Unpaid severance is 45% of Korea's wage arrears — and the penalty rises this month

Korean employers were confirmed to owe their workers ₩1,081.4bn in the first seven months of 2026. Of that, ₩491.9bn was retirement benefits — severance, 퇴직금 — against ₩527.8bn in ordinary unpaid wages. Almost half of the country’s wage-theft problem is a single payment that comes due on the day someone leaves.

That is not an accident of the reporting. It is the design of the scheme.

Severance in Korea is a promise, not a fund

Under Article 8 of the Employee Retirement Benefit Security Act, an employer owes at least 30 days of average wage for every year of continuous service, payable to anyone who has worked a year or more and averaged 15 hours a week. Average wage is the previous three months of pay divided by the days in that period; where that is lower than ordinary wage, ordinary wage applies instead. The formula the Labour Ministry uses is daily average wage × 30 × (days of service ÷ 365).

For a worker on ₩4m a month with five years in, that is roughly ₩20m. Article 9 gives the employer 14 days from the last working day to hand it over.

Here is the part most people never think about until they need to: for three-quarters of Korean workplaces, nobody has set that money aside. The 2005 Act created funded pension plans — defined benefit, defined contribution, held at an outside financial institution — as an alternative to the old unfunded severance scheme. It did not abolish the old scheme. Twenty-one years on, the Ministry of Data and Statistics counted 442,000 workplaces with a funded plan at the end of 2024, out of 1,646,000 eligible. An adoption rate of 26.5%.

So for most employees of most Korean companies, severance is a number in the accounts. Whether it becomes money depends on whether the company can pay on the day you resign.

The arrears are concentrated where the funding isn’t

Split the ₩1,081.4bn by employer size and the pattern is exact. Workplaces with fewer than five employees account for ₩367.8bn. Those with five to 29 account for ₩435.2bn. Together, ₩803.0bn — 74% of everything owed. Companies with 300 or more staff account for ₩20.3bn, under 2%.

Large employers converted to funded plans long ago; the ministry-sponsored tripartite task force puts adoption above 90% among firms with 300 or more staff. Small employers did not, and small employers are where the arrears live. The money is missing from precisely the balance sheets that never held it.

Source: Ministry of Employment and Labor, cumulative to 31 July 2026.

Foreign nationals were owed ₩87.8bn of the total — 8.1%. That share is worth reading against the fact that foreign workers are heavily concentrated in manufacturing and construction firms of exactly the size that dominates the table above. If you are on an E-9 at a 20-person parts supplier in Gyeonggi, you are in the highest-risk cell of the grid.

What changes on 18 September

Parliament amended the Act on 17 March 2026. Most of it took effect on 1 July: the small-business retirement pension fund scheme, previously open to firms of 30 or fewer, now covers firms under 100, and the self-employed can pay into a contributor account of their own.

The penalty provisions were held back six months. From 18 September 2026, withholding retirement benefits carries up to five years’ imprisonment or a fine of up to ₩50m, up from three years or ₩30m. The stated purpose in the legislature’s own explanatory note is deterrence — raising employers’ sense of exposure so the arrears do not happen in the first place.

Whether a heavier sentence deters a company that has run out of cash is a fair question. It does change the negotiating position of the worker standing in front of a labour inspector, which is where most of these cases are actually settled: of the ₩1,081.4bn confirmed to July, ₩748.4bn was resolved through inspector-supervised settlement and ₩333.0bn referred to prosecutors.

The unfunded scheme is being abolished

On 6 February 2026 a tripartite task force of the Labour Ministry, the two national union federations, the employers’ federation and the SME federation signed a joint declaration agreeing to two things: external funding of retirement benefits becomes mandatory for every workplace, and a trust-based pension structure is introduced alongside the existing contract-based one.

The government reported the follow-up plan to the emergency economic ministers’ meeting on 11 March. It committed to finalising the trust-based design by July, legislating the amendment within the year, and phasing the mandate in by workplace size after a survey of small-business liquidity. A separate strand looks at the people the Act does not reach at all — workers under one year of service, platform and dependent-contractor workers.

The phase-in schedule has not been published. Until it is, the practical position is unchanged: unless your employer runs a DB, DC or SME fund plan, your severance is unsecured credit extended to your employer, at 30 days of wage per year, with no interest and no collateral.

Two things follow for anyone planning an exit. If you are leaving Korea, sort the payment channel first — Article 9(2) requires severance to go into an IRP account, and departure from the country is one of the listed exceptions, but the exception applies to workers on employment-permitted statuses who leave after resigning. Getting that wrong from abroad is far harder to fix than getting it right in advance. And if you are on the way out of a job at a small company, the calculation of whether to leave in March or in June is not only about your notice period; it is also about the employer’s cash position on the fourteenth day after your last one.

The rest is the ordinary machinery of Korean employment. What you are actually owed on departure depends on service length and average wage, which is why the 21% flat-tax break-even for foreign workers and the rules on who gets a National Pension refund both change the arithmetic of a resignation date. Severance is usually the largest of the three, and the only one where the money may not exist yet.

Figures current as of 6 September 2026, drawn from the Ministry of Employment and Labor’s arrears statistics (cumulative to 31 July 2026, new basis excluding double-counted amounts), the Ministry of Data and Statistics’ 2024 Retirement Pension Statistics published 15 December 2025, and the Employee Retirement Benefit Security Act as amended by Act No. 21475 of 17 March 2026.