Hiring through personal connections is old in Japan, but the modern referral programme, with a defined process and a bonus for a successful hire, spread mainly through start-ups and foreign companies. It is now common at large Japanese employers too, partly because agency fees are high.
The legal point is specific to Japan. Article 40 of the Employment Security Act prohibits anyone recruiting workers from paying remuneration to the people doing the recruiting, with exceptions that include ordinary wages paid to the employer's own staff. A referral bonus is therefore safe when it is written into the work rules or pay rules as part of wages and paid through payroll. A cash gift outside payroll, or a payment to someone who is not an employee, sits outside the exception. Large, repeated payments to the same employee can also start to look like an unlicensed placement business.
Because the bonus is wages, it is taxed and treated like other pay.
What it means for a foreign employer
- Write it into the rules. A global referral policy needs a matching clause in the Japan work rules or pay rules, with the amount and conditions, before the first payment.
- Keep amounts modest and fixed. A defined bonus per hire is safer than a percentage of salary that starts to resemble an agency fee.
- Expect far fewer referrals than at home. In Japan a referral puts the referrer's standing at risk. If the person fails the interview, the referrer has shown they lack influence; if the hire struggles, the pressure attaches to both of them. A bonus rarely offsets that. Run a programme, but don't build your sourcing plan around it.
- Confidentiality cuts both ways. Candidates may hesitate if they think word will get back to their employer through mutual contacts. Make clear how the referral will be handled.
Sources
- Employment Security Act, Article 40.
- Ministry of Health, Labour and Welfare guidance on payments to employees for recruitment, as summarised by Japanese labour law firms and social insurance labour consultants.