Japanese Labour Standards Law uses the concept of the average wage for a range of purposes. For payments such as allowance for notice of dismissal or compensation benefits for absence from work, where the payment needs to reflect the ordinary living expenses of the worker, the average wage becomes the standard to calculate these payments.

The concept of average wage is widely used. It applies to area such as allowance for notice of dismissal, compensation benefits for absence from work, annual paid leave payment, accident and/or disaster compensation, and calculation of salary reduction penalty.

The average wage, in principle, is calculated using total wages for the 3 months prior to the event for which payment is to be made. The total wages are divided by the number of calendar days in that 3 months period. If the wages were set by working hours or days, by piece-work system, or by a contract system and the number of working days is not many, this method may differ. In this case, the total wage is divided by the actual working days for the 3 months period to determine an actual working day wage. Then if 60% of the calculated actual working day wage for that worker is higher than the calculated average wage using the calendar day method, then the 60% of the actual working day wage becomes the average daily wage for that worker.