Severance payment, also called retirement benefit or separation pay, refers to the money a company pays an employee as compensation for their period of service when the employee leaves the company. This system is common not only in Korea but also in other countries, although the details may differ.
In Korea, the basic rule for severance payment is that an employee must have worked for at least one year, and the company pays 30 days of average salary for each year of service.
Here’s more information about severance payments in Korea.
1.What is the severance payment?
It’s a kind of salary that the company pays to an employee who has worked for the company for at least one year and then leaves. It can also be called retirement benefit, redundancy pay, or separation pay.
In Korea, by law, if an employee works for one year or more, the employee is entitled to about 30 days’ average salary of a year. Since this is required by law, it is mandatory, not optional.
The reason for retirement or resignation does not affect an employee's right to receive severance pay. even an employee who is terminated for cause can still calim severance pay under Korea labor law.
As long as an employee works in Korea, the Korean severance pay law can be applied. Both domestic and foreign employees working in Korea for a company registered abroad are entitled to claim severance pay under Korean labor law. Even illegal workers can be eligible for the Korean severance pay.
2. How is the severance payment calculated?
The amount of severance pay should be determined by the agreement between the employer and the company. when it's not determined, company follow the minimum severance pay calculation by law.
To calculate severance pay, you need to check the employee’s working period and the average salary for the 3 months prior to leaving the company.
Example)
“Bill” worked at “Company A” for 2 years. His total salary for the last 3 months before leaving the company was 12,000,000 KRW.
A) 12,000,000 / 92 = 130,434
B) 130,434 × 30 × 730 ÷ 365 = 7,826,040KRW
->The company should pay the employee 7,826,040 KRW as severance payment.
If there were bonus amounts that “Bill” received in the 12 months before leaving the company, 25% of the bonus should be added to his salary for severance calculation. For example, if the total bonus was 8,000,000 KRW, then the total salary used for calculation would be 14,000,000 KRW instead of 12,000,000 KRW. so his severance payment will be 9,130,434KRW
3.When should the company pay it?
The severance payment must be paid within 14 days after the employee leaves the company. If the payment is delayed, the company is required to pay 20% interest to the employee.
Nowadays, it is also possible to register for a retirement pension plan. In this case, the company can pay the employee’s severance payment monthly or yearly in advance, before the employee leaves the company.
To register a retirement pension plan, you need to visit the bank in person and submit the required documents. The registration process can be a bit tedious, but once it’s done, managing employees’ severance payments becomes much easier
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