If you employ staff in Korea, severance pay (퇴직금) is not an optional perk — it is a statutory obligation that accrues from the first year and lands as a lump sum the moment someone leaves. Foreign employers are often surprised by how predictable, and how sizeable, the liability can be. This guide walks through who qualifies, how the entitlement builds, how it is calculated, and the planning choices that keep it from becoming a cash-flow shock.
What severance pay is — and who qualifies
Korean severance pay is governed by the Labor Standards Act and the Employee Retirement Benefit Security Act (ERBSA). The rule is simple: an employee who has worked continuously for one year or more and averages at least 15 hours per week is entitled to a retirement payment when employment ends.
A few points that trip up new employers:
- The reason for leaving does not matter. Resignation, dismissal, mutual agreement, or contract expiry all trigger the payment. There is no "for cause" exception that erases it.
- Foreign and Korean employees are treated identically. Nationality has no bearing on eligibility.
- It is fully employer-funded. Unlike pension or health insurance, nothing is deducted from the employee's paycheck. Severance is a company expense layered on top of gross salary.
- Under one year of service = no statutory severance, though contracts or company policy can be more generous.
How it accrues: roughly one month per year
The widely cited shorthand is "about one month's pay for every year of service," and that is accurate. Entitlement builds continuously rather than vesting on anniversaries, so an employee who works 1.5 years is owed roughly 1.5 months of average wage.
The statutory formula is:
Severance = 30 days of average wage × (total days of service ÷ 365)
The critical variable is average wage, which is calculated from the employee's total earnings over the final three months of employment — divided by the number of calendar days in that period. "Total earnings" is broader than base salary. It typically includes:
- Base pay
- Overtime and night-work premiums
- Fixed monthly allowances
- A proportional share of regular bonuses paid over the year
Because the calculation leans on the last three months, end-of-tenure raises, large bonuses, or heavy overtime in that window all push the payout up. Our Korea compensation guide covers how allowances and bonuses are structured, which directly affects this number.
A worked example
Consider an employee who worked exactly three years with an average wage of 4,000,000 KRW per month in their final three months.
| Item | Figure |
|---|---|
| Average monthly wage | 4,000,000 KRW |
| Years of service | 3 |
| Severance owed (approx.) | 12,000,000 KRW |
That is three months of pay handed over at once. Multiply that across a team of long-tenured staff and the accrued liability becomes a balance-sheet item you cannot ignore.
Retirement pension: the system replacing the old lump sum
Historically, companies parked severance internally and paid it out at departure (the "Severance Pay System"). Increasingly, the standard is a retirement pension plan under ERBSA, where funds are set aside externally with a financial provider. Every employer must operate at least one of the following:
- Defined Benefit (DB): The employer guarantees the final payout (the same ~30-days-per-year formula) and bears the investment risk. Liability tracks the employee's final salary.
- Defined Contribution (DC): The employer deposits at least one-twelfth of annual salary into the employee's account each year. Once contributed, the obligation is settled; investment risk and return sit with the employee.
- Legacy Severance Pay System: Internal, unfunded accrual — still used by some employers but being phased toward funded plans.
A reform to ERBSA is targeted for enactment by the end of 2026 that would push more employers onto externally funded DB or DC plans rather than unfunded internal reserves. Employers planning multi-year hiring in Korea should assume external funding is the direction of travel.
DB vs. DC at a glance
- Choose DB if you expect strong salary growth and want predictability tied to final pay.
- Choose DC if you prefer fixed, fully-expensed annual contributions and want to remove your salary-inflation risk.
- Switching a workforce between systems requires the consent of a majority union or a majority of employees — not a unilateral employer decision.
Payment, IRP transfer, and tax
Two operational rules matter at departure:
- The 14-day rule. Severance, along with any unpaid wages, must be settled within 14 days of the last working day unless both parties agree to extend. Late payment can expose the employer to penalties and interest.
- Mandatory IRP transfer. Since April 2022, statutory severance is generally paid into the employee's Individual Retirement Pension (IRP) account on a pre-tax basis, rather than as cash to a bank account, unless it rolls directly into a new employer's plan.
On tax, there is good news for employees: severance is classified as retirement income and taxed separately from regular salary, using a formula that recognizes years of service. The effective rate is typically far lower than the progressive income tax and social-insurance burden applied to monthly wages — a long-serving employee can see a low single-digit effective rate on their lump sum.
Planning checklist for employers
To keep severance from catching you off guard:
- Accrue monthly, not annually. Book roughly 1/12 of salary as a liability each month so the payout is already funded.
- Pick a pension system deliberately. Decide DB vs. DC before you scale headcount; retrofitting is harder once you have employees and need their consent.
- Watch the final-three-months window. Be aware that late-tenure bonuses and overtime inflate the payout.
- Budget the full loaded cost. Severance sits on top of gross pay, pension, and insurance contributions — model it into your true cost-per-hire from day one.
- Confirm contractor status carefully. Genuine freelancers (who withhold 3.3%) are outside the severance regime, but misclassifying an employee as a contractor does not erase the entitlement. See our overview of Korean labor law essentials for the distinction.
Closing thoughts
Severance pay in Korea is rules-based and predictable, which means it rewards employers who plan and penalizes those who don't. Handled well, it is simply a known annual accrual; handled late, it becomes a 14-day scramble with penalty exposure. Hire From Korea helps global companies hire Korean talent and structure compliant, fully-costed employment from the start. If you would like help mapping your severance and retirement-pension obligations to your hiring plan, request a consultation and we will walk you through it.