Payments Regulation

Payroll Evolution in Japan: Understanding Digital Wage Payments via Fund Transfer Service Providers

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read
Slide illustrating Japan’s digital wage framework: ¥1 million cap, guarantee scheme, fee-free cash access, and employer consent flow.

TL;DR

  • From April 2023, Japanese employers may, with employee consent, deposit wages into accounts at MHLW-designated Fund Transfer Service Providers (FTSPs).
  • Designated FTSPs must cap balances at ¥1 million, guarantee full repayment on insolvency, offer monthly fee-free cash access, and meet strict security and reporting standards.
  • Employers must sign a labour-management agreement, give full explanations, and obtain written consent before switching to digital payroll.

Table of Contents

  1. The Foundation: Wage Payment Principles in Japan
  2. The New Frontier: Enabling Payments to FTSP Accounts
  3. The Gatekeepers: Designated Fund Transfer Service Providers
  4. Implementation Process for Employers
  5. Practical Considerations and Outlook
  6. Conclusion

Japan, while traditionally known for its reliance on cash, is experiencing a significant shift towards cashless transactions, increasingly facilitated by smartphone apps and digital wallets offered by non-bank entities known as Fund Transfer Service Providers (FTSPs). Recognizing this trend and responding to calls for greater flexibility in payroll, the Japanese government recently amended regulations to permit employers to pay wages directly into accounts held with these FTSPs. This system, often referred to as "digital wage payments" (デジタル払い - dejitaru barai), offers a modern alternative to traditional cash or bank transfer methods but comes with a specific regulatory framework designed to protect workers' earnings. For companies operating in Japan, understanding the requirements and implications of this new option is crucial for payroll management and compliance.

The Foundation: Wage Payment Principles in Japan

The default method for wage payment in Japan is governed by Article 24 of the Labor Standards Act (労働基準法 - Roudou Kijun Hou, "LSA"). This cornerstone provision establishes the principle of direct payment to the worker in full, using legal tender (i.e., cash).

However, recognizing the practicalities of modern commerce, exceptions have long existed. The LSA Enforcement Regulations (労働基準法施行規則 - Roudou Kijun Hou Shikou Kisoku) permit payment via bank transfer (to a designated bank or other financial institution account) or transfer into certain securities brokerage accounts (shouken sougou kouza), provided the employer has obtained the individual employee's explicit consent. These exceptions paved the way for the prevalence of bank transfers for payroll in contemporary Japan.

The New Frontier: Enabling Payments to FTSP Accounts

Driven by the proliferation of FTSPs (offering services often linked to popular payment apps like PayPay, Line Pay, Rakuten Pay, etc.) and regulatory reform discussions highlighting the potential convenience for employees, a new exception was added to the LSA Enforcement Regulations (specifically Article 7-2). Effective April 1, 2023 (Reiwa 5), this amendment allows employers, again with employee consent, to pay wages via fund transfer into accounts held with Designated Fund Transfer Service Providers.

Crucially, this option is not available through any FTSP. The system establishes a stringent designation process overseen by the Ministry of Health, Labour and Welfare (MHLW or 厚生労働省 - Kousei Roudou Shou), ensuring that only providers meeting specific security, financial stability, and worker protection criteria can handle wage payments.

The Gatekeepers: Designated Fund Transfer Service Providers (指定資金移動業者 - Shitei Shikin Idou Gyousha)

The core of the digital wage payment system lies in the MHLW designation process. Why the extra layer of regulation beyond the existing oversight by the Financial Services Agency (FSA) under the Payment Services Act (資金決済に関する法律 - Shikin Kessai ni Kansuru Houritsu)?

Deliberations within the Labour Policy Council (労働政策審議会 - Roudou Seisaku Shingikai) highlighted key concerns unique to wage payments. Wages are fundamental to workers' livelihoods, demanding a high degree of security and certainty. Unlike general e-money balances, wage funds require robust protection against provider insolvency and immediate access, akin to bank deposits. Therefore, the MHLW designation requirements were established to ensure that FTSPs handling wages meet standards comparable to, though not identical with, traditional financial institutions specifically concerning worker protection. Only FTSPs registered as Type 2 providers under the Payment Services Act are eligible for designation.

