How Korean Severance Pay Works: Average Wage, DB vs DC Pensions, Interim Settlement and the 14-Day Deadline

In South Korea, severance pay (퇴직금, toejikgeum) is not a perk that a generous employer may or may not offer. It is a statutory floor. Article 4 of the Employee Retirement Benefit Security Act requires every employer to set up at least one retirement benefit scheme, and Article 11 says an employer that set up nothing is treated as having a severance pay scheme. “We don’t do severance here” has no legal effect. The only workplaces outside the Act are businesses that employ only live-in relatives and households employing domestic workers (Article 3).

This article explains how the amount is determined under Korean law and where the differences between workers come from. Statute references are to the Korean texts on the government’s Korea Law Information Center; English terms are descriptive translations, not official ones. Nationality is not a condition anywhere in these rules, so foreign employees in Korea are covered on the same terms.

Four schemes the law recognizes

Article 2 defines four kinds of retirement benefit scheme:

Scheme	What is fixed in advance	What the worker receives
Severance pay scheme (Art. 8)	At least 30 days of average wage per year of service	Final average wage × 30 × years
Defined benefit pension, DB (Arts. 13–18)	The benefit level	At least the same as the severance scheme (Art. 15)
Defined contribution pension, DC (Arts. 19–22)	The employer’s contribution	At least 1/12 of annual wages each year, plus investment results
SME retirement pension fund (Art. 23-2 onward)	The employer’s contribution	For businesses with fewer than 100 regular workers, run by the Korea Workers’ Compensation and Welfare Service

The severance scheme and DB plans use essentially the same arithmetic. What differs is where the money sits. Under the severance scheme there is no obligation to fund it outside the company, so collection can become harder if the business runs into trouble. A DB employer must hold a minimum level of reserves with a registered pension provider (Article 16). DC plans work on a different formula altogether.

An employer that wants to introduce a scheme or switch to a different type needs the consent of a union representing a majority of workers or, failing that, a majority of the workers themselves (Article 4(3)). Different calculation rules for different employees within one business are prohibited (Article 4(2)).

Who qualifies

Article 4(1) excludes two groups: workers with less than one year of continuous service, and workers whose contracted hours average under 15 per week over four weeks.

Three misunderstandings come up often:

• “I’m on a fixed-term contract, so no severance.” Employment type is irrelevant. A worker who completes one year or more of continuous service qualifies.
• “I worked 20 hours a week during busy periods, so I qualify.” The test is contracted working hours. Overtime that pushed some weeks above 15 hours does not change the contracted figure.
• “Part-timers don’t get it.” A part-timer contracted for 15 hours or more per week who stays more than a year does.

The year is counted in days: if the period from hire date to leaving date is even one day short of 365, the statutory obligation does not arise. If you are close to that line, confirm which date your employer records as your leaving date.

Average wage versus ordinary wage

Severance is based on the average wage (평균임금). Article 2(1)(6) of the Labor Standards Act defines it as the total wages paid to the worker during the three months before the triggering event, divided by the total number of days in that period. It is a backward-looking average of money actually paid. The Ministry of Employment and Labor states the full formula as average daily wage × 30 × days of continuous service ÷ 365.

The ordinary wage (통상임금) looks forward. Article 6 of the Labor Standards Act Enforcement Decree defines it as the hourly, daily, weekly or monthly amount agreed to be paid regularly and uniformly for contracted or total work. It is used where a rate is needed in advance, such as overtime premiums.

Usually the average wage is higher, because overtime pay and a share of bonuses feed into it. But unpaid absences or reduced pay in the last three months can push it below the ordinary wage. Article 2(2) of the Labor Standards Act then applies: the ordinary wage is used as the average wage. It is a floor that stops severance falling below a normal month’s rate.

What goes into the three-month average

Base pay and allowances actually paid in the three months count in full. Money paid on an annual cycle is prorated. The Ministry adds 3/12 of the total bonus paid in the year before leaving and 3/12 of unused annual leave pay. Its own calculator gives the examples “bonus addition ₩1,000,000 = ₩4,000,000 × 3/12” and “leave pay addition ₩75,000 = (₩60,000 × 5 days) × 3/12”.

Leave pay has a limit. The Ministry’s interpretation (임금근로시간과-2861, December 2021) counts pay for leave that arose in the year before the leaving year and was not taken. It excludes pay for leave that arose in the leaving year itself and becomes payable only because the worker is leaving, since that payment did not exist before the triggering date.

Some things come out. Article 2 of the Labor Standards Act Enforcement Decree removes the following periods, and the wages paid during them, from the calculation: the first three months of probation, business suspension caused by the employer, maternity and miscarriage leave, treatment for a work-related injury, parental leave, industrial action, military or reserve duty, and employer-approved leave for non-work illness. Its second paragraph also excludes wages and allowances paid on a temporary basis and wages paid in kind.

DB versus DC: the same career, two outcomes

Consider someone hired on 1 September 2021 who leaves on 1 September 2026. Their annual salary rose each year: ₩36M, ₩40M, ₩44M, ₩48M, ₩52M. Assume no bonuses.

