Severance Pay in Korea (퇴직금): A 2026 Guide for Employers

Who qualifies for severance pay in Korea?

Every employee with at least one year of continuous service who averages 15 or more hours a week is entitled to severance when employment ends. The rules sit in the Employee Retirement Benefit Security Act (근로자퇴직급여 보장법, geulloja toejik geubyeo bojangbeop).

• The reason for leaving does not matter. Resignation, dismissal, mutual agreement and contract expiry all trigger payment.
• Nationality does not matter. Foreign and Korean employees are treated identically, as are fixed-term and part-time staff who meet the thresholds.
• It is fully employer-funded. Nothing is deducted from pay; severance is a cost on top of gross salary.
• Under one year of service, no statutory severance is due, although a contract or company policy can be more generous.

Two arrangements do not remove the obligation. Severance cannot be prepaid in monthly instalments, so a "severance included" (퇴직금 포함) salary package common in startup offers does not discharge it. An interim settlement (중간정산, jungan jeongsan) before departure is allowed only on statutory grounds, such as a non-homeowner buying a home or paying a housing lease deposit, medical costs for care lasting six months or more, or bankruptcy proceedings. And while genuine independent contractors fall outside the system, misclassifying an employee as a contractor does not erase the entitlement.

How is severance pay calculated?

The statutory minimum is 30 days of average wage for each year of service, pro-rated by days:

Severance = average daily wage × 30 × (days of service ÷ 365)

Average wage (평균임금, pyeonggyun imgeum) is the total wages paid in the three calendar months before the leaving date, divided by the number of calendar days in that period. It is broader than base salary and typically includes:

• Base pay and fixed monthly allowances
• Overtime, night and holiday premiums
• A pro-rated share of bonuses paid over the previous year

If the average wage works out lower than the employee's ordinary wage, the ordinary wage is used instead. Because the calculation looks only at the final three months, late raises, bonuses and heavy overtime in that window all push the payout up. Our Korea compensation guide explains how allowances and bonuses are usually structured.

A worked example

An employee leaves after exactly three years (1,095 days). Their pay over the final three calendar months, July to September (92 days), was KRW 4,000,000 a month.

That is close to the "one month's pay per year" shorthand, handed over in a single payment. Across a team of long-tenured staff, the accrued liability becomes a balance-sheet item.

Severance pay system vs. retirement pension (DB and DC)

Every employer must operate at least one retirement benefit system. There are three options:

• Severance pay system (book reserve): the employer accrues the liability internally and pays at departure using the formula above.
• Defined benefit (DB): the employer guarantees a payout at least equal to the statutory formula, holds the plan with an external financial institution and bears the investment risk. The statutory funding target has been 100% since 2023.
• Defined contribution (DC): the employer pays at least one-twelfth of the employee's annual wages into the employee's account each year. Once paid, the obligation is settled; investment risk and return sit with the employee.

Choose DB if you want the payout tied to final pay and can manage the funding; choose DC if you prefer a fixed, fully expensed annual cost with no salary-inflation risk. Introducing or switching a plan requires the consent of a union representing the majority of employees or, if there is none, a majority of employees, so decide before headcount grows. Employers with a pension plan must also give participants pension education at least once a year.

The system is changing. In February 2026, government, unions and employers agreed to make externally funded retirement pensions mandatory for all workplaces, phased in by company size, alongside new fund-type pension plans. As of mid-2026, the government was aiming to legislate within 2026, with the phase-in schedule still to be finalized. Until an amendment passes, book-reserve severance remains lawful, but employers planning multi-year hiring in Korea should treat external funding as the direction of travel.

Paying severance: the 14-day rule, IRP and penalties

Severance and any other unpaid wages must be settled within 14 days of the employee's last day. The deadline can be extended only by agreement between employer and employee in special circumstances.

