Retirement Benefit System · Severance Pay
Severance Pay
What is the retirement benefit system?
- Based on 30 days of average wage per year of service
- The key issue is whether periods of continuous service are combined
- Interim settlement is limited to statutory reasons
Severance pay is calculated on the day an employee leaves, but the amount is determined by the records built up since the hire date. The hire date in the employment contract, the items listed in the wage ledger, and how leaves of absence and transfers were handled all feed directly into the period of continuous service and the average wage. So setting up a retirement benefit system is less about writing one line in the rules than about keeping HR records in a form that can withstand verification at the time of departure. In practice, what matters is whether the payroll administrator can open the file on the employee’s last day and arrive at a number without dispute.
Cases first diverge on coverage. Employees who work fewer than 15 hours per week on average over four weeks, and those with less than one year of continuous service, are excluded. But if a three-month contract has been renewed four times and passes one year, the employee is covered. The calculation basis is 30 days of average wage × years of continuous service, and the average wage is the total wages for the three months before departure divided by the total days in that period. Items paid on an annual basis, such as annual leave allowance or regular bonuses, are included only at the prescribed proportion, and if the average wage is lower than the ordinary wage, the ordinary wage is treated as the average wage. Payment is due 14 days after departure, and an extension is possible only by agreement of the parties.
The cost structure also differs by plan type. Under a defined benefit (DB) plan, the company is responsible for the benefit level based on the average wage at retirement. Under a defined contribution (DC) plan, the company pays in at least one-twelfth of annual total wages each year, so the way wage increases flow into the company’s cost differs between the two. Interim settlement is allowed only for reasons listed in law, such as a first-time home purchase, a lease deposit burden, medical care of 6 months or more for the employee or a dependent, bankruptcy or personal rehabilitation, or introducing a wage peak system. An interim settlement made without checking the reason is not recognized as a settlement, so you may have to recalculate and pay again for that period.
The most common mistake in practice is trusting form over substance. Some companies assume that tenure resets if they accept a resignation letter and rehire the person a few days later, but if the job duties and reporting lines continue unchanged, the periods are added together based on substance, not form. Split-payment arrangements, in which severance is added to monthly pay, are also generally void, so the company may have to pay severance again on top of what it has already paid. Payment more than 14 days late incurs late-payment interest of 20% per year for the overdue days, and nonpayment itself is a criminal offense, so it is safest to document the calculation basis as soon as notice of resignation is received. Detailed requirements and figures may be amended, so have a specialist review any large settlement.
Inwoo LeeLeadership, communication, and performance management expert
Kyungtae KimHR expert · organizational culture and HR strategy consultantThe Employee Retirement Benefit Security Act requires employers to set up at least one of a severance pay system or a retirement pension system, and provides that severance pay must be at least 30 days of average wage for each year of continuous service.
This is the case of Company A, an auto parts manufacturer with 140 employees and KRW 32 billion (≈ US$23,941,300) in annual revenue. For 5 years it had signed 22 production-line contract workers to 11-month terms, left a one-month gap, and then re-signed them. The problem surfaced when 3 departing workers filed a complaint with the labor office, saying 'pay us severance for 4 years of service.' (hypothetical example)
- The HR director cross-checked five years of contracts against access logs and found that 18 days of the supposed one-month gap showed the employee actually working on the same line. The conclusion: this was a renewal, not a break in service.
- In the labor law firm’s review, the three complainants’ continuous service came to 3 years 10 months, 4 years 2 months, and 4 years 7 months, and the estimated unpaid amount worked out to roughly KRW 9 million (≈ US$6,730) per person.
- When the payroll manager recalculated the average wage to include annual leave allowance and 3/12 of the regular bonus of 400% per year, average severance pay per employee rose 11.4% from the first calculation.
- The CEO asked, 'Don't the other 19 have the same problem?' The company retroactively recognized the tenure of all its contract workers, enrolled them in a DC retirement pension, and restructured to pay contributions every month.
- The three complaints were withdrawn by agreement, and the total of KRW 28.7 million (≈ US$21,500) was settled within the 14-day deadline. The following year, the 7 departing employees raised zero objections, and processing time dropped from 3 hours to 40 minutes per case.