Employment Contract

Part 4. Essential Information Required for Employment Contract

Chapter 4. Severance Pay and the Retirement Pension Plan

Before December 2005, there were only two types of retirement payments stipulated in the Labor Standards Act: the Statutory Severance Pay Plan to be paid upon resignation and the Interim Severance Pay Plan which could be paid while the employee was still employed. However, in December 2005, the Employee Retirement Benefit Security Act (hereinafter referred to as the ERBS Act) was enacted and introduced something new: the Retirement Pension Plan, which can take the form of either a Severance Pay System or a Retirement Pension Plan. The Retirement Pension Plan is also further broken down into three types: the Defined Benefit Plan, the Defined Contribution Plan and the Individual Retirement Plan. Under these plans and upon retirement, employees can receive gains made from investment of their pension funds, either as a lump sum or monthly pension from an outside financial agency.
The ERBS Act, revised July 26, 2012, strengthened the Retirement Benefit Plan to ensure the retirement benefit is used as income during old age, rather than extra income before retirement. Interim severance payments are now restricted, and one of only seven reasons must exist. The Individual Retirement Plan has also been introduced. In cases where retirement pension holders resign before retirement, opening of an IRP is mandatory, and funds are transferred as a lump sum from the previous employer to either the new employer’s pension plan, or an IRP account. The accumulated retirement benefit in this IRP account will, by law, be kept and managed until the employee is 55.
Hereafter, I would like to look at the differences between the severance pay system and the Retirement Pension Plan, the necessity for the Retirement Pension Plan, and details of the different types of pension plans.

Ⅰ. Severance Pay System

1. Requirements of Severance Pay
1) Those eligible for severance pay shall be employees under the Labor Standards Act.
① How to calculate severance pay for a person assigned to a regular position from that of a daily worker
The consecutive years of employment to calculate severance pay for an employee who worked for a company as a daily worker but was reemployed as a regular employee shall be considered collectively based on the concrete facts as follows: If a temporary employee quit his temporary position, the employer accepted it, and he followed employment procedures by applying for a regular position, his previous labor contract was terminated effectively regardless of the new employment. However, if the temporary employee was rehired to a regular position while maintaining temporary employment, this is only a transfer to a regular position from an irregular position and his employment cannot be deemed effectively terminated.
② When a retired employee was rehired at the same company, the employer cannot make a special contract that excuses the employer from severance pay obligations, as this violates compulsory law. The agreement becomes null and void.
When rehiring a retired employee, the company shall pay severance pay to the employee whose service period has become at least one year after the re-employment. Even though both parties agree there will be no severance pay, this agreement violates law and is null and void.
③ If a person has continuously maintained daily employment formally as a daily worker, the Labor Standards Act shall apply and the employer shall pay severance pay if the daily worker serves at least one year.
If a person has been a daily worker formally but maintained daily employment without cessation, he/she shall be considered a regular employee. It is not true that the continuity of employment shall only be estimated by the employees providing an average of 25 days or more of work per month, but also by the employee providing 4 to 15 days on average every month. As certain daily workers provided labor service for 4 or 5 days every month without exception, they were considered continuously employed and the Labor Standards Act applies.

2) Consecutive years of employment: The employee shall serve continuously for at least one year.
Years of continuous employment refer to the period from the time the employee begins working for a company to the time the employee’s employment relations with the company are terminated. The period of disciplinary ‘suspension from work’ due to reasons attributable to the employee shall be included in the period of continuous employment, which is the basic data for calculating severance pay, if a person maintains subsidiary employment relations with his employer.
According to Article 8(1) of the Employee Retirement Benefit Security Act, employers shall pay severance pay equivalent to the average wage for thirty days or more for each one year of continuous employment. The period of continuous employment in this Act means “the period from the establishment of labor relations to their termination.” The period in which the employee did not provide labor service, but was under subordinate employment relations with an employer, shall be included into the period of continuous employment for calculating severance pay. Accordingly, the period of disciplinary ‘suspension from work’ due to reasons attributable to the employee shall be included in the period of continuous employment as the basic data for calculating severance pay, so long as an employee has maintained subsidiary employment relations with his employer.

