Severance pay in Japan: entitlements and negotiated packages

What severance pay are you entitled to in Japan?

• Check the basis of each payment under three headings: the law; your existing contract, the work rules or a collective agreement; and the terms you agree now. Some payments rest on more than one basis. For each item, check separately the conditions for payment, the amount and the payment date.
• Payments required by law: statutory pay in lieu of dismissal notice (where the employer dismisses without 30 days' notice, average wages for the shortfall in notice; Labour Standards Act, Art. 20 — this applies only to dismissals, not to termination by mutual agreement or non-renewal). Wages up to the end date, and unpaid overtime (if claimed after leaving, the undisputed part must in principle be paid within seven days of your request; Labour Standards Act, Art. 23).
• Payments under contract, work rules or collective agreement: a retirement allowance (taishokukin — not payable by law as such; check the basis and conditions in the retirement allowance rules, collective agreement or individual agreement; it is not limited to retirement at retirement age). Assets in a defined contribution (DC) pension cannot necessarily be taken in cash just because you leave; check the conditions for benefits and the transfer procedures and deadlines with the plan administrator (link to official guidance). Payment for unused annual leave where an agreement or rule provides for a buy-out (buy-out is not legally required; taking leave before the end date is covered in section 3). Bonuses, incentives and equity compensation (RSUs, stock options: check the contract and plan rules for requirements to be employed on the payment date and for vesting).
• Additional payments agreed now: money agreed on top of what is due under law or existing contracts, conditional on your agreeing to leave, settling a dispute or similar. Typically the employer offers it to avoid the risk of a contested dismissal. It is often expressed as "X months' salary", but there is no statutory standard. Check what "months' salary" includes (base salary only, or bonuses and other items) and whether the figure is gross. Such offers typically arise in a request to resign, as an alternative to a redundancy dismissal, or as an option after a PIP.

• Notice pay is different: statutory pay in lieu of dismissal notice is a payment required by the dismissal procedure, not consideration for accepting the dismissal. You can receive it and still contest the dismissal. A payment labelled "one month in lieu of notice" cannot be classified from its name alone as the statutory payment or as an additional payment for agreeing to leave. On termination by mutual agreement, statutory notice pay does not normally arise at all. Even on a dismissal, the amount required depends on the days of notice given and on average wages, and "one month's salary" and "30 days' average wages" are not necessarily the same. Check the breakdown.
• Once termination by mutual agreement has validly taken effect, contesting the end of employment means examining whether that agreement was formed and is valid. Separately, a release of claims may restrict claims such as unpaid wages. An agreement or waiver does not necessarily wait until the money is actually paid to take effect. If you have already agreed, see Asked to resign in Japan? for what to check. Whether receiving compensation offered or paid at the same time as a dismissal amounts to accepting the dismissal or waiving claims depends on the payment conditions, the documents, and the exchanges before and after receipt — so check the conditions before accepting, and if the money has already been paid, review those circumstances.

How to assess a severance offer

• Your prospects of contesting the dismissal and of claiming wages for the period after it, and the cost and time of a dispute, are all negotiating material. A negotiated settlement sum may include wage claims; a separate settlement amount is not automatically added on top of back pay.
• Relevant factors include your length of service and pay level, how long resolution would take, the employer's circumstances (a deadline for the headcount reduction, reporting to headquarters) and yours (job prospects, your period of stay, how long you can go without income).
• Past settlements are a reference point, but they cannot be applied directly, because the grounds for dismissal, the claims and the terms differ. There is no single figure that answers "how many months is normal". Before comparing months, align what is being compared: the total including existing entitlements or the additional payment only; which pay items are included; a fixed amount or a conditional one; cash, shares or services. The same "several months" can mean very different things in what you receive and what you undertake.

How your employment end date affects pay and benefits

• End date: it affects taking annual leave (check your remaining days and whether you can take them before the end date; buy-out is not legally required), bonus eligibility requirements tied to being employed on the payment date, vesting dates for equity compensation, the date your social insurance coverage ends, and immigration notification deadlines. Moving the end date later can be worth as much as, or more than, an increase in the cash amount.
• Distinguish your last working day, the end date of employment and the vesting conditions under the plan, and check how pay, benefits and equity are treated during garden leave (a period in which you are paid but not required to work until the end date). Extending the end date does not automatically advance vesting. For equity compensation, check not only the vesting date but also when shares are actually delivered, forfeiture or clawback conditions before and after vesting, and the post-termination exercise window for stock options. For a foreign parent company's plan, check which approvals are needed to change the terms and who the parties to any agreement are.
• Stated reason for separation: recording the history of the request to resign in the agreement is useful, but your employment insurance category is decided by Hello Work after checking the facts.
• Outplacement support, a reference, how the reason for leaving is recorded in internal systems, and the procedure for returning personal items and data can also be included in the terms.