An FTSP must satisfy the following key requirements (stipulated in the amended LSA Enforcement Regulations Art. 7-2, Para. 1, Item 3) to become a Designated FTSP:

  1. Account Balance Cap (¥1 Million Limit): The account used for receiving wages must have a balance limit set at JPY 1,000,000 or less. Alternatively, if the balance exceeds ¥1 million (e.g., immediately after a wage deposit), the FTSP must have mechanisms in place to promptly (e.g., same day) transfer the excess amount to a bank account pre-designated by the employee, ensuring the FTSP account balance returns to ¥1 million or below. Rationale: This cap is primarily linked to the feasibility and structure of the required guarantee mechanism (see next point). It ensures the maximum potential payout per employee under the guarantee scheme remains within manageable limits.
  2. Full Guarantee in Case of Insolvency: The FTSP must have a robust mechanism, typically involving contracts with external guarantors like banks or insurance companies, to guarantee the full repayment of the employee's account balance if the FTSP becomes insolvent (faces bankruptcy, civil rehabilitation, etc.). This repayment must be made promptly, typically aiming for within 60 business days of the insolvency event trigger. Rationale: This is a critical worker protection measure. Standard FTSP fund preservation rules under the Payment Services Act require segregation of user funds or securing them via deposits/trusts, but repayment in bankruptcy can be delayed by legal proceedings and might not cover the full amount if segregated funds are insufficient. Standard bank deposit insurance covers only up to ¥10 million per depositor per bank. The MHLW requirement ensures wage funds held with designated FTSPs have a specific, rapid, and full guarantee up to the ¥1 million cap.
  3. Loss Compensation for Unauthorized Transactions: The FTSP must have clear policies and procedures to compensate employees for losses resulting from unauthorized transactions (e.g., fraudulent withdrawals, system errors) that are not due to the employee's own intentional misconduct or gross negligence. The standard should align with protections typically offered for internet banking fraud. Even if employee negligence contributes, compensation should not be automatically denied wholesale but considered on a case-by-case basis. Rationale: Protects employees from theft or errors in the digital environment. Employees must typically notify the FTSP within a reasonable period (at least 30 days) of discovering a loss.
  4. Minimum Account Validity Period (10 Years): Measures must be in place to ensure the employee can access their account balance for at least 10 years from the date of the last transaction (deposit or withdrawal), unless exceptional circumstances (like a police request for account freezing) apply. Rationale: Aligns with the 10-year period after which inactive bank accounts may be deemed dormant under Japanese law, ensuring long-term access to wage funds.
  5. Transfer/Withdrawal in 1-Yen Units: Fund transfers into the designated FTSP account must be possible in increments of JPY 1. Furthermore, employees must be able to withdraw their funds as cash, also in JPY 1 increments, through readily accessible means like ATMs or transfers to their bank accounts. Rationale: Ensures precise wage payment and full access to funds, maintaining the spirit of the LSA's "payment in currency" principle.
  6. Fee-Free Cash Access (At Least Monthly): The FTSP must provide a way for the employee to withdraw cash from their wage account at least once per month without incurring any withdrawal fees from the FTSP itself. This could be via fee-free ATM access or fee-free transfers to a designated bank account. (Note: Fees charged by the receiving bank for withdrawal from that account are not covered by this requirement). Rationale: Addresses concerns that digital payments could impose extra costs on workers needing cash, ensuring basic liquidity without penalty.
  7. MHLW Reporting Capability: The FTSP must have the internal systems and processes to report accurately and promptly to the MHLW on its operational status, financial health (including any non-payment related business lines), and the status of its guarantee mechanism upon request. Rationale: Enables MHLW oversight to ensure continued compliance with designation requirements.
  8. Technical Capability and Social Credibility: The FTSP must demonstrate it possesses the necessary technical infrastructure, security measures (e.g., holding certifications like Privacy Mark or ISMS is considered favorably), and overall financial stability and reputation (social credibility) to reliably handle sensitive wage payment operations. Rationale: Ensures the basic operational competence and trustworthiness required for handling employee wages. Compliance history with the Payment Services Act and other regulations is also considered.

Only FTSPs that apply for and receive designation from the MHLW after demonstrating compliance with all these requirements are permitted to receive digital wage payments.