2. Calculation of Severance Pay
Severance pay shall be 30 days or more of average wage for each year of consecutive service. The period of continuous employment shall include suspensions from work, service as a full-time labor officer of a labor union, labor service as a daily employee, detention periods from a criminal case, probationary periods, periods of strike, periods of absence, periods of suspension of service, suspension from work owing to personal illness, etc. However, military service period shall not be included in continuous employment.

① ‘Suspension period from work’ due to reasons attributable to the employee shall be included in the period for calculating average wages.
Average wage to calculate severance pay stipulated in Article 2 of the Labor Standards Act means the amount calculated by dividing the total amount of wages paid to a relevant employee during the three calendar months immediately before the day on which a cause for calculating his average wages occurred by the total number of calendar days during those three months. If the amount calculated in this method is lower than that of the ordinary wage of the employee concerned, the amount of the ordinary wage shall be deemed his average wages. In cases where the period of calculating average wages includes a period of time falling under any of Subparagraph 1 to 8 of Article 2(1) of the Enforcement Decree to the LSA, the period and wages paid for that period shall be deducted respectively from a basis period for the calculation of average wages and the total amount of average wage. However, the period in which the employee did not provide labor service due to reasons attributable to him/her, such as absence from work, shall not be excluded from the basis period for the calculation of average wages. Accordingly, in cases where the employee did not provide labor service during the basis period to calculate severance pay due to such reasons attributable to him/her, the identical period shall be included into a basis period of average wages and calculated for severance pay..

② How to include bonuses paid through one year into the amount subject to the calculation of average wages.
There are no regulations stipulated in labor law about matters concerning payment of bonuses, but bonuses shall be deemed wages as remuneration for work when they are stipulated in the rules of employment for payment conditions, amount, and payment period, or when they have been paid so habitually to all employees that the employee may have natural expectations to receive a bonus as a matter of course. On the other hand, in cases where the payment rate of bonuses was established per year-unit and paid for periods exceeding one month, the total amount of bonus paid for a certain month shall not be included into calculation of average wages. The bonuses shall be calculated by dividing the total amount of bonuses paid to a relevant employee during the twelve calendar months before the day on which a cause for calculating his average wages occurred by the total number of calendar months, which is 3/12 times the total amount of bonuses paid per year.

3. Prohibition against Discriminating Systems for Severance Pay
① Discriminating severance pay between full-time employees and part-time employees violates the principle of prohibition against different application.
Article 34(2) of the Labor Standards Act prohibits establishment of different severance pay systems according to job classification, title, business classification, etc. in one workplace and requires one severance pay system. If a company differentiates its application of severance pay between full-time employees and part-time employees, this violates the principle of prohibition against discrimination. Even though a company hires full-time employees and part-time employees differently and applied different the hiring procedures, job characteristics, promotion/transfer, etc. to them, discrimination in severance pay shall not be justified without reasonable cause.
② That the company included an amount equivalent to severance pay into the monthly wage for foreign pilots was establishing a different application between foreign employees and domestic employees.
If a company agreed to include an amount equivalent to severance pay into the monthly wage for foreign pilots, it means that the company will not pay severance pay at the time of retirement for foreign pilots. This is a different system of severance pay, prohibited by Article 28(2) of the previous Labor Standards Act, compared to the domestic pilots who receive severance pay when employment relations are terminated. Therefore, foreign pilots can apply for severance pay according to the rules of employment applying to the majority of employees.
③ If there are two different applications of severance pay—such as the rules of employment regulating a cumulative severance pay system for domestic employees and individual employment contracts regulating a singular severance pay system for foreign workers—this violates the prohibition against different application of severance pay.

