Severance Pay for Accommodation Staff: A Complete Guide

TL;DR

How much severance pay should you give your accommodation staff, and when?

Labor Q&A for Hospitality Operators with Attorney Choi Chang-kyun

07. Severance Pay for Accommodation Staff: A Complete Guide

Hospitality Labor Q&A Series #7

Writer: Choi Chang-kyun, Labor Attorney

Editor: Lee Chae-eun, ONDA Manager

Labor Law Firm Seocho specializes in hospitality labor management. We currently advise numerous accommodation businesses, deliver training for major franchise headquarters (Yanolja, Yeogi Eottae), and work to build happier workplaces across the hospitality industry.

We believe that happy workplaces make for happy lives. This series aims to provide essential labor management information for those building great places to work.

When you hire staff, you probably estimate labor costs. Monthly wages are straightforward — they're a recurring line item. But severance pay only shows up when someone leaves, which often catches operators off guard if they haven't planned ahead.

That's why it's important to know in advance when severance pay is required and how to calculate it. What are the most common severance pay questions we hear from accommodation operators?

1. When do I owe severance pay?

Article 4(1) of the Employee Retirement Benefit Security Act ("Retirement Benefit Act") states that "an employer shall establish at least one retirement benefit system to provide benefits to retiring employees." Article 8 further specifies that "an employer establishing a severance pay system shall provide at least 30 days' worth of average wages for each year of continuous service."

The three retirement benefit systems are:

Lump-sum severance pay
Defined Benefit (DB) retirement pension
Defined Contribution (DC) retirement pension

Under this law, any business employing workers must operate one of these three systems.

Severance pay applies regardless of employment type — anyone who works for at least one year is entitled to it. Even if an employee works exactly 365 days, you must pay severance.

However, Article 4 provides exceptions: "This does not apply to workers with less than one year of continuous service, or to workers whose prescribed weekly working hours average less than 15 hours over a four-week period."

2. How do I calculate severance pay?

The calculation method depends on which retirement benefit system you choose. Lump-sum severance and DB pensions calculate differently from DC pensions.

For lump-sum severance and DB pensions:

"30 days' average wage × continuous service period (total days worked ÷ 365)"

Average wage under the Labor Standards Act means total wages paid during the three months before separation, divided by the total number of days in that period.

Continuous service period means the period of ongoing employment, regardless of employment type — daily worker, probationary, part-time, contract, etc. As long as the employment relationship continued, it counts. That includes absences, work stoppages, and leave periods.

What about DC retirement pensions?

"At least 1/12 of annual total wages"

DC pensions allow contributions once or more per year, with total annual contributions equaling at least 1/12 of annual total wages.

For employees whose pay increases annually, lump-sum severance or DB pensions generally yield a higher amount. For workers with variable pay whose last three months of wages decline, DC pension contributions may be larger.

✔️ Tip

For a precise calculation, use the Ministry of Employment and Labor severance calculator. Enter hire date, separation date, days worked, base salary, and allowances.

3. Am I required to enroll in a retirement pension?

Article 5 of the Retirement Benefit Act states: "Employers of newly established businesses after the effective date of this Act shall, after hearing the opinion of the employee representative, establish either a DB or DC retirement pension system within one year of business establishment."

So technically, yes — you must enroll. However, there is no penalty provision for violating this rule, so non-compliance doesn't trigger immediate consequences.

4. Can severance pay be paid out mid-employment?

Interim severance payouts are restricted to the specific circumstances defined in the Retirement Benefit Act. Permitted reasons include:

Purchase of a home in the employee's name (employee must not own a home)
Rental deposit or security deposit (employee must not own a home; once per employment period)
Medical treatment requiring six months or more for the employee, spouse, or dependent, with medical expenses exceeding 12.5% of annual total wages
Bankruptcy or rehabilitation within five years of the interim payout request
Implementation of a wage peak system
Agreement to change working hours for three months or more (at least 1 hour per day or 5 hours per week)

Without one of these reasons, an interim payout has no legal effect. If an invalid interim payout occurs, the employee has not actually received severance — they can claim the full amount upon separation. The previously paid amount becomes unjust enrichment and must be recovered through separate civil litigation.

If an employee requests an interim payout, verify carefully that the reason is legally permitted.

5. How do I calculate severance when there's leave or absence?

Leave: Exclude the leave period when calculating the three months of wages used to determine average wage. If the employee was on leave for one month out of three, divide the two months' total wages by the two months' total days.

Absence does not reduce the three-month calculation period, which means average wage will be lower. However, Article 2(2) of the Labor Standards Act provides that if ordinary wage exceeds average wage, ordinary wage is used as average wage.

Ordinary wage means the daily wage specified in the employment contract, excluding overtime and night shift premiums. Since most 24-hour hospitality operations include night shift premiums in salary, ordinary wage tends to be set relatively low.

6. Can an employee waive severance pay?

Some employers and employees sign agreements or waivers renouncing severance pay. A 2018 Supreme Court ruling clarified: severance waivers signed during employment are invalid. Waivers signed after separation are valid.

7. Must severance be paid into an IRP account?

A July 12, 2022 amendment to the Retirement Benefit Act requires severance to be paid only into an Individual Retirement Pension (IRP) account.

However, the revised enforcement decree allows payment into a regular account if: 1) the employee separates at age 55 or older, 2) the employee is deceased, or 3) the severance amount is ₩3 million or less. There is no penalty provision for violating this rule.

Today we covered when accommodation operators must pay severance, how to calculate it under different retirement benefit systems, and key precautions. If you employ staff, use this guide to resolve any severance pay questions.