Do you want to know how many million won in severance pay an employee with a monthly salary of 3 million won and 3 years of service receives? Many people simply think of it as multiplying the salary by the years of service, but in reality, there is a much more complex calculation involved.
Severance pay must be paid as statutory benefits, but, If you do not know the exact calculation method, it is difficult to determine whether the amount proposed by the company is correct. In this article, I have organized the process step-by-step, from how to calculate average wages to the items included, so that anyone can follow along.
Basic conditions for receiving severance pay
First, you must check if you are eligible for severance pay. You must have a continuous employment period of at least one year and work at least 15 hours per week. Not only full-time employees, but also contract workers and part-timers can receive it if they meet these conditions.
The important thing here is the calculation standard. We look at the 'scheduled working hours' stipulated in the employment contract, not the actual hours worked. If the contract states 20 hours per week, the standard is met even if you actually worked only 15 hours.
There are no exceptions, even for small companies. Even in workplaces with fewer than 5 employees, the payment of severance pay is a legal obligation. Even if it states 'non-payment of severance pay' in the contract, it is invalid.
Since periods of leave of absence are included in the length of service, even if you take parental leave, that period is added to the calculation.
Average wage is not just a simple monthly salary; it is calculated like this.
| item | Whether to include | note |
|---|---|---|
| base salary | include | Required items |
| Fixed allowance (position/duty) | include | Things paid regularly |
| Overtime, night, and holiday work allowances | include | Statutory allowance |
| Bonuses (regular/daily) | include | Reflecting 3/12 of the annual total |
| Performance-based bonuses | exception | due to individual variation |
| Congratulatory and condolence expenses, meal expenses, and transportation expenses | exception | Nature of employee benefits |
Average wage is not calculated by dividing the monthly salary by 3. It involves a complex process of adding up all wages for the three months prior to retirement and dividing by the number of days.
The basic formula is as follows: (Total wages for the 3 months prior to retirement + Annual bonus × 3/12 + Unused annual leave allowance × 3/12) ÷ Total number of days in the 3 months prior to retirement = Average daily wage. Then, after multiplying the average daily wage by 30 days... The final severance pay is the value obtained by dividing the number of days of employment by 365 days.
For example, if your 3-month salary is 9 million won, there are no bonuses or annual leave allowances, and the 3 months consist of 90 days, your average daily wage is 100,000 won. Please note that if the average wage is lower than the ordinary wage, the ordinary wage will be automatically applied.
Items included in and excluded from wages
When calculating average wages, what is added or subtracted significantly influences the result. Basic salary, overtime, night, and holiday work allowances, and fixed allowances (position allowance and job allowance) must be included.
Bonuses are included as well, Only 3 months' worth (3/12) of the total bonuses received during the year prior to retirement is calculated. If it is a holiday bonus or a regular bonus, it is usually included because it satisfies the requirements of regularity and uniformity.
On the other hand, allowances of a welfare nature, such as congratulatory and condolence expenses, meal allowances, and transportation expenses, are not included. Performance-based bonuses or merit-based pay are also not included as they vary by individual.
Annual Leave Allowance and Bonuses: Easily Confusing Calculation Methods
Annual leave allowance is divided into two types. Annual leave that has already accrued but has not been used is reflected in the average wage at 3/12. On the other hand, annual leave that accrues only upon retirement (e.g., annual leave newly generated upon completing 3 years of service) is settled separately from severance pay.
The criteria for determining whether bonuses are included in ordinary wages have changed starting in 2025. Previously, they were included only if all three conditions—regularity, uniformity, and fixedness—were met, The fixed requirement has now been removed, and payments made regularly and uniformly are eligible for inclusion. It means that even with employment conditions, you can be eligible as long as it is regular.
If your company does not have a bonus system, you should naturally exclude that item from the calculation. However, you must be careful, as failing to enter a bonus into the calculator will significantly lower the result.
Severance Pay Payment, Deadlines and Response to Delays
The company from the date of retirement You must pay severance pay within 14 days. The deadline can be extended by agreement, but otherwise, regarding the amount overdue Late payment interest of 201 TP3T per year is automatically applied.
If a problem arises, the first step is to consult directly with the company. However, if the company does not respond, you can file a complaint with the Ministry of Employment and Labor, in which case you can receive dispute mediation.
Since the non-payment of severance pay can escalate into a legal dispute, it is advisable to clearly confirm the payment schedule with the company before resigning.
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Severance Pay, Taxes, and Tax-Saving Strategies
Severance pay is subject to a 'retirement income tax' different from general income tax, and the tax rate is much lower. The longer the years of service, the larger the tax credit., For example, if the service period is 5 years or less, you receive a deduction of 1 million won × years of service, and if it exceeds 5 years, you receive a deduction of 5 million won + 2 million won × (years of service – 5).
If you transfer your severance pay to an IRP account, taxes are not levied immediately. When withdrawing later, you only need to pay 701 TP3T for years 1 to 10 and 601 TP3T for years 11 and above, allowing you to save up to 401 TP3T in taxes compared to a lump sum.
If you receive a lump sum, you must pay taxes immediately, but through an IRP, you can use a strategy of paying taxes later at a lower tax rate over time. You can choose based on your personal financial situation.
While calculating severance pay and optimizing taxes can be complex, you can protect your rights simply by verifying the amount offered by the company yourself. If necessary, consult with the Ministry of Employment and Labor along with your employment contract.