4. How to Pay Severance Pay
① Even though the company has paid some amount as severance pay in the wages paid every month, it cannot be accepted as payment of severance pay.
The severance pay stipulated in Article 34(1) of the Labor Standards Act occurs on the condition of termination of employment relations, and, in principle, will not be paid during the labor contract. Even if an employer agrees with employees to include a certain amount of severance pay in monthly wages, this cannot be valid as payment of severance pay stipulated in Article 34(1) of the Labor Standards Act.
② It is null and void due to violation of the Labor Standards Act if an employee signs a special contract giving up the right to request severance pay or not to launch a civil suit.
Severance pay is the remuneration characteristic of deferred wages to be paid in return for continuous employment to an employee who retires after serving a certain period of time. The concrete right to request severance pay occurs on condition of the fact of termination of continuous employment. If an employee previously signed a special contract giving up the employee's right to request severance pay at the time of retirement or to launch a civil suit, it is null and void due to violation of the Labor Standards Act's compulsory regulation.

Ⅱ. Retirement Pension Plan
1. Concept
Under the Retirement Pension Plan, the company deposits the retirement contributions with an outside financial agency, and the employee receives a retirement benefit from the financial agency upon resignation. Under the Severance Pay System, the employer pays a pre-determined amount in severance pay upon employee resignation.
The Retirement Pension Plan requires regular retirement contributions to an outside agency, which can reduce the company’s financial burden as it does not have to pay out large amounts upon resignation, contrary to the severance pay system. As the severance pay should be paid in full as a lump sum upon retirement, the company will have a heavier financial burden.

2. Necessity for the Retirement Pension Plan and How to Introduce the RPP
From the employee’s perspective, the reasons necessitating the Retirement Pension Plan are as follows: Firstly, it is necessary to supplement the social welfare system. Currently, most people depend on National Pension only. However, this is not enough for necessities. With three levels of social security (National Pension, Retirement Pension, and Individual Pension), the employee will be far better prepared. Secondly, it is necessary to protect the right for employees to secure their retirement benefits. If the company goes bankrupt, the employee will most likely not receive wages of any kind. To ensure benefits do not remain unpaid, companies shall deposit their contributions at an outside financial agency through the Retirement Pension Plan. From the employer’s perspective, the reasons necessitating the Retirement Pension Plan are as follows: Firstly, companies can reduce corporate tax through the Retirement Pension Plan. 100% of retirement reserve for the Retirement Pension Plan can be claimed as a tax deduction each year. Secondly, the Defined Benefit Plan aids in reducing company debt, as the retirement pension deposit is deducted from the retirement reserve. Defined Contribution plans allow the total amount the company has paid into the retirement benefit each fiscal year to be regarded as actual retirement payout, thereby reducing company debt. Thirdly, companies introducing the Retirement Pension Plan can also reduce their wage claim premiums: 50% of the premiums multiplied by the guaranteed rate covered by the Defined Contribution retirement benefit.
The employer shall establish pension regulations, obtain the consent of the employee representative, and permission from the Ministry of Employment & Labor before introducing the Retirement Pension Plan. Upon employee retirement, the financial agency shall pay out a lump sum or a regular pension from the retirement fund the employer deposited. The retirement pension company (trustee) will be a financial agency such as a bank, insurance company, or securities firm, and perform operational management and asset management. Operational management includes designing the retirement pension, operational method of the assets, and administration. Asset management includes such tasks as depositing contributions and paying out retirement benefits, maintaining and managing assets, establishing and managing/operating the account.

3. Types of Retirement Pension Plan
1) The Defined Benefit Retirement Plan (DB)
① Concept: Under the Defined Benefit plan the company deposits 60% or more of the retirement contributions expected for the year to an outside agency, and the financial agency pays 100% of the retirement benefit within its obligation to pay. The Defined Benefit plan is characterized by a prior confirmation of the severance payment. This is calculated in the same way as in the existing Severance Pay System, and is equal to the final month’s total wage. Severance pay is calculated by multiplying the average monthly wage (over the final 3 months) before resignation/retirement by the years of service.

