Severance Payment Allowance

Up until the end of 2012, some employers with fewer than 5 employees were able to pay just 50% of the standard severance payment. However, in accordance with the Korean Standard Labor Law, from January 1, 2013, all employers are required to pay their employees around one month’s wage for one year of employment as severance pay. I have received many questions and comments concerning this issue, so it is important to share some information regarding this subject.

To be eligible for this severance payment, employees must have:

· Worked 15 hours or more per week on a four-week average; and

· Been employed by the company for over one year.

If you have employed any part-time employees, interns, daily workers, irregular workers, free-lancers, or individual contractors who meet the conditions listed above, you must pay his or her severance pay within 15 days from the day s/he quit the job. There is no way around this (for example, not providing an employment contract or working through 1-year periodic contracts). You must base the severance payment on your actual average payment to your employees.

In practice, as an employer, you must pay one month’s salary after an employee has completed one year of his or her contract while multiplying 8.34% of your employee’s yearly salary amount that you pay into his or her “Retirement Fund Account” at a bank. Thereafter, you must keep reserves of 8.34% of the employee’s monthly salary.

I would not recommend putting this severance allowance into a bank account under the name of your employees like a large employer might if his or her service period was less than 12 months. Instead, simply put it on the debt account and recognize it as one of your expenses.

For more details, please send an e-mail to jz@taxjz.com.