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Japan Background Checks

Introduction

Professional advisors in Japan (lawyers, CPA’s, etc.) are increasingly being asked to assist with the performance of background checks on potential employees in Japan.

Historically, foreign employers rarely performed such checks and even now such pre-employment procedures are far less common than in jurisdictions such as Australia or the United States.

This paper explains the reasons for the increased interest in Japan background checks, the scope of the background checks that are available, and also the limitations that clients and their advisors need to be aware of.

Mitigating Hiring Risk

Foreign companies have often been unaware of the risks that they face when hiring in Japan. While some risk is common across all jurisdictions, many risks are unique to Japan for language and cultural reasons.

Japan hiring risks can be divided into four broad categories:

1. Unsuitable Candidates Can Cause Damage to the Japan Business: A significant, expensive, and unfortunately common mistake made by foreign companies in Japan is to rely exclusively on interviews and background checks that are performed only in English. Clients need to bear in mind that the goal of hiring in Japan is to operate more effectively in the Japan market. A typical mistake involves selecting a candidate who demonstrates fluency (and charm) in English. These candidates will have a good sense of what a foreign interviewer wants to hear. Unfortunately, the characteristics that make an individual suitable in the eyes of foreign management may not transfer well when the person is dealing with Japanese clients and customers.

2. Difficulty Terminating Employees: In Japan, employees have strong rights. Even if an employee has no real basis for a claim, the employer can be forced to expend significant financial and management resources defending allegations of improper termination. In addition, even mere allegations can damage a foreign company’s reputation in the Japan market. Probation periods and fixed term contracts can useful though such provisions are routinely challenged in court by aggrieved employees.

3. Poor Hiring Choices Can Lead to Legal Liability: A Japan preemployment background check can mitigate several legal risks that can flow from a bad hiring decision. Legal risk includes:

  • Suits Brought By the Employee Against the Employer: A key goal of a Japan preemployment background check is to avoid hiring an employee who has a history of making unreasonable claims against former employers.
  • Direct Legal Liability to Third Parties: Where an employee causes harm to a third party, the employer may be held liable for (the equivalent of) negligent hiring. This is especially relevant if the employee’s behavior could have been identified by a Japan background check.

4. Internal Control: The Internal Control Environment found in the Japan operations of foreign companies is often weak. This weak internal control environment stems from:

  • Size of the Japan Operation: The Japan operations of foreign companies are usually comparatively small. This means that the proper segregation of duties (for example approving roles and payment roles) is ineffective or even non-existent.
  • Source Documents are in Japanese: The language issue makes verification of source documents by non-Japanese staff (including internal and external auditors) difficult. Foreign management generally has to accept the word of Japan based employees that documents are what they are purported to be.
  • Banking is in Japanese: Related to the issue of source documents, banking transactions are done in Japanese (English language banking is extremely limited). This makes financial oversight difficult.
  • Japanese Companies are Legally Bound via a Company Seal: Signatures are not used by Japanese companies entering important transactions. This means that bank accounts can be opened / operated, loans entered, and contracts executed by anyone with possession of the company seal. Even if the company has internal rules regarding use of the Company Seal these rules are typically not be effective against third parties.
  • Respect for Age and Seniority: Japan has a culture of respect for more senior employees and in general for anyone older. Less senior / younger employee will rarely question the actions of an older / more senior employee.

In summary, in the context of a weak internal control environment, it is critical that professional advisors guide their clients in the use of preemployment background checks to minimize risks associated with individual employees.

Japan Background Checks– Cost-Benefit Analysis

Foreign employers in Japan may be reluctant to initiate background checks due to cost factors; especially when compared to the relatively cheap, standardized checks that are available in jurisdictions such as the United States. In addition, there is understandable reluctance to slow down the hiring process, particularly when a potential “superstar” employee has been identified.

However, there is increasing awareness of the need to balance the cost and time required to complete these preemployment background checks needs to be compared to the cost of a failed hiring decision. Recruiters in Japan often charge around 35% of the candidates first year (total compensation). In addition, a failed Japan hire may do real harm to the business in Japan and tie the Japan entity in expensive litigation.

Types of Background Checks in Japan

The type of preemployment background check undertaken in Japan will depend on the circumstances. Considerations include the seniority of the employee and the nature of the Japan operation.

There are broadly three types of background check available in Japan as follows:

  1. Database Checks: The focus of these basic checks is to check details such things as organized crime membership, bankruptcy status, and residential address of record.
  2. Basic In Person Checks: The focus here is for someone to physically confirm basic information such as residential address.
  3. Reference Checks: References are contacted and interviewed to confirm such thing as the applicants strengths / weakness, competence, tardiness, special achievements, etc.

Limitations on Japan Pre-employment Checks

It need to be understJapan has strong protections in place with respect to personal privacy. Important implications for preemployment background checks include:

  • Need for Written Consent: Most meaningful Japan pre-employment background checks will start with obtaining the written consent of the candidate to undertake the pre-employment check.
  • No Credit Checks. It is generally not possible to undertake a pre-employment credit check in Japan.

Professional advisors should work with their clients to ensure that appropriate written consent is in place early in the hiring process.

Conclusion

It is important that professional advisors raise the issue of appropriate background checks with their clients. This discussion should occur as early as possible, certainly no later than the point when offer letters / employment contracts are being prepared.

Where a key hire is involved, a Japan background check should include someone interviewing the candidate in Japanese and undertaking (at least) a basic background check. The basic background check should confirm matters such as residential address, educational qualifications, and prior employment.

The above is provided for general information purposes only and does not constitute advice to undertake or refrain from undertaking any action. Only qualified Japanese professionals are able to advise on Japan immigration, legal, and tax matters.