Severance pay looks different once you calculate it yourself — average wage and the 3/12 bonus trap
Most people accept whatever lands in the account when severance is paid, without checking. Yet the method is set by law, and you can work it out yourself. The eligibility test is two lines: one year or more of continuous service, and 15 hours or more a week. Meet those and you receive at least 30 days of average wage for each year of service.
What decides the actual amount is how the 'average wage' is calculated. Hundreds of thousands of won turn on that single step.
Average wage is calculated over the three months before leaving
Average wage is the total wages paid in the three months before the leaving date, divided by the total number of days in that period. Two points need drawing out.
- The denominator is days, calendar days rather than working days. It generally comes to between 89 and 92
- The numerator is total wages, covering not only base pay but allowances paid regularly and uniformly
So heavy overtime in the final three months raises the average wage, while unpaid leave in that period lowers it. The timing of departure affects the amount.
How bonuses and unused leave allowance are counted
This is the part most often missed.
- Annual bonus — three twelfths of the amount received in the 12 months before leaving is added to the three-month wage total
- Allowance for unused annual leave — three twelfths of the amount that accrued two years before departure and was paid in the year before departure is added
Leave these two out and the figure drops noticeably. If your payslips show a bonus and it has not been reflected in the severance calculation, ask for the calculation breakdown.
Compared against ordinary wage, the higher figure applies
If the calculated average wage comes out below the ordinary wage, the ordinary wage is treated as the average wage. This principle is written into the labour standards act.
There are situations where it bites. Where a shutdown or sick leave in the final three months left wages low, calculating on the ordinary wage basis is what prevents a loss.
Working through an example
Take a three-month wage total of 9 million won over a period of 91 days.
- Daily average wage = 9,000,000 ÷ 91 = about 98,901 won
- Severance for one year of service = 98,901 × 30 = about 2.96 million won
- For three years and six months = 98,901 × 30 × 3.5 = about 10.38 million won
Service is calculated pro rata by day. It does not step up in whole years but accrues in proportion to days served, which means a few days can change the amount.
The payment deadline is 14 days
Severance is payable within 14 days of the leaving date as a rule. The deadline can be extended by agreement between the parties, but passing it without agreement amounts to unpaid wages.
Late payment can attract delay interest, and a complaint can be filed with the labour ministry. Advice is available from the ministry's customer counselling centre on 1350.
With a retirement pension (DB or DC) the calculation differs
Where the company operates a retirement pension scheme, the method splits.
- DB (defined benefit) — calculated on the final average wage. The result is close to the formula above
- DC (defined contribution) — the company pays in at least one twelfth of the annual wage total each year, and the final amount varies with investment performance
Under DC, what matters more is whether the annual contributions were actually made. Enrolment details can be checked with the labour welfare corporation or the financial institution.
What to have to hand
- Start date and leaving date — the basis of continuous service
- Payslips for the last three months — to see which allowances are included
- Bonus payment history for the last year
- Whether a retirement pension applies, and of which type
With those four you can calculate it yourself. Where your figure differs materially from the company's, the first step is to request the basis of calculation in writing.
Frequently asked questions
Is nothing payable under one year?
Entitlement requires one year or more of continuous service. Even under a year, however, unpaid wages and leave allowance can be claimed separately.
What if I worked fewer than 15 hours a week?
Periods averaging under 15 hours a week across four weeks may be excluded from continuous service. If the working pattern changed partway, each period needs checking.
The company closed and I was not paid.
There is a substitute payment scheme under which the state pays up to a set limit first. Claim deadlines apply, so check them.
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