Implementation Process for Employers

Introducing digital wage payments requires employers to follow specific steps, ensuring compliance and protecting employee rights:

  1. Conclude a Labor-Management Agreement (労使協定 - Roushi Kyoutei): Before offering digital wage payments, the employer must enter into a formal written agreement with either the labor union representing a majority of employees at the workplace or, if no such union exists, with a person representing the majority of employees. This is the same requirement as for implementing bank transfers for payroll. The agreement must clearly define:
    • The scope of employees eligible for the digital payment option.
    • The specific names of the Designated Fund Transfer Service Providers whose accounts can be used for wage payments.
    • Other related matters as agreed upon.
  2. Provide Thorough Explanation to Employees: Because FTSP accounts differ from bank accounts (e.g., no deposit insurance, specific guarantee limits, potential usability differences), employers (or the designated FTSP acting on their behalf) have a duty to provide clear and comprehensive explanations to employees who are considering this payment method. Key points to cover include:
    • The FTSP is not a bank and does not accept deposits.
    • The ¥1 million account balance cap and how excess amounts are handled.
    • The specific guarantee mechanism protecting funds up to ¥1 million in case of FTSP insolvency.
    • The rules for compensating losses due to fraud or error.
    • Available methods for withdrawing funds as cash, including how to access the required monthly fee-free withdrawal.
    • The 10-year minimum period for account access.
    • The need for the employee to determine the appropriate amount or percentage of their wages they wish to receive digitally, ensuring it generally stays within the balance cap and any FTSP-imposed daily withdrawal limits.
  3. Obtain Individual Employee Consent (労働者の同意 - Roudousha no Doui): This is perhaps the most critical step. Payment of wages into an FTSP account is only permissible if the individual employee voluntarily consents after receiving the full explanation outlined above.
    • Voluntary: Consent cannot be coerced or made a condition of employment. Employees must always retain the option of receiving wages in cash or via bank transfer.
    • Informed: Consent must be based on a proper understanding of how the FTSP account works and its differences from a bank account.
    • Written Recommended: While oral consent might be legally valid, obtaining written consent using a clear form (the MHLW provides templates) is strongly recommended to avoid future disputes. The consent form should ideally allow the employee to specify the Designated FTSP, the account details, and the amount or percentage of wages to be transferred digitally.

Practical Considerations and Outlook

While the legal framework is now in place, the practical rollout involves several considerations:

  • Timeline: Although legally effective from April 1, 2023, actual digital wage payments could only commence after FTSPs successfully applied for and obtained designation from the MHLW (a process expected to take several months from the first applications) and after employers completed the necessary labor-management agreements and obtained employee consent. The first designations were expected later in 2023 or beyond.
  • Employee Choice & Scope: Digital payment remains strictly an option for employees. It's likely to be used for part of an employee's wages, given the ¥1 million cap, rather than the full amount for higher earners. Employees need to actively manage the requested digital portion.
  • Addressing Misconceptions: Public awareness and clear communication are needed to counter misunderstandings. Digital wage payments involve transfers of legal tender (Japanese Yen) to the FTSP account, not payment in proprietary points, stablecoins, or other cryptocurrencies. The system is optional, not mandatory.
  • FTSP Market: It remains to be seen how many FTSPs will seek and obtain designation, and how widely adopted this payment method will become among employers and employees. The stringent requirements, particularly around the guarantee mechanism, may pose significant operational and financial hurdles for some providers.
  • Ongoing Oversight: The MHLW will continue to monitor designated FTSPs to ensure they maintain compliance with the required standards for worker protection.

Conclusion

The introduction of digital wage payments represents a significant modernization of Japan's payroll landscape, offering potential convenience for a digitally savvy workforce. However, it is implemented with considerable caution, prioritizing worker protection through a stringent MHLW designation process for participating FTSPs. Key requirements focus on guaranteeing fund safety up to ¥1 million, ensuring loss compensation, and providing accessible, low-cost cash withdrawal options. For employers, utilizing this system requires careful adherence to procedural steps, including concluding labor-management agreements, providing thorough explanations, and obtaining voluntary, informed consent from each participating employee. While offering increased flexibility, both employers and employees must clearly understand the operational framework and the specific characteristics of FTSP accounts compared to traditional banking options.