[Updated: May 6, 2020]
There was a news report that more than half of the foreign workers in South Korea are not aware of the fact that they can claim for the severance pay. Yes, Korean labor law recognizes severance pay. It is being regulated by the Guarantee of Workers’ Retirement Benefits Act(“GWRBA”). In this article, we will provide you a guide to the general ideas of how severance pay works, who gets it and how much in Korea.
- 1 What Is Severance Pay in Korea?
- 2 Severance Pay Is a Statutory Liability of Every Employer Doing Business in Korea
- 3 Severance Pay Is a Statutory Right for Every Employee Working in Korea
- 4 Who Is Entitled to Severance Pay under Korean Law?
- 5 How Is Severance Pay Calculated in Korea?
- 6 Severance Pay Should Be Given Even When The Employment Contract Is Governed By the Foreign Laws
What Is Severance Pay in Korea?
According to GWRBA, the severance pay is a payment which the employer is required to pay for its retiring or resigning employees. The reason for retirement or resigning does not matter. Even an employee who is fired due to his fault can claim the severance pay under Korean law.
Severance Pay Is a Statutory Liability of Every Employer Doing Business in Korea
Severance pay is a statutory liability of the employer. It doesn’t matter whether an employment contract provides the severance pay clause or not, because severance pay is a statutory right.
The place of incorporation of the employer doesn’t matter. So long as its employee provides its service within Korea, the Korean severance pay law shall apply to the foreign company.
Severance Pay Is a Statutory Right for Every Employee Working in Korea
It applies to every employer doing business in Korea. A branch of a foreign company is also subject to the severance pay liability under Korean law. Even a domestic of a foreign employee who works in Korea for the company which is registered in a foreign country can claim the severance pay pursuant to the Korean labor law. (We will elaborate on this later in this article)
Who Is Entitled to Severance Pay under Korean Law?
At Least 1 Year of Continuous Service
Under Korean law, every retiring employee is entitled to severance pay, except an employee whose continuous service period is less than one year and an employee whose average weekly working hours over a four-week period is less than 15 hours.
Only employees are entitled to severance pay under Korean law. The term employee means someone who provides labor pursuant to the employer’s instructions or directions in exchange for wage compensation. This does not rely on how the contract describes the title of the person. Even if the contract defines the party as an independent contractor or agent, the person can be classified as an employee when the content of service and how it works fall within the character of an employment relationship.
The important factors for classifying someone as an employee are, among other things, (i) whether the person receives instructions or directions from an employer, so there exists a superior/subordinate relationship and (ii) whether the wages the person receives are of a nature that compensates for the labor he or she provided.
For example, there are many cases where the Korean court ruled that the foreign English teachers in Hagwon or school are the employees who are entitled to severance pay, so long as they provide their service under the direction of the Hagwon.
Valid Working Visa or Korean Citizenship Are Not Required
The nationality of the employee doesn’t matter. Foreigners have the same right of severance pay as domestic people. Even illegal foreign workers are entitled to severance pay.
How Is Severance Pay Calculated in Korea?
The amount of severance pay should be determined by the agreement between the employer and the employee. However, it is common that the employers provide the minimum severance package under GWRBA.
30 Day’s Average Wage
Under GWRBA, an employee is entitled to receive a severance payment at the rate of 30 days’ “average wage” for each “continuous year of service.”
In the calculation of the “average wage”, a base salary, and other payments such as overtime payment, position allowance, incentive allowance paid to all employees to promote efficiency shall be included.
With respect to the bonus payment, if it was paid irregularly and one-time out of the company’s profit, it shall not be included.
Continuous Year of Service
Regarding the “continuous year of service”, the Korean courts have held that it means the period from the time of execution of an employment contract to the time of employment termination.
If an employee, however, was absent from work for a certain period of time during the “continuous years of service”, such as taking personal leave for study or serving in the military, those non-employment periods shall be excluded from the “continuous years of service”.
Internal transfer with the same company doesn’t count as a discontinuation of the service. Lateral transfer with a group company could raise some complicated issues regarding whether the employer should pay the severance. Generally speaking, if the current contract is terminated and the employee becomes relieved from the supervision/direction of the current employer, the current employer should pay the severance. If not, the employment is deemed extended and the employee will be paid off the severance when the contract is finally terminated.
Severance Pay Should Be Given Even When The Employment Contract Is Governed By the Foreign Laws
So far we have explained the severance pay under the Korean law. For someone who is familiar with contract law, however, it would be questionable whether the employer can circumvent the severance pay liability by using a foreign governing law clause in its employment contract.
For example, a U.S. based company enter into an employment agreement with its staff working in Korea. The U.S. company can put a contract clause which designates the U.S. law as the governing law of the employment relationship. As the U.S law, not a Korean labor law, shall apply to this contract relationship, can the U.S employer argue that it is exempted from the severance pay liability under the Korean law? The answer is No. The employer can still get a severance pay pursuant to Korean labor law, even if the contract is governed by foreign law which doesn’t recognize severance pay.
The Korean law prohibits the employer from circumventing its severance pay liability by exercising the choice of law. According to Korean law, even though the employer and employee mutually choose the law of the foreign country as the governing law, the employee is still able to enjoy the rights and protections under the mandatory rules of Korea where his workplace is located. The Korean courts interpret the rules and regulations regarding the severance pay are the mandatory rules. Thus, the employee is still entitled to severance pay under Korean law regardless of what their employment contract says about the governing law.
Actually, our office had successfully represented foreign employees regarding this matter. The client worked in Korea for a multi-national company. The foreign company introduced a scheme to circumvent the severance payment under Korean law. They designated the Hong Kong law as the governing law of their contract and had their staffs in Korea enter into a contract with a paper company in Hong Kong. The Korean court held that the Korean severance pay law should be applied regardless of the employer’s choice of Hong Kong law so long as the employees provide their services in Korea. And then the court ordered the company to pay the severance pay and interests thereof.
We hope this article to be of assistance to you. If you have more questions on severance payment or any other Korean labor law-related issues, please send an email by simply clicking here or visit Legal Consultation page. Our Korean licensed lawyers, not a U.S. lawyer residing in Korea, will answer your inquiry.
Also, you can find a stack of legal information and articles on Korean labor law, written by a Korean licensed lawyer, by clicking here.
© Wonil Chung, Korean Licensed Lawyer, Chung & Partners, Korean Full Service Law Firm. All rights reserved.
Because of the generality of this update, the information provided herein, which may or may not reflect the most current legal development, may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.