Paying Korean Severance Pay in Installments in Korea

A claimant made a claim to the Ministry of Employment & Labor of Korea that he did not receive severance pay due to an agreement signed to receive severance in installments. Upon resigning, the company in Korea argued that 10% of the employee’s monthly salary served as an additional payment in lieu of severance pay, as per the signed severance installment agreement. This agreement, along with an application for payment of severance pay in monthly installments and a pledge outlining repayment of any overpayment, was mandatory for all employees during the hiring process.

Key Questions in the Pre-Payment of Severance Case

1. Can the preliminary payments received be offset against the owed severance pay?
2. Can the employee claim a separate severance pay amount if they file a petition with the Korean Ministry of Employment & Labor stating non-receipt of severance pay?
3. Are the monthly prepayments received from the company considered unfair gains or ordinary wages, considering that they were regular and fixed?

Classification of Agreements to Receive Severance Pay by Installment and Interim Settlements of Severance Pay

1. Agreements to receive severance pay in installments: Such agreements involve the employer paying a certain amount as severance pay in advance, alongside monthly or daily wages. While similar to interim settlements, severance pay installments are for future employment and not paid at the time of resignation.
2. Interim settlements of severance pay: According to the Workers’ Retirement Benefit Guarantee Act, severance pay is typically paid after an employee resigns. It is accrued based on years of service and amounts to 30 days of the average wages per year. Interim settlements cover already accrued severance pay but paid before the resignation.

Criteria for Judgment on an Agreement to Receive Korean Severance Pay in Installments

1. Supreme Court Decision (May 20, 2010: 2007da90760): The Supreme Court’s ruling clarified key aspects regarding agreements to receive severance pay in installments. It addressed the validity of such agreements, whether the payments constituted wages or unfair gains, the possibility of offsetting unfair gains, and the scope of prepaid severance pay replacing mandatory severance pay at resignation.
2. Critiques within the Supreme Court Ruling: While the Supreme Court ruling established precedents, there were certain criticisms. Some argued that agreements to receive severance pay in installments violated the law by waiving the right to claim severance pay. Others contended that the prepayments should be considered ordinary wages since they were regular and fixed. Additionally, replacing the unfair gains with severance pay raised concerns about avoiding the obligation to pay full severance upon resignation.

Revision of Related Law and Changes in Major Precedents

1. Legislation Prohibiting Abuse of the Interim Payment System for Severance Pay: To prevent abuse of interim settlement systems, the Retirement Benefit Act was revised in 2011. Stricter requirements were implemented, limiting interim severance payments to specific circumstances.
2. Recent Korean Court Precedents Related to Paying Severance Pay in Installments: Several court rulings shed light on the issue. In some cases, courts ruled that the severance pay received through installments must be returned to the employer as an unfair benefit. However, the Supreme Court held that severance pay received through installment agreements cannot be regarded as unfair gains and, therefore, cannot be sought for return.

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