What to check in a severance agreement

• Release or waiver of claims: a clause under which you give up claims within a defined scope, or confirm that no claims remain. Unpaid overtime and similar claims can be covered even if they are not listed individually. If you want to keep a claim, have it expressly excluded. Check whether the release runs only in favour of the employer or also parent and affiliated companies, and which claims for which period it covers. Look not only at the wording but also at how it was explained and negotiated.

• Who pays, and on what terms: check who is liable to pay, the payment date, currency and conditions, whether payment is in instalments, and what happens if payment is late. Check when, and on what conditions, the release takes effect, separately from when the end of employment takes effect. Making full payment a condition of the release does not guarantee that payment will be made. Check whether your right to the agreed payment is carved out of the release, and what you can do if it is not paid. If the business is being wound down or liquidated, consider the certainty of payment, not just the amount. Where wages go unpaid because of insolvency, the unpaid wage advance scheme may cover regular wages and retirement allowances that meet its conditions. Statutory notice pay is not covered. Not everything in a package is covered either. There are time limits, so check early.

• Confidentiality and non-disparagement: is the scope too wide, and is the sanction for breach (such as repayment) excessive? A repayment clause is not automatically void because it is there; check the validity of the restriction and, separately, the consequences of breach (repayment, damages). Make sure the clause does not prevent you from consulting a lawyer or tax adviser, making disclosures required by law, or making legally protected reports.

• Non-compete and non-solicit: a post-employment non-compete (a restriction on working for or operating a competing business after employment ends) is assessed for reasonableness in light of the secrets or interests the company seeks to protect, your role, the duration, territory and scope of the restriction, any compensation, and the effect on your ability to find work. A restriction beyond a reasonable scope may be void as contrary to public policy, but it is safer to check the terms before signing and ask for changes if needed (the outcome of negotiation is not guaranteed). For a non-solicit clause, check specifically whom you may not approach and what conduct is prohibited. If your original contract already contains restrictions, check whether they survive after you leave.

• Governing law and jurisdiction: governing law is the question of which country's law applies; jurisdiction is the question of which country's courts hear a dispute. A choice of foreign law does not by itself exclude all the protections of Japanese labour law (Act on General Rules for Application of Laws, Art. 12). The effect of a clause designating a foreign court depends on when it was agreed, whether the dispute had already arisen, and where the work was performed. Even an agreement made when you leave cannot uniformly exclude bringing a future employment dispute before the Japanese courts (Code of Civil Procedure, Arts. 3-4 and 3-7). If there is an arbitration clause, check its scope and effect separately from the jurisdiction clause. Equity compensation agreements with a foreign parent may differ from the employment contract in the parties and the nature of the contract, so check their governing law and dispute resolution clauses individually. If there are English and Japanese versions, check which prevails.

How severance payments are taxed in Japan

• Tax classification: how each part of a package is taxed depends on its substance, not its label. A lump sum paid on leaving may qualify as retirement income (taishoku shotoku), but unpaid wages, overtime and ordinary bonuses are in principle employment income. Statutory pay in lieu of dismissal notice is treated as retirement income for income tax purposes.
• Retirement income benefits from deductions, but the calculation depends on years of service and other factors; "short-service retirement payments" (five years' service or less) and payments to directors are treated differently. Retirement payments from another employer, and lump sums from a corporate DC plan or iDeCo, can also change the retirement income deduction depending on when they are received and how the service or contribution periods overlap (link to National Tax Agency guidance).

• Withholding for tax residents: a tax resident receiving a retirement payment in Japan submits a "declaration concerning receipt of retirement income" (taishoku shotoku no jukyu ni kansuru shinkokusho) to the payer by the time of payment. If it is not submitted, as a rule 20.42% of the amount paid is withheld as income tax and special reconstruction income tax, and the position is settled through a tax return. The amount withheld and your final tax liability are different things; you cannot work out your net amount by deducting 20.42% from the package total. Also confirm what will be deducted from the offer, and when and how much you can expect to receive. Payments made directly by a foreign parent company need separate checking for withholding and filing.
• If you are leaving Japan: distinguish your departure date, your end date of employment and the payment date, and confirm before agreeing which tax year the income falls in, your residence status for tax, and the withholding and filing procedures. Receiving payment after you leave does not necessarily mean it is not taxable in Japan.
• For your actual tax position, consult a tax accountant (zeirishi) or other tax adviser.

