Appointed, Not Employed: What a First Japan Country Manager Signs Up to as Representative Director

When a foreign enterprise technology vendor registers its first Japan leader as 代表取締役 of the KK, that person is appointed to run the company rather than employed by it. Both sides should understand what that changes before the offer is signed.

In 2017 I was promoted from director of a division to managing director of the company I was working for. The promotion came with a new agreement to sign. Doing my due diligence on it, I worked through points I had heard about in passing but had never looked into, because they had not applied to me. None of them changed my decision, but several were points I realised I had to pay attention to. Any first-time managing director should understand them before signing.

When a foreign enterprise technology vendor sets up a kabushiki kaisha (KK) in Japan, the first country manager is often registered as its representative director (代表取締役). The title carries real authority. It also changes the legal relationship. A representative director is appointed under a 委任契約, not employed under an employment contract (雇用契約). The position is closer to a contractor engaged to deliver an outcome than to an employee, and the outcome is running the company. As a result, most of the protection Japanese labour law gives employees does not apply.

This article is written for two readers. The first is the executive taking a managing director seat for the first time. The second is the company hiring its first leader in Japan. In my experience, both usually meet this question late, when the agreement is already on the table.

A director is appointed, not employed

The Companies Act states that the relationship between a KK and its officers follows the Civil Code rules on 委任, under which one party entrusts another to act on its behalf. A director owes the company a duty of care and a duty of loyalty, and the dismissal rules of the Labour Standards Act and the Labour Contract Act do not, as a rule, apply.

The Labour Standards Act protects a “worker”, meaning someone who works under the direction of an employer and is paid wages for that work. Ministry of Health, Labour and Welfare guidance treats the representative or executive body of a corporation as outside that definition.

Courts look at substance, not the title

Whether someone is a worker turns on the facts. The test asks whether the person works under direction and supervision (使用従属性) and whether the pay is consideration for that work.

A title alone does not settle it. Ministry guidance treats an officer who holds no executive authority (業務執行権) or power of representation (代表権), but works as a factory manager or department head for wages, as a worker. Courts have found worker status for a sales office head who also held the title of managing director, and for a “vice president” who did ordinary staff work. This is the employee-director (使用人兼務取締役) exception.

The representative director sits at the other end. In one Tokyo District Court case, a representative director who decided and carried out matters central to the business, without instruction from anyone, was held not to be a worker because his power of representation was comprehensive. A representative director who holds full authority over the business is therefore unlikely to be treated as a worker.

Removal is not dismissal

An employee in Japan can be dismissed only where the dismissal is objectively reasonable and socially acceptable (Labour Contract Act, Article 16). A director has no equivalent protection. Shareholders can remove a director at any time by ordinary resolution, and no reason is required. In a KK wholly owned by its foreign parent, that is a decision of a single shareholder. The representative title can also be withdrawn by the board where the KK has one, which leaves the person a director without representative authority.

The protection a director does have is financial. A director removed without just cause (正当な理由) can claim damages from the company. The loss is measured by what the director would have received by serving to the end of the term, typically the remaining remuneration and, in some cases, bonus and retirement pay. Just cause covers situations that objectively prevent the director from doing the job, such as misconduct, illness that prevents the work, or clear unfitness for the role. There have been cases where a lack of ability was accepted as just cause because the director fell short of what the specific role required, and cases where it was rejected because the criticism was general. A major shareholder’s loss of confidence, a preference for another candidate, or a difference over management direction has generally not been enough on its own. Whether just cause exists depends on the facts of each case.

The term of office therefore matters. The standard term is up to two years, and a non-public KK can extend it to up to ten years in its articles. A longer term raises the potential claim, and a shorter term reduces it. A director can also resign at any time, because either party to a 委任契約 may end it at any time.

Social insurance changes in three different ways

Employment insurance (雇用保険). Directors are generally not covered. An ordinary director who also holds an employee role, such as department head, can be covered where the facts show a strong employee character. A representative director is not covered, so there is no unemployment benefit after removal.
Health insurance and pension (健康保険・厚生年金). These continue. An officer who receives remuneration from the company as consideration for regular work is insured as a person used by the company.
Workers’ accident insurance (労災). Directors fall outside it. Officers of smaller companies can join through a special enrolment scheme run through a labour insurance association, subject to headcount limits by industry. Otherwise, private accident cover is worth considering.

Director pay follows tax rules, not payroll practice

A KK can deduct director remuneration for corporate tax only where it is a fixed regular payment (定期同額給与), a bonus filed in advance with the tax office (事前確定届出給与), or a qualifying performance-linked payment (業績連動給与).

Base pay. The monthly amount must stay the same through the fiscal year. It can normally be changed only within three months of the start of the fiscal year, or on a material change in duties or a serious deterioration in results.
Bonus. The timing and amount must be filed with the tax office in advance. If the amount paid differs from the filing, in either direction, the whole payment loses its deduction.
Commission and performance pay. Performance-linked pay requires an objective formula set by a compensation committee or equivalent process, and public disclosure such as a securities report. Where the KK is a family-type company (同族会社) for tax purposes, it qualifies only if it is wholly owned by a company that is not. Unless the KK meets these conditions, commission that varies with monthly bookings is not deductible for the KK, because it is neither a fixed regular payment nor a bonus filed in advance.

A representative director cannot be treated as an employee-director for tax purposes. The option of paying part of the package as employee salary, which ordinary directors with a department role can use, is therefore not available to the person holding the representative seat.

None of this makes variable pay unlawful. It changes the cost and the mechanics. Common approaches include a higher fixed base, a bonus filed in advance, or variable pay and equity provided by the parent. Each has its own tax treatment and needs advice.

What this means in practice

For the company hiring its first Japan leader

Decide whether the country manager needs to be the representative director. Since 2015, a KK no longer needs a representative director resident in Japan, so a parent executive can hold the seat.
If the country manager is employed rather than appointed, choose the title with care. A company that gives a director without representative authority a title such as 社長 (president) can be bound by that person’s acts towards third parties who rely on it.
An employee-director arrangement is possible for an ordinary director with a genuine employee role. It is not possible for the representative director.
If the country manager is appointed representative director, document the appointment as a 委任契約, and align the remuneration with the tax rules before the first payment.

For the executive taking the seat for the first time

Ask whether you will hold an employment contract, a 委任契約, or both, and with which entity.
Ask how long the term of office is, and what is paid if you are removed early. There have been cases where retirement pay was recovered because it had been fixed in advance, and cases where it was not because no provision existed. Agreeing the amount in writing at appointment removes that uncertainty.
Confirm how bonus and commission will be paid, by whom, and on what timetable.
Plan for the gaps: no unemployment benefit, no workers’ accident cover unless specially enrolled, and the need for directors’ and officers’ liability insurance.

What to put in the offer and agreement

Item	What to settle
Structure	委任契約, employment contract, or both; which entity is the counterparty
Term	Length of term and reappointment process
Fixed pay	Monthly amount for the fiscal year and the review date
Bonus and commission	Amount or formula, payer (KK or parent), filing and payment dates
Equity	Plan, vesting, and treatment on removal or resignation
Departure	Agreed payment on removal without cause, notice, and handover period
Protection	Directors’ and officers’ liability insurance and company indemnity
Restrictions	Confidentiality and any post-departure non-compete
Benefits	Social insurance, workers’ accident special enrolment, private cover

The representative director seat is the right structure for many first Japan leaders. It should be a deliberate choice, made with both sides understanding what it removes and what has to replace it.

This article is general information, not legal or tax advice. Readers should take their own legal and tax advice on their specific arrangement.

Sources

Government and official sources

Legal, academic and professional commentary