② Characteristics: As the amount of retirement benefit is determined beforehand, plans for the retirement years are possible. As the company contributes to and manages the retirement reserve directly, the employee is free of those responsibilities. One disadvantage is that transferring the retirement deposits to another company is difficult. Depositing additional money or withdrawing money early is not allowed by law, but it is possible to borrow the money as a secured loan, for the following purposes: 1. First-time purchase of a house; 2. Medical treatment for 6 months or longer for the employee or his/her dependents; 3. Decision for commencement of a rehabilitation proceeding; 4. Bankruptcy; or 5. Other reasons and conditions such as natural disasters, etc., prescribed by Ordinance of the Ministry of Employment & Labor. The DB Plan is suitable for companies with job security, low turnover, and who provide high salary increases.

③ Conditions for eligibility: The employee receives retirement pension or lump sum allowance upon retirement. The retirement pension is eligible for those who are 55 years old or older and have subscribed to it for 10 years or more. In this case, the beneficiary period shall be 5 years or longer. The lump sum payment is paid to those who are not eligible for the pension and those who want to receive it as a lump sum payment. This lump sum payment means that the retirement benefit is transferred to the IRP account.
2) The Defined Contribution Retirement Plan (DC)
① Concept: The level of contribution the employer and employee make is predetermined by pension law, with the employee’s final retirement benefit determined by the company’s contributions and the employee’s investment gains. Investment outcomes are up to the employee and the final payment depends on the performance of his or her investments. The employer deposits 1/12 of the employee’s annual salary every year. A retirement payment is deposited every month, like an interim severance payment. Final payout is determined by performance of the employee’s investments. The employee’s retirement benefit is equal to company contributions and investment returns.

② Characteristics: Employees can put additional money into this fund. As the fund is separately managed, it is easy to move it to another company, plus, payout can be higher than the Defined Benefit plan if the investment returns are good. However, management of the retirement funds is at the risk of each employee, who is responsible for choosing appropriate investments. The companies that are more suited to the Defined Contribution plan are 1) Companies with lower salary increases and 2) Companies implementing an annual salary system.

③ Conditions for eligibility: The employer deposits 1/12 of the employee’s annual salary every year. The employee manages the retirement fund, and will receive it as a monthly pension or lump sum payment upon retirement. The retirement pension is eligible for those who are 55 years old or older and have subscribed to for 10 years or more. In this case, the beneficiary period shall be 5 years or longer. The lump sum payment is paid to those who are not eligible for pension or who want to receive it as a lump sum payment. This lump sum payment means that the retirement benefit is transferred to the IRP account.

3) The Individual Retirement Plan (IRP)
① Concept: The Individual Retirement Plan can take the form of a Company IRP or an individual IRP. The Company IRP is a retirement pension plan as described in the Employee Retirement Benefit Security Act and is acceptable as a retirement benefit scheme for companies that employ 9 or fewer employees. It operates in basically the same way as the Defined Contribution plan, but companies do not have to create the pension rules. In cases where the company later employs 10 or more employees, the Defined Contribution plan shall be adopted. The Individual IRP was designed for the employee to be able to manage his or her own retirement benefit until retirement or until receiving it if resignation occurs earlier.

② Characteristics/Conditions for eligibility: Under the Retirement Pension Plan, when the employee resigns or retires, the retirement benefit shall be transferred to an IRP. Upon reaching the age of 55, the employee can receive a regular retirement pension or lump sum payment. The IRP reserve cannot be withdrawn earlier than the required age except for the legal reasons described in Article 2 of the Enforcement Decree to the ERBS Act: Reasons for Offering Right to Receive Benefits as Collateral. However, The Retirement Pension Plan (DB, DC, Company IRP) shall be transferred to an IRP except in the following situations: 1) The subscriber receives payment after age 55 upon retirement; 2) The subscriber returns the borrowed money with wage collateral; 3) The retirement fund is equal to 1.5 million won or less, as stipulated by the Minister of Employment & Labor.

For further questions, please
call (+82) 2-539-0098 or email bongsoo@k-labor.com

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