• Severance scheme or DB plan: the last three months’ wages total ₩13,000,000, the window is 92 days and service is 1,826 days. ₩13,000,000 × 30 × 1,826 ÷ (92 × 365) ≈ ₩21,207,266. The final salary is applied to all five years.
• DC plan: if the employer pays exactly 1/12 of each year’s salary, contributions total (36 + 40 + 44 + 48 + 52) million ÷ 12 ≈ ₩18,333,333, before investment gains or losses.

The gap is about ₩2.87M before returns, and closing it over five years would take strong investment performance. That structure is why a DB-style calculation tends to favor workers whose pay is rising fast, while DC can look better when pay is flat or falling, as under a wage-peak arrangement. DC does have one structural advantage: the money is in the worker’s own account every year, independent of the employer’s later fortunes.

For DC members, the average-wage rules above make no difference at all. A bonus landing in the final quarter, or February falling inside the window, does not change what is in the account.

Interim settlement: only for listed reasons

Under the severance scheme, getting severance paid out before leaving is allowed only at the worker’s request and only for the reasons in Article 8(2) of the Act and Article 3 of its Enforcement Decree:

1. A worker without a home buys one in their own name.
2. A worker without a home pays a jeonse deposit or rental deposit for their own residence (once per employer).
3. The worker, spouse or dependant needs six months or more of medical treatment and the worker bears medical costs above 12.5% of annual wages.
4. The worker was declared bankrupt within the five years before applying.
5. The worker obtained a court decision opening individual rehabilitation within the five years before applying.
6. The employer introduces a wage-peak system that cuts pay in exchange for extending or guaranteeing the retirement age.
7. By agreement, contracted hours are cut by at least one hour a day or five hours a week and the worker will continue for at least three months.
8. Severance would fall because of the working-hour reduction introduced by the 2018 Labor Standards Act amendment.
9. The worker suffered damage from a disaster designated by Ministry notice.

Reasons 6 to 8 share a logic: the average wage is about to drop, and applying a lower wage to all past service would cost the worker, so the law lets them lock in the earlier period first. After an interim settlement, continuous service for severance purposes restarts from the settlement date. The employer must keep supporting documents for five years after the worker leaves.

DC plans have no interim settlement; instead the Act allows early withdrawal of the balance for reasons set by decree (Article 22).

The 14-day deadline and the IRP rule

Severance must be paid within 14 days of leaving (Article 9(1)). The date can be extended only by agreement between the parties in special circumstances, not by the employer’s unilateral notice. Under Labor Standards Act Article 37, a lump-sum retirement benefit not paid within 14 days accrues delay interest from the next day, and Article 17 of its Enforcement Decree sets the rate at 20% a year.

Payment is in principle made by transfer to an Individual Retirement Pension (IRP) account in the worker’s name (Article 9(2)); if the worker does not nominate one, it goes to an IRP in their name. The Enforcement Decree (Article 3-2) lists exceptions:

• leaving at age 55 or older;
• a benefit at or below the amount set by Ministry notice;
• the worker’s death;
• a foreign worker who held a work-eligible status of stay and leaves Korea after the job ends;
• deductions required by other laws (the remainder still goes to an IRP).

The right to claim severance lapses after three years without exercise (Article 10). If the employer becomes insolvent, retirement benefits are paid ahead of taxes, public charges and other debts, except those secured by pledge or mortgage (Article 12).

Why retirement income tax is low

Severance is money built up over many years and received at once. Taxing it like one year’s salary would push it into high brackets, so Korea’s Income Tax Act softens it in two steps (Articles 48 and 55(2)):

1. A service-years deduction is subtracted first (₩1M per year for up to five years, then larger amounts in later bands). Any part-year counts as a full year.
2. The remainder is divided by years of service and multiplied by 12 to turn it into an annual equivalent. A second deduction is taken, the ordinary brackets apply, and the resulting tax is divided by 12 and multiplied by years of service again.

For ₩50M of severance after 10 years: the service deduction is ₩15M; converted pay is (₩50M − ₩15M) × 12 ÷ 10 = ₩42M; the converted-pay deduction is ₩8M + 60% × (₩42M − ₩8M) = ₩28.4M; the tax base is ₩13.6M. At 6% that is ₩816,000, and × 10/12 gives ₩680,000 of income tax. With 10% local income tax on top, the total is about 1.5% of the payout. Money transferred to an IRP is not taxed on transfer; tax applies when it is withdrawn.

Running your own numbers

If you are under a severance scheme or a DB plan, the hire date, leaving date, last three months’ wages, last year’s bonus and prior-year unused leave pay are enough for a working estimate. The severance pay calculator shows the average daily wage, gross severance and an estimate of retirement income tax. If an excluded period such as parental leave or work-injury treatment falls inside your three-month window, the Ministry’s counseling line (1350 within Korea) or a certified labor attorney is a better guide than any calculator.