Severance pay and retirement pensions in Korea: what workers are owed

If you work in South Korea for at least one year, the law guarantees you a payout when you leave your job. That payout is called toejikgeum (퇴직금, severance pay), and it applies to almost every worker regardless of nationality, visa type, or whether you quit or are dismissed. The one-sentence answer: for each full year you work, your employer owes you the equivalent of one month of your average wage.

Calculator: Korea Severance Pay Calculator — work out your severance pay (toejikgeum) from your start date and last three months’ pay.

How it works

The legal basis is Article 34 of Korea’s Labour Standards Act and the Employee Retirement Benefit Security Act (ERBSA), which came into force on 1 December 2005. Two conditions must both be met to qualify.

• Length of service: you must have worked continuously for the same employer for at least one full year.
• Hours per week: your average working hours must be 15 hours or more per week across the entire employment period.

Part-time workers averaging fewer than 15 hours a week are exempt. Everyone else — full-time employees, fixed-term contract workers, and foreign nationals — qualifies on equal terms.

The statutory minimum payout is 30 days of your pyunggyun imgeum (평균임금, average wage) for every year of service. Average wage is calculated from your total earnings in the final three calendar months before your last day: base salary, fixed allowances, and a pro-rated share of any annual bonus received in the preceding 12 months (annual bonus ÷ 12 × 3). It is not just your headline base salary. Partial years count proportionally — three years and six months of service yields 3.5 months of average wage.

Employers must pay severance within 14 days of your last working day. Payments delayed beyond that accrue interest at 20% per year. Failure to pay is a criminal offence carrying up to three years in prison or a fine of up to ₩30 million.

When an employer operates a toejik yeongeup (퇴직연금, retirement pension) plan — rather than a simple cash severance scheme — the money is accumulated in a separate account during your employment. The three pension structures are explained below.

Why Korea does it this way

Korea’s lump-sum severance system dates to 1953, when the original Labour Standards Act created a mandatory retirement allowance of one month’s pay per year served. At the time, workplace pensions did not exist and most workers had no other retirement savings mechanism.

By the early 2000s, two problems were clear. First, employers held severance money on their own balance sheets; if a company went bankrupt, workers lost their entitlement. Second, because job tenures were short and payouts came in cash, workers often spent the money rather than saving it for retirement.

The ERBSA of 2005 introduced a funded pension layer to sit alongside — or replace — the old cash reserve system. Employers could now contribute to ring-fenced pension accounts at banks or insurers, reducing insolvency risk for workers. Participation in retirement pension plans has grown steadily since then, though the underlying one-month-per-year entitlement has remained constant throughout.

The numbers that matter

What it means for you

Defined Benefit (DB) vs Defined Contribution (DC) pension plans

If your employer has enrolled in a hwakjeong geupyeo (확정급여, Defined Benefit or DB) plan, the company bears the investment risk. Your payout at retirement is still calculated by the one-month-per-year formula based on your wage at departure — exactly like the old cash reserve system, but held in a segregated account. DB tends to favour workers whose wages rise steeply over a long career.

A hwakjeong giyeo (확정기여, Defined Contribution or DC) plan shifts the investment decisions to you. Your employer deposits the equivalent of one twelfth of your annual wage into your personal DC account each month. You direct how those contributions are invested. The final payout depends on investment returns. DC can be advantageous if your wage growth is modest but your investments perform well.

An gaein toejik yeongeup (개인형 퇴직연금, Individual Retirement Pension or IRP) account is a personal portable account. When you leave any job, your severance or DC balance can be rolled into an IRP. You can also make voluntary top-up contributions to an IRP for tax benefits.

For workers leaving a job

If your severance exceeds ₩3 million and you are under 55, the law requires it to be deposited into an IRP rather than paid directly in cash — unless you are permanently leaving Korea. Open an IRP with any licensed Korean bank or insurer before your last day. Funds in the IRP grow tax-deferred and can be drawn from age 55 as an annuity, at a reduced tax rate of 3.3–5.5% on withdrawals (as long as total annual pension income from this source stays at or below ₩15 million).

If you take a direct cash lump sum when eligible, you pay toejik sodeuktax (퇴직소득세, retirement income tax) before the funds are released. The effective rate is progressive and depends on both the total amount and your years of service — longer service reduces the effective rate. Use the National Tax Service calculator to estimate your individual liability before deciding.

For foreign workers leaving Korea permanently

Permanent departure is a recognised exemption under ERBSA. This means you can request direct cash payment of your severance rather than being required to route it through an IRP. Your employer or the pension institution will withhold retirement income tax before paying. Steps to take before your last working day:

• Confirm in writing with your employer how your severance will be paid and when.
• Verify that your average wage calculation includes all fixed allowances and bonus proration — ask for a written breakdown.
• If you have an existing DC or IRP account, contact the institution about the process for lump-sum withdrawal on emigration. Rules and required documentation vary by institution.
• Check whether your home country has a tax treaty with Korea. Korea has bilateral double-taxation agreements with many countries; the treaty may affect how the Korea-withheld tax is credited at home. Verify with a qualified tax adviser or your home country’s revenue authority.
• Keep copies of your employment contract, payslips for the final three months, and the severance payment receipt for your records.

FAQ

Does it matter whether I quit or was fired?

No. The right to severance under Korean law is not conditional on the reason for leaving. Whether you resign voluntarily, are dismissed, or your fixed-term contract simply expires, the one-month-per-year entitlement applies equally, provided you meet the one-year and 15-hours-per-week thresholds.

My employer says my contract is ‘freelance’ — do I still qualify?

Possibly. Korean courts look at the substance of the working relationship, not the label on the contract. If you worked set hours, used the employer’s tools, followed their instructions, and were economically dependent on that one employer, a court may find you were an employee in practice. If you believe you have been misclassified, the Ministry of Employment and Labour (고용노동부) accepts complaints and can investigate.

What happens if my employer goes bankrupt before paying my severance?

If your employer operated a funded DB or DC pension plan, your entitlement is held in a segregated account at a financial institution and is protected from the employer’s insolvency. If the employer used the old-style unfunded reserve system (still permitted for smaller firms), you can file a imi-nim cheogeup (임금채권보장, Wage Claim Guarantee) claim through the Korea Workers’ Compensation and Welfare Service (근로복지공단, KCOMWEL), which can cover unpaid severance up to a statutory ceiling. Check current limits at KCOMWEL’s website.

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