Do You Owe Severance If an Employee Resigns in Korea?

The short answer: yes, and it catches people out

A foreign parent company sets up a Korean subsidiary, hires four people, and budgets for their salaries plus employer social insurance. Two years later, one of them resigns to join a competitor. The country manager forwards an invoice from the departing employee’s lawyer, and head office asks why it is being asked to pay a redundancy package to someone who quit.

It is not a redundancy package. It is 퇴직금 — a statutory retirement benefit that every qualifying employee accrues from their first day, and that becomes payable when they leave, for any reason at all.

If your Korean entity has employees and has never booked a severance accrual, it has been understating its cost base for as long as it has had staff. That is the practical problem: not the payment itself, which is knowable in advance, but discovering it for the first time as a cash demand.

Who qualifies, and who does not

Article 4(1) of the Act requires every employer to operate at least one retirement benefit scheme. It then carves out exactly two categories of employee:

Both tests have to be satisfied. A part-timer working 12 hours a week for five years is outside the scheme; a full-timer at eleven months is outside it too — but at twelve months and one day, the full year counts.

Three things about “continuous service” catch foreign employers:

• It follows the employment relationship, not the contract document. Rolling a fixed-term contract, or re-papering someone onto a new agreement, does not restart the clock by itself.
• Nationality is irrelevant. A foreign national on an E-7 or D-8 visa accrues on exactly the same terms as a Korean colleague. Departing foreign staff often do not know to ask, which does not reduce the liability sitting on your balance sheet.
• Probation counts. A three-month probationary period is part of continuous service, not a prelude to it.

How the calculation actually works

The statutory formula in Article 8(1) is a prorated amount equivalent to 30 days’ average wage for each year of continuous service.

The word doing the work there is average wage, which is a defined term. Under the Labor Standards Act it means the total wages paid in the three calendar months immediately before the triggering event, divided by the total number of calendar days in that period.

A worked example

An employee on a gross monthly salary of KRW 4,000,000 leaves on 30 June after exactly three years, with no bonus in the reference period.

Roughly three months’ salary, for three years of service. That is the shape of the liability: about one month of pay per year worked, accruing from day one and payable in a single sum at an unpredictable moment.

Add a regular bonus into the reference quarter and the figure rises, because the bonus lifts the average wage. This is why the timing of someone’s departure relative to your bonus cycle changes what you owe — and why employers who accrue at a flat one-twelfth of salary tend to be slightly under-reserved.

Retirement allowance or retirement pension?

The Act contemplates two ways of meeting the obligation, and the distinction matters more for a new subsidiary than most people realise.

A retirement allowance (퇴직금) is paid by the employer from its own funds when the employee leaves. A retirement pension (퇴직연금) is funded during employment into an external financial institution, as either a defined benefit or a defined contribution plan.

Article 5 requires a business established after the 2012 wholesale amendment to set up a defined benefit or defined contribution plan within one year of establishment, having sought the opinions of the employee representatives. A newly incorporated foreign subsidiary should therefore not assume the informal pay-it-when-they-leave approach is available to it by default.

Changing scheme type later requires the consent of the employee representatives, and a change that disadvantages employees requires their consent specifically. It is materially easier to get this right at the start than to unwind it in year three.

The 14-day rule

Article 9(1) requires payment within 14 days of the date the entitlement arises. The deadline can be extended only by agreement between the parties, in extraordinary circumstances.

That last clause is narrower than foreign employers assume. It does not cover:

• “Our payroll runs on the 25th.”
• “Head office has to approve any transfer over this amount.”
• “The employee has not returned their laptop.”
• “We are still calculating it.”

Late payment attracts delay interest and is one of the most straightforward complaints an employee can bring to the Labor Office. Because the amount is usually undisputed, these cases tend to resolve against the employer quickly.

The mistakes we are asked to fix

In rough order of how often they arrive:

1. No accrual at all. The entity has run for three years and the liability appears nowhere in the accounts. This is an accounting problem before it is a legal one — the P&L has been overstating profit, and if there is any prospect of an audit, a valuation or a sale, it will surface at the worst possible moment.
2. A foreign-template contract that contradicts the Act. Clauses stating severance is payable “at the company’s discretion” or “only on redundancy” are unenforceable. They do not reduce the obligation; they just guarantee an argument.
3. Interim settlement without a prescribed ground. Paying someone out mid-employment to smooth cash flow, outside the grounds the Presidential Decree allows, does not extinguish the entitlement.
4. Assuming resignation forfeits it. Covered above, and still the most common.
5. Under-accruing by ignoring bonuses. A flat one-twelfth of base salary understates the figure for anyone with a regular bonus.

What to do about it

The obligation is entirely knowable in advance. What makes it painful is discovering it late, and the fix is unglamorous: calculate the accrual monthly on actual wages, post it to the ledger rather than a spreadsheet, and check that your contracts and rules of employment describe the scheme you are actually operating.

If you are not sure whether your Korean entity has been accruing correctly, the fastest way to find out is to look at the last three months of payroll registers against the balance sheet. That comparison takes minutes and answers the question. It is also the first thing we check when taking over a payroll, and it is closely tied to how the books are kept — an accrual only means something if it is in the ledger the accounts are drawn from.

Figures and statutory references current as at 14 August 2026, checked against the Korea Legislation Research Institute English translation of the Act on the Guarantee of Employees’ Retirement Benefits and the Labor Standards Act definition of average wage. Korean employment law is amended regularly — confirm against the sources listed below before acting, and take advice on your specific facts.