A Statutory Employment Cost That Should Be Considered Before Hiring

Severance pay in Korea is fundamentally different from the discretionary severance packages commonly offered in some other countries.

Under Korean law, severance pay—legally treated as a retirement benefit—is a statutory employee entitlement. It is protected under the Act on the Guarantee of Employees’ Retirement Benefits, which establishes detailed rules regarding eligibility, calculation, payment deadlines and payment procedures.

A foreign company hiring employees in Korea should therefore account for severance from the beginning of employment. Failing to budget for or properly administer this obligation can create an unexpected liability when an employee resigns, is dismissed or reaches the end of a fixed-term contract.

Who Is Eligible for Statutory Severance Pay?

As a general rule, an employee becomes eligible for statutory severance pay when the employee:

• Has completed at least one year of continuous service; and

• Has worked an average of at least 15 hours per week over a four-week period.

The obligation generally applies regardless of whether the employment ends through voluntary resignation, dismissal, mutual separation or expiration of a fixed-term contract.

Foreign nationality does not exclude an employee from Korean severance protection. If a foreign employee is legally regarded as an employee under Korean labor law and satisfies the service requirements, the employee is generally entitled to the same statutory severance benefits as a Korean employee.

How Is Severance Pay Calculated?

The statutory minimum is 30 days of average wages for each year of continuous service.

The general formula is:

Severance Pay = One-Day Average Wage × 30 Days × Total Service Days ÷ 365

For budgeting purposes, employers often estimate the annual severance cost at approximately one month of salary for each completed year of service—or roughly 8.33% of annual compensation.

However, the final calculation is not necessarily based only on the employee’s current monthly base salary.

Average wage is generally calculated using the employee’s wage payments during the three months immediately preceding the termination date. Depending on the facts, the calculation may include regular allowances, bonuses and certain unused annual leave payments.

If the calculated average wage is lower than the employee’s ordinary wage, the ordinary wage may be used instead. Therefore, the actual severance liability can differ from a simple one-month-salary estimate.

Severance Cannot Simply Be Included in Monthly Salary

Foreign employers sometimes attempt to state in an employment agreement that the employee’s monthly salary already includes severance pay.

This approach is generally problematic. Merely labeling part of the employee’s monthly salary as “severance” does not normally eliminate the employer’s statutory obligation to calculate and pay severance when employment ends.

Advance or interim payment of severance is permitted only in limited circumstances prescribed by law. Employers should therefore avoid relying on a contractual waiver or an inclusive salary clause without obtaining proper advice.

Payment Deadline and IRP Requirement

Statutory severance must generally be paid within 14 days after the employment termination date.

The payment date may be extended where special circumstances exist and the employer and employee specifically agree to the extension. A company should not assume that the deadline can be postponed unilaterally because of an internal approval process or an overseas funding delay.

Since April 14, 2022, statutory severance must generally be transferred to an Individual Retirement Pension account, commonly referred to as an IRP, designated by the departing employee.

The usual process includes:

• Confirming the employee’s final service period and termination date;

• Calculating the employee’s average wage and statutory severance;

• Obtaining the employee’s IRP account confirmation;

• Preparing the applicable retirement income tax documents; and

• Transferring the severance amount within the statutory deadline.

Payment directly to the employee’s ordinary salary account may be permitted in limited cases, including:

• The employee retires at age 55 or older;

• The total retirement benefit is KRW 3 million or less;

• Payment results from the employee’s death;

• A qualifying foreign employee has departed Korea after retirement; or

• Another specific statutory exception applies.

Because the IRP exceptions are narrowly defined, employers should confirm the payment method before transferring the funds.

Retirement Allowance and Retirement Pension Plans

Korean employers may generally satisfy their retirement benefit obligations through one of the following arrangements:

• A statutory severance allowance system;

• A Defined Benefit retirement pension plan, commonly known as a DB plan;

• A Defined Contribution retirement pension plan, commonly known as a DC plan; or

• An eligible small-business retirement pension fund arrangement.

Under a traditional severance allowance system, the employer records and pays the liability when the employee leaves.

Under a retirement pension arrangement, contributions or reserves are maintained through an external retirement pension provider. This structure is intended to strengthen protection of the employee’s retirement assets, including where the employer experiences financial difficulties.

For businesses established after the relevant provisions took effect in July 2012, the law directs employers to establish a DB or DC retirement pension plan within one year after hearing the opinion of the employees’ representative. Where no qualifying pension arrangement has been established, however, the employer’s statutory severance obligation does not disappear; the ordinary severance allowance system is generally deemed to apply.

The Korean government continues to promote broader retirement pension coverage. In 2026, access to the Small and Medium Enterprise Retirement Pension Fund was expanded to businesses with fewer than 50 employees, with a further expansion to businesses with fewer than 100 employees scheduled for 2027. The government has also continued to pursue the phased expansion of retirement pension adoption.

Foreign employers should therefore consider not only the immediate severance liability but also whether a DB, DC or eligible small-business pension arrangement is operationally appropriate.

Why Employers Should Plan Before Hiring

Severance should be addressed when the employment structure and compensation package are designed—not only after an employee announces a departure.

Before hiring in Korea, employers should consider:

• Reserving approximately one month of compensation per service year;

• Clearly separating base salary, allowances, bonuses and severance;

• Determining whether the company will operate a severance allowance, DB or DC arrangement;

• Establishing a termination checklist that includes average wage calculations and IRP documentation;

• Allowing sufficient time for overseas funding and internal approval; and

• Reviewing the treatment of bonuses, unused leave payments and other compensation elements.

Failure to prepare may result in an unexpected cash requirement, missed payment deadline, labor complaint, late-payment liability or other legal sanctions.

Korea Payroll Partners supports severance calculations, retirement income tax reporting, IRP payment coordination and termination payroll administration for foreign companies operating in Korea.

Need assistance with Korean severance pay or termination payroll? Contact Korea Payroll Partners by email.

Official References

• Korean Government Easy Law Guide – Severance Pay Calculation, Deadline and IRP Payment

• Ministry of Employment and Labor – Official Severance Pay Calculator

• Ministry of Employment and Labor – 2026 Expansion of the SME Retirement Pension Fund