Unpaid Wages in Japan: Leveraging the "Wage Payment Security System" (Chintai Tategae Barai Seido)

When a company in Japan faces bankruptcy (破産手続 - hasan tetsuzuki), one of the most immediate and pressing concerns for its employees is the status of their unpaid wages and retirement benefits. Recognizing the potential for severe hardship, Japan has established a crucial safety net known as the "Unpaid Wage Advance System" (未払賃金立替払制度 - Miharai Chingin Tategae Barai Seido). This government-administered program provides partial, expedited payment of certain labor claims, offering a lifeline to workers during a difficult transition.

This article outlines the workings of this system, including eligibility criteria, the types of payments covered, the application process, and its interaction with the formal bankruptcy proceedings, particularly the role of the bankruptcy trustee (破産管財人 - hasan kanzainin).

What is the Unpaid Wage Advance System?

The Unpaid Wage Advance System is operated based on the Wage Payment Security Act (賃金の支払の確保等に関する法律 - Chingin no Shiharai no Kakuho tō ni Kansuru Hōritsu, commonly abbreviated as 賃確法 - Chinkakuhō). The primary administrative body is now the Japan Institute for Labour Policy and Training (JILW) (独立行政法人労働政策研究・研修機構 - Dokuritsu Gyōsei Hōjin Rōdō Seisaku Kenkyū Kenshū Kikō), which has taken over the functions of the former Laborers' Health and Welfare Organization (労働者健康福祉機構 - Rōdōsha Kenkō Fukushi Kikō).

The core objective of the system is to alleviate the financial distress of employees who have lost their jobs or are owed wages due to their employer's insolvency by providing them with a portion of their unpaid earnings relatively quickly, without having to wait for the potentially lengthy bankruptcy distribution process.

Eligibility Criteria

For an employee to benefit from this system, both the employer and the employee must meet specific criteria:

For the Employer:

1. Insolvency Status: The employer must either be:
   • Legally Bankrupt: Subject to a formal court declaration of bankruptcy, commencement of civil rehabilitation proceedings, or corporate reorganization proceedings.
   • Factually Bankrupt (事実上の倒産 - jijitsujō no tōsan): For smaller enterprises not undergoing formal court proceedings, a Labor Standards Inspection Office (労働基準監督署 - rōdō kijun kantokusho) can issue a certification of factual bankruptcy if the business has ceased operations and there's no prospect of wage payment.
2. Operational Period: The employer must generally have been in business for at least one year prior to the insolvency.
3. Labor Insurance Coverage: The employer must have been covered by Japan's workers' accident compensation insurance (労災保険 - rōsai hoken), which is mandatory for most employers.

For the Employee:

1. Employment Status: The individual must have been an employee of the insolvent employer.
2. Timing of Retirement/Dismissal: The employee must have retired or been dismissed from the company within a specific timeframe. Typically, this is from six months before the date of the employer's bankruptcy petition (or application for factual bankruptcy certification) up to two years after that date.
3. Unpaid Eligible Claims: The employee must have unpaid "regular wages" and/or "retirement allowances" that meet the system's definitions.

What Payments are Covered and How Much?

The system is designed to cover core earnings and established retirement benefits, but not all types of employment-related payments.

Covered Wages (対象となる賃金 - Taishō to naru Chingin):

1. "Regular Wages" (定期賃金 - teiki chingin): This refers to basic salary, fixed monthly allowances, and other periodic payments that constitute the employee's regular compensation.
2. "Retirement Allowances" (退職金 - taishokukin or 退職手当 - taishoku teate): Lump-sum payments due upon retirement or severance, as stipulated by the employment contract, work rules, or company's retirement benefit plan.

Critically, for both regular wages and retirement allowances to be eligible, they must have become due for payment within the six months immediately preceding the employee's actual date of retirement or dismissal.

Excluded Payments:

The system generally does not cover:

• Bonuses or other irregular, performance-based payments.
• Payment in lieu of notice of dismissal (解雇予告手当 - kaiko yokoku teate).
• Commuting allowances, expense reimbursements, and other non-wage benefits.
• Payments to company directors unless they also had a clear and distinct status as an employee for the work in question.

Percentage and Caps on Advanced Payments:

• Percentage Advanced: The system advances 80% of the total eligible unpaid regular wages and retirement allowances. The 20% shortfall reflects, in part, an approximation of typical deductions like income tax and social insurance that would have been withheld from full pay.
• Maximum Limits: There are age-based caps on the total amount of unpaid wages/retirement allowance that the system will consider for the 80% calculation. Consequently, there's a maximum advance payment an employee can receive. As of general guidance (specific figures should always be confirmed with JILW as they can be updated):
  • For employees aged 45 and over: The total unpaid eligible amount considered is capped (e.g., at 3.7 million JPY), leading to a maximum advance (e.g., 2.96 million JPY, which is 80% of 3.7 million).
  • For employees aged 30 to under 45: The caps are lower (e.g., total considered 2.2 million JPY, max advance 1.76 million JPY).
  • For employees under 30: The caps are the lowest (e.g., total considered 1.1 million JPY, max advance 0.88 million JPY).
• Minimum Claim: There is also usually a minimum total unpaid amount required for an employee to be eligible for an advance (e.g., 20,000 JPY).