How to negotiate and respond to an offer

• Do not accept the first offer on the spot. Ask for it in writing and for time to consider. Asking for more time does not by itself extend the deadline; confirm whether an extension has been granted. After the deadline, the same terms may no longer be available. Check the grounds for dismissal, the employer's explanations and the procedure followed, and if there are grounds to contest the dismissal, set out the specific facts. Negotiate not only the amount but also the end date, the stated reason for separation, paid leave, equity compensation, garden leave, the scope of the release and the payment terms, as a package.
• If you instruct a lawyer, they can organise the basis for your claims and responses, the terms offered, and the cost and time of negotiation and of each procedure, and can negotiate with the company on your behalf.
• An oral agreement can be effective, but to avoid later disputes about whether an agreement was reached or what it says, have every promise written into the agreement. If the agreement has an entire agreement clause ("this document is the entire agreement between the parties"), earlier emails and oral promises may be denied effect. Check every clause of the final version before signing.

Terminology used in this article

• severance pay — not used as the name of a single statutory benefit under Japanese law; used as the reader's or company's term for money connected with leaving
• severance package — the payments, benefits and conditions offered in connection with leaving employment (not only the additional payment)
• statutory pay in lieu of dismissal notice — the statutory payment (distinguished from pay for a contractual notice period)
• retirement allowance (taishokukin) — not limited to retirement at retirement age
• settlement — used for dispute resolution (an ordinary agreed departure is termination by mutual agreement)
• release or waiver of claims — giving up claims (distinguished from agreement to end employment)
• non-compete / non-solicit — restrictions on competing after employment ends / restrictions on approaching clients or employees (specify who and what)
• garden leave — release from work while employment continues (pay, benefits and whether other work is allowed depend on the terms)
• vesting / clawback / forfeiture — vesting (distinguished from delivery, sale and exercise) / recovery of compensation already paid / loss of compensation or rights (what is covered and the triggers depend on the plan)
• gross / net — before / after deductions (check whether "net" means the expected payment or the position after final tax)

Related articles

• Asked to leave: Asked to resign in Japan?
• Is the dismissal valid: Unfair Dismissal in Japan — Advice for Employees (existing guide)
• PIP: Put on a PIP in Japan?
• Redundancy dismissal: Laid off in Japan?

Request a review of your severance offer — We check the breakdown, payment terms and the rights you would give up, and set out your negotiating position.

References

• Labour Standards Act, Art. 20 (statutory pay in lieu of dismissal notice; exceptions apply), Art. 23, Art. 104 and Art. 39
• Civil Code, Arts. 522(1) and (2), 695, 127, 541 and 542
• Act on General Rules for Application of Laws, Art. 12; Code of Civil Procedure, Arts. 3-4(2) and 3-7(6); Arbitration Act, Supplementary Provisions, Art. 4
• Income Tax Act, Arts. 30, 199, 201 and 203 (the 20.42% withheld where no declaration is filed is 20% income tax plus special reconstruction income tax); for non-residents, Arts. 161, 171, 212 and 213; Basic Circular on Income Tax 30-5
• National Tax Agency guidance: receiving a retirement payment; withholding on retirement payments; short-service retirement payments; timing of retirement income; overlap adjustment of the retirement income deduction for DC and iDeCo lump sums (including the 2026 amendments)
• iDeCo official guidance on benefits and on changing or leaving employment; Japan Organization of Occupational Health and Safety, unpaid wage advance scheme
• Reference cases (with limits): Singer Sewing Machine case (Supreme Court, Second Petty Bench, 19 January 1973, Minshu Vol. 27 No. 1, p. 27); Foseco Japan Limited case (Nara District Court, 23 October 1970, Hanrei Jiho No. 624, p. 78). Case law on equity compensation is withheld pending verification of the original texts
• JFBA Rules on Advertising by Attorneys, Art. 3

This article is general information, not legal advice on your situation. Figures and procedures are as at the time of writing and may change. We do not handle applications, changes or notifications concerning status of residence; if you wish, we can refer you to a specialist who handles immigration matters.

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