1. Pay into the IRP. Since 14 April 2022, statutory severance is generally paid into the employee's Individual Retirement Pension account (IRP; 개인형 퇴직연금, gaeinhyeong toejik yeongeum) rather than as cash, with tax deferred until withdrawal. Exceptions include employees aged 55 or older and small amounts.
2. Avoid late payment. Unpaid amounts accrue delay interest of 20% a year from the day after the deadline.
3. Know the penalties. Since 18 September 2026, failure to pay severance on time is punishable by up to 5 years' imprisonment or a fine of up to KRW 50 million, up from 3 years or KRW 30 million. The same increase applies to other unpaid wages from 8 October 2026.

For the employee, severance is taxed as retirement income, separately from salary and with deductions that grow with years of service, so the effective rate is usually well below the rate on the same amount paid as salary. The tax and social insurance guide covers how regular pay is taxed.

Planning checklist for employers

• Accrue monthly. Book about one-twelfth of salary as a liability each month so the payout is already funded.
• Pick a system deliberately. Decide on severance, DB or DC before you scale headcount; changing later needs employee consent.
• Budget the full loaded cost. Severance sits on top of gross pay and the employer's social insurance share of roughly 10.5–11.5% for office roles; see running payroll in Korea.
• Watch the final three months. Late bonuses and overtime raise the payout.
• Do not bundle severance into salary. Pay it at departure, or only through a qualifying interim settlement.
• Calendar the 14-day deadline for every departure and confirm the employee's IRP details early.
• Check contractor status. Our Korean labor law guide explains when a contractor is legally an employee.

Severance in Korea is rules-based and predictable: handled early, it is a known monthly accrual; handled late, it becomes a 14-day scramble with criminal exposure. Hire From Korea is a recruiter-led hiring partner that shortlists 3–5 vetted Korean candidates and coordinates bilingual (English–Korean) interviews; contract review, payroll and tax support, or an Employer of Record setup can be arranged on a custom quote. Request a consultation to plan your hire.

Frequently asked questions

Is severance pay mandatory in Korea?

Yes, for employees with at least one year of continuous service who work 15 or more hours a week. It applies whether the employee resigns, is dismissed or reaches the end of a fixed-term contract, and the minimum is 30 days' average wage per year of service.

How is severance calculated for a partial year?

After the first full year, severance is pro-rated by days of service. An employee who leaves after 18 months is owed about 1.5 times 30 days' average wage. Someone who leaves before completing one year is not owed statutory severance.

Can severance be included in the annual salary?

No. Severance cannot legally be prepaid as part of monthly pay, so a "severance included" package does not discharge the obligation. Early payment is allowed only as an interim settlement on statutory grounds, such as buying a first home or long-term medical care.

What happens if an employer pays severance late?

Unpaid severance accrues 20% annual delay interest from the day after the 14-day deadline, unless both sides agreed to extend it. Since 18 September 2026, non-payment is punishable by up to 5 years' imprisonment or a KRW 50 million fine.

Sources

• KOTRA — 2025 Labor Laws in Korea (PDF) — eligibility and 30-day minimum, average wage definition, 14-day payment, IRP payment since 14 April 2022, DB funding target, pension education
• Korea Legislation Research Institute — Act on the Guarantee of Employees' Retirement Benefits (English) — DC contribution of at least one-twelfth of annual wages, consent for plan changes, IRP transfer and the age-55 exception
• Korea Legislation Research Institute — Enforcement Decree of the same Act (English) — permitted grounds for interim settlement
• Junggi Economy — Retirement benefit arrears penalty up to 5 years from 18 September (Korean) — penalty increase from 3 years / KRW 30 million to 5 years / KRW 50 million, per MOEL
• Maeil Shinmun — Wage arrears penalties up to 5 years from 8 October (Korean) — 20% delay interest and the 2026 penalty increases
• HUB International — South Korea severance pay reform and pension changes (June 2026) — agreement on mandatory externally funded plans and the 2026 legislative target

This article is general information, not legal or tax advice. Rules change — confirm specifics with a licensed Korean labor attorney (노무사) or tax accountant.