The Application Process and the Role of the Bankruptcy Trustee

The process for an employee to receive an advance payment involves several steps, with the bankruptcy trustee playing a crucial certification role in cases of legal bankruptcy:

1. Employee Application: The affected employee initiates the process by submitting an application to the JILW.
2. Trustee's Certification (破産管財人の証明 - hasan kanzainin no shōmei):
   • For companies under formal court-supervised bankruptcy, the bankruptcy trustee is responsible for verifying the employee's claims. This involves a meticulous review of the bankrupt company's payroll records (賃金台帳 - chingin daichō), timecards, employment contracts, retirement benefit regulations (退職金規程 - taishokukin kitei), and other relevant documentation to determine:
     • The employee's period of employment and date of retirement/dismissal.
     • The amount of eligible unpaid regular wages.
     • The amount of eligible unpaid retirement allowance.
   • Once these amounts are confirmed, the trustee issues a formal certificate (証明書 - shōmeisho) to the employee. This certificate is a key document in the employee's application to JILW. Given the importance and potential complexity, trustees may consult with JILW's staff for guidance, especially in cases with unclear records or unusual employment terms.
3. Submission to JILW: The employee submits their application to the JILW, along with the trustee's certificate and other necessary documents. A particularly important document is the "Declaration for Receipt of Retirement Income" (退職所得の受給に関する申告書 - taishoku shotoku no jukyū ni kansuru shinkokusho), which is required because the advanced payments are treated as retirement income for tax purposes.
4. JILW Review and Payment: JILW reviews the application and, if approved, makes the advance payment directly to the employee. The process from application to payment typically takes around two months.

Interaction with the Bankruptcy Proceedings

The Unpaid Wage Advance System operates in conjunction with, but is distinct from, the main bankruptcy proceedings.

Subrogation (求償権の代位取得 - Kyūshōken no Dai-i Shutoku)

When JILW makes an advance payment to an employee, it is legally subrogated to the employee's original claim against the bankrupt company's estate for the amount paid. This means JILW "steps into the shoes" of the employee and can seek recovery from the bankruptcy estate.

Priority of JILW's Subrogated Claim

Crucially, JILW's subrogated claim generally retains the same priority status in the bankruptcy proceedings as the original employee's wage or retirement claim.

• If the original claim (or part of it) qualified as an administrative claim (e.g., wages for the 3 months prior to bankruptcy), JILW's subrogated portion of that claim also ranks as an administrative claim.
• If the original claim (or part of it) qualified as a priority bankruptcy claim, JILW's subrogated portion ranks as such.
  This principle was affirmed by the Japanese Supreme Court in a judgment on November 22, 2011 (Saikō Saibansho, Heisei 23-nen (Ju) No. 1078, Minshū Vol. 65, No. 8, p. 3165).

Employee's Remaining Claim

The employee still retains a claim against the bankruptcy estate for:

• The unpaid 20% of the eligible wages/retirement allowance that was not covered by the advance.
• Any eligible unpaid amounts that exceeded the age-based caps of the system.
  This remaining claim also keeps its original priority status (administrative or priority bankruptcy).

Coordination by the Bankruptcy Trustee

The trustee must therefore manage these intertwined claims when making distributions from the bankruptcy estate. They need to determine how the 80% advance from JILW is allocated against the different components of an employee's total claim (e.g., against retirement allowance first, then older regular wages, per JILW's internal rules of application - 充当 - jūtō). This allocation then determines the nature and amount of JILW's subrogated claim and the employee's residual claim for the purposes of bankruptcy distribution. This can be complex, especially if an employee has multiple types of unpaid claims with different priority statuses.

Tax Implications for the Employee

A notable feature of the Unpaid Wage Advance System is that any payments received by employees under it are treated as "retirement income" (退職所得 - taishoku shotoku) for Japanese income tax purposes. This applies even if the original unpaid amount was for regular wages. Retirement income in Japan is subject to significant deductions and is often taxed at a more favorable rate than regular employment income, which can provide an additional benefit to the affected employees. This is why the "Declaration for Receipt of Retirement Income" is required.

Importance of Pre-Bankruptcy Preparation

For companies anticipating financial difficulties, maintaining accurate and up-to-date payroll and retirement benefit records is paramount. When bankruptcy becomes inevitable, the debtor's counsel can greatly assist the process by:

• Ensuring these records are well-organized and readily available for the future trustee.
• Informing employees about the Unpaid Wage Advance System and the necessary documentation.
• Pre-calculating potential unpaid amounts to help employees and the future trustee.

Such preparatory work can expedite the trustee's certification process, enabling employees to receive advances more quickly.

Conclusion

The Unpaid Wage Advance System (Miharai Chingin Tategae Barai Seido) stands as a vital pillar of support for employees in Japan when their employer faces bankruptcy. By providing a relatively swift partial payment of essential unpaid regular wages and retirement allowances, it helps to cushion the immediate financial blow of job loss and employer insolvency. The bankruptcy trustee's role in accurately verifying and certifying these claims is indispensable for the system's proper functioning, ensuring that this important safety net reaches those it is designed to protect. While not a full recovery, these advance payments, coupled with the priority afforded to labor claims within the bankruptcy proceedings, offer a significant measure of protection for workers in challenging circumstances.