A recent news report revealed that more than half of the foreign workers in South Korea are not aware of the fact that they can claim 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 with a comprehensive guide on how severance pay works in South Korea, who is eligible to receive it, and how much you can expect to receive.

What Is Severance Pay in Korea?

According to GWRBA, the severance pay is a mandatory payment that employers must provide to employees upon retirement or resignation.  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 claim severance pay under Korean labor law.

Severance Pay Is a Statutory Liability of All Employers Doing Business in Korea

Severance pay is a statutory liability for every employer operating in Korea.  It doesn’t matter whether an employment contract provides the severance pay clause or not.  The employer’s place of incorporation is irrelevant. 

Severance Pay Is a Statutory Right for All Employees Working in Korea

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. (We will explore this in more detail later in the article.)

Even illegal workers can be eligible for the Korean severance pay.

What Are the Requirements under the Korean Severance Pay 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.

Employee status

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 wages.  The classification of “employee” is not determined by job title or contract wording. Even if a contract refers to someone as an independent contractor or agent, they may still be classified as an employee if the nature of their work meets the criteria for an employment relationship.

The key 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.

According to the Korean Supreme Court, Key factors in determining whether someone is an employee are as follows:

1. Employer control: Whether the employer sets the scope of work, enforces workplace rules or policies, and exercises significant supervision or control over the course of work.
2. Work conditions: Whether the employer designates working hours and locations, and whether the worker is bound by those conditions.
3. Economic independence: Whether the worker owns their tools, materials, or equipment, or can hire third parties to perform the work, indicating conducting business on their own account and independently.
4. Risk of profit or loss: Whether the worker bears the risk of profit or loss through the provision of their labor, as opposed to receiving fixed compensation.
5. Compensation structure: Whether the wages are directly linked to the labor performed, whether a base or fixed salary is provided, and whether income tax is withheld at the source.
6. Continuity and exclusivity: Whether there is an ongoing relationship with the employer and whether the worker is exclusive to the employer.
7. Recognition under social security laws: Whether the worker is recognized as an employee under social insurance and other labor-related regulations.

It should be noted, however, that Supreme Court emphasizes that not withholding income tax and not recognized as an employee under social securituy law alone does not invalidate an employee’s status, since employers often have the economic power to unilaterally decide these aspects.

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.

Additionally, there have been cases where executives working in Korea were recognized as employees under Korean severance pay law, given that they provided labor under significant employer control and lacked independent decision-making power in key business areas. (Please see this article)

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 the GWRBA, an employee is entitled to receive severance payment at the rate of 30 days’ average wage for each continuous year of service.

Average wage is calculated based on the employee’s salary from the last 3 months. This includes the base salary as well as additional payments such as:

• Overtime pay
• Position allowance
• Incentive allowances paid to all employees to promote efficiency

However, bonus payments are treated differently. if a bonus is paid irregularly and one-time from the company profit, t is not included in the calculation of average wage.

Continuous Year of Service

The term “continuous year of service” refers to the period from the start of an employment contract until the termination of employment, as interpreted by Korean courts.

However, if an employee is absent from work for a certain period of time during their continuous service, such as taking personal leave for study or serving in the military, those non-working periods are excluded from the continuous years of service.

Internal transfers within the same company do not interrupt the continuity of service.  Lateral transfers within a group company can raise more complex issues regarding severance payment obligations.  Generally, if the current contract is terminated and the employee becomes relieved from the supervision/direction of the original employer, the current employer should pay the severance.  If not, the employment is deemed to have extended without a break and severance will be paid at the final termination of the contract.

Severance Pay Must Be Given Even When the Employment Contract Is Governed By Foreign Laws

We have so far explained the severance pay under the Korean law.  However, for someone who is familiar with contract law, it would be questionable whether an employer can avoid severance pay obligations by including a foreign governing law clause in an employment contract.

For example, a U.S.-based company could enter into an employment agreement with its staff working in Korea and include a clause designating U.S. law as the governing law of the employment contract.  Since the U.S law, not a Korean labor law, shall apply to this contract relationship, can the U.S employer claim exemption from severance pay liability under Korean law?  The answer is no.  The employee 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 through a choice of law.  According to Korean law, even if the employer and employee agree to apply foreign law to their contract, the employee who works within Korea still retains the rights and protections provided by the mandatory labor rules of Korea, including severance pay. The Korean courts consistently interpret severance pay regulations as mandatory. Therefore, regardless of what the employment contract stipulates regarding governing law, employees are entitled to severance pay under Korean law if they work in Korea.

In fact, our office successfully represented foreign employees in such cases.  Our client worked in Korea for a multinational company that provided temporary staffing services. The company attempted to bypass Korean severance laws by using Hong Kong law as the governing law of the employment contract. However the Korean court ruled 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. The court ordered the company to pay the severance pay and accrued interest.

How to Collect Unpaid Severance Pay in Korea

There are various reasons a Korean employer might fail to pay severance. In such cases, it’s important to consult with a Korean lawyer to fully understand your rights and explore the most efficient way to collect your claim.

Since unpaid severance is considered a debt owed by the employer, the general process for debt collection in Korea applies. Additionally, you may file a claim with your local labor board to pursue the matter.

Read More: Korean Lawyer Explains Debt Collections In South Korea – Overview

Notably, failure to pay severance is not only a debt issue but can also result in criminal penalties under Korean law. Employers who intentionally withhold severance pay may face fines or imprisonment.

As a related matter, It’s worth to note that many ‘labor attorneys’ are actually not a lawyer.  The term labor attorney is a quite misleading translation of Korean occupation ‘노무사(nomusa)’.  A 노무사(nomusa) is licensed to provide legal advice on labor matters, but they are not lawyers and cannot represent clients in court. In Korea, a lawyer is called 변호사(byonhosa).

FAQ

Q) Can My emloyer include a severance pay in the gross monthly salary?

In general, this is not allowed under Korean law.  Employers sometimes use this kind of payroll system to reduce the financial burden of severance pay.(Think about the fact that the base salary is the average of the last 3 month salaries)  Thus the law only permits this payroll under several conditions, which is not easy to meet.

If you have any questions about the Korean severance pay in Korea and would like to speak directly with our Korean qualified English speaking lawyer, click the contact button below.  A real Korean lawyer-not a U.S. attorney hired by a Korean lawyer or just an English speaking staff-will help you competently.

For more in-depth legal information and articles on Korean labor law, written by a licensed Korean lawyer, click here.

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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.