companies use a hybrid strategy:

1. Start with EOR for first 6-12 months with 1-3 employees
2. Validate market fit and growth trajectory before committing capital
3. Begin entity setup process at 4-5 employees (allowing for 1-3 month lead time)
4. Transition employees to entity once incorporation is complete
5. Typical transition timeline: 3-4 months from decision to completion

Important Considerations for Transition:

• Employees will need new employment contracts with the entity
• May require 1-2 week gap between EOR termination and entity hiring
• Benefits and seniority handling must be carefully managed
• Communicate clearly with employees about the transition
• Budget for running both EOR and entity costs during transition period

Conclusion: EOR or Japanese Entity for Your Business

There is no one-size-fits-all answer to the EOR versus Japanese entity decision. The right choice depends fundamentally on your capital availability, growth plans, and strategic timeline. The financial break-even point occurs around 3-5 employees. Below this threshold, EOR often makes more sense in Year 1, but above it, entity economics become compelling quickly.

The EOR path offers speed (1-3 days vs 1-3 months), preserves capital for other business uses, and provides maximum flexibility for market testing. In contrast, Japanese entity setup delivers dramatic long-term cost savings (¥4-5M annually for 5 employees, ¥10-11M annually for 10 employees after Year 1), demonstrates serious market commitment to partners and clients, and provides complete operational control.

FAQs: Employee of Record vs. Japanese Entity

Can you transition from EOR to Japanese entity later?

Yes, this is a common and viable transition path. The process typically takes 3-4 months. Employees will need new employment contracts with your entity, and there may be a 1-2 week gap between EOR termination and entity hiring. Benefits and seniority handling requires careful management, but most EOR providers have experience facilitating these transitions. Plan ahead and communicate clearly with affected employees.

How long does Japanese entity incorporation take?

Japanese entity incorporation typically takes 1-3 months from initial planning to being ready to hire your first employee. This breaks down approximately into weeks 1-2 for initial setup, weeks 3-6 for filing and registration, weeks 7-9 for banking and systems, and weeks 10-12 for HR policies and hiring. This timeline assumes no major complications—issues with documentation or banking relationships can extend the process.

Do I need a Japanese citizen as representative director?

No, but you need a Japanese resident. A foreign national with a valid visa (such as a work visa or business manager visa) and a Japanese address can serve as representative director. The key requirement is residency in Japan, not Japanese citizenship.

Can EOR employees become direct employees of my Japanese entity?

Yes, but it requires new employment contracts. The transition typically involves a 1-2 week gap between EOR termination and entity hiring. Benefits and seniority handling varies by provider and situation. Some providers offer smoother transitions than others, so discuss this possibility upfront when selecting an EOR provider if you anticipate eventual entity setup.

What are the tax implications: EOR vs. Japanese entity?

Both options require Japanese corporate tax on Japan-sourced income. With an EOR, the provider handles all tax compliance and withholding. With your own entity, you're responsible for all corporate tax filings, employee tax withholding, and year-end adjustments. Entities offer more tax optimization options long-term, but also carry more compliance burden and risk.

At what headcount does a Japanese entity make financial sense?

The break-even point is approximately 3-5 employees if you have capital available. Below this threshold, EOR often costs less in Year 1. At 10+ employees, entity setup shows clear financial advantages, saving ¥10-11M annually compared to EOR after the setup year.

What happens if my EOR provider exits Japan?

Your employees would need to transfer to a new EOR provider or you would need to establish an entity. Review your service agreement carefully for transition terms and notice periods. Most reputable providers have contingency plans, but this represents a real business continuity risk that should factor into your decision-making.

How do Japanese employees perceive EOR employment?

Perceptions are mixed and generational. Younger workers, especially in tech and international companies, are generally more accepting of EOR arrangements. Traditional companies and older workers tend to prefer direct employment for the stability and prestige it represents. For senior-level hires, direct employment is often strongly preferred and may be necessary to attract top candidates.

Can I use EOR for executive-level hires in Japan?

Yes, it's technically possible, but executives often prefer direct employment for status, stability, and the signal it sends about their role. Using EOR for C-level positions may limit your candidate pool and could impact your ability to attract top executive talent. For senior roles, direct entity employment is generally recommended if feasible.

Is the Japanese entity capital locked forever?

The capital is your company's asset and appears on your balance sheet, but it must remain within the Japanese entity. You can use it for legitimate business expenses like payroll, rent, equipment, and operations, but you cannot freely withdraw it as dividends or repatriate it to your parent company without proper procedures. It represents an opportunity cost—capital that could be deployed elsewhere in your business.