Hello, this is Attorney Choi Jong-ha from Cheongchul Law Firm.

When an employee who has worked for a long time leaves, their primary concern is usually the severance pay. The severance pay that accumulates like savings is a substantial amount, and since it is paid separately from the salary, many employees receive their severance pay without raising significant questions.

However, those who are a bit more diligent may check if they received 'one month of salary per year based on the average of three months' salary', and even those who are more meticulous may use severance pay calculators provided by various sources.

Nevertheless, no matter how sophisticated the calculator used, the core issue is 'what is the basis for calculating the severance pay' - in other words, how much of the total amount received under various items is considered 'wages'. Below, we will look at typical elements that are omitted or miscalculated when calculating severance pay.

1.     Ordinary Wage vs Average Wage

Many employers calculate the daily average wage based on a specific employee's three months of salary, and based on this, they calculate severance pay. However, Article 2, Paragraph 2 of the Labor Standards Act states, “If the amount calculated in accordance with Paragraph 1, Item 6 is less than the employee's ordinary wage, then the ordinary wage is considered the average wage.” Therefore, it is necessary to compare the ordinary wage and the average wage first when calculating severance pay.

Particularly in workplaces where the prescribed working hours per month are set at 209 hours (if Saturdays are designated as unpaid holidays in the employment rules or contracts, it is highly likely that the prescribed working hours will be 209 hours), there are often cases where the ordinary wage exceeds the average wage. And in this case, depending on whether the ordinary wage is applied according to legal standards, the final severance pay amount can vary significantly.

For example, if A, who set the prescribed working hours at 209 hours, joined on January 1, 2015, and left on January 1, 2025, receiving a monthly basic salary of 5,000,000 won in 2024, A's daily average wage would be 163,043.48 won.

The employer who calculated it this way would typically take the 163,043.48 won and multiply it by 30 to get the amount for one month’s salary, and then multiply that by 10 to provide the severance pay for 10 years. The severance pay calculated this way would be 48,913,044 won.

However, this is a method of calculating severance pay that violates the Labor Standards Act. A's daily ordinary wage is 191,387.56 won (basic salary of 5,000,000 won / monthly prescribed working hours of 209 hours X daily work of 8 hours), which significantly exceeds the daily average wage of 163,043.48 won. By this standard, the legally calculated severance pay is 57,463,459 won.

Just by applying the ordinary wage instead of the average wage, there can be almost a ten million won difference in the severance pay.

From an employer's perspective, it is necessary to take measures to prevent unintended wage arrears by overlooking these laws, while also implementing various measures to ensure that the ordinary wage does not exceed the average wage. On the other hand, from a worker's perspective, it is important to verify whether the severance pay they are set to receive (or have received) overlooks these standards.

2.     Meal Allowance, Vehicle Maintenance Costs, etc.

Many employers often pay part of the salary under separate titles such as meal allowances or vehicle maintenance costs for tax-saving purposes. Typically, these costs, under the premise that they are 'not wages', are often excluded from the average wage or ordinary wage that serves as the basis for severance pay calculations.

However, it should be noted that for meal allowances or vehicle maintenance costs, if they are paid regardless of actual cost processing, they can be recognized as wages. For example, meal allowances paid uniformly regardless of whether an employee is dining (or even commuting) or vehicle maintenance costs uniformly provided to employees above a certain rank regardless of whether the employee owns a vehicle can be recognized as wages since they lack a cost reimbursement nature.

The inclusion or exclusion of these items can significantly impact severance pay depending on the employee's salary components, so it is important to be cautious during calculations.