Mandatory Retirement Benefits for employees under Korean labor law

This post is a brief explanation of mandatory severance benefits that are required by Korean labor law.

Employee Retirement Benefit Security Act stipulates mandatory severance packages for employees who leave a company after at least one year of service.

The misuse of the word ‘retirement’ in the law confuses foreign managers. I think “severance benefits” is more appropriate term. The definition of retirement in Wikipedia is: “Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits.”

Retirement Benefits under the act is not only for retirees who are at the closing stage of their working life. Regardless of whether an employee is going into retirement or not, he is entitled to the benefits upon termination of the employment relations as long as he worked for a company more than 1 year. Every kind of termination is covered by the law. An employee may resign, may be laid off, or even be fired for making serious mistakes that brought damage to the company. For example, for the last situation, the employer should pay him retirement pay and try to claim damages through a lawsuit. In a nutshell, an employee is entitled to retirement benefits described in the law for all kind of termination.

Retirement pay to be paid to a worker is average wage of 30 days for 1 year. If a worker leaves the company after 1 year and several months, retirement pay for those additional months should be calculated on a pro rata basis.

If an employer established a company and makes no decision about mandatory retirement package, retirement pay system is automatically adopted. The retirement pay is basically the same thing as mandatory severance pay.

Under the Employee Retirement Benefit Security Act, labor and management can choose retirement pension system instead of retirement pay. An employer should obtain an agreement of a majority union or majority of workers (if there is no majority union) to decide on retirement benefit system. They may choose retirement pay or retirement pension.

Retirement pension has two types. One is defined contribution (DC) and another is defined benefit (DB).

Under the DC program, an employer contributes predetermined money, which is 1/12 of the annual total wage of workers to the individual accounts of workers at the financial institutions chosen as pension providers by labor and management. It is up to workers to manage the fund based on advice by the financial institutions. Upon termination of the employment relations, the financial institution pays pension as annuity or lump-sum to workers.

Under the DB program, the amount of pension benefit payable to the workers is predetermined. The contribution to be made by the employer vary depending on the outcome of the fund management which is the responsibility of financial institution. The amount of pension benefit under the DB program is the same as retirement pay, which is average wage of 30 days for one year of service.