Does Overtime Pay Count Toward Severance Pay? Average Wage Calculation Explained for Foreign Workers in Korea

Does Overtime Pay Count Toward Severance Pay?

Many workers who regularly do overtime are unsure, when they actually leave a job, whether their overtime pay is reflected in their severance. The short answer is: overtime pay (연장근로수당) is, as a rule, included in the average wage (평균임금) that serves as the basis for severance pay (퇴직금). However, you need to understand a few conditions and calculation methods precisely to avoid losing out.

Note for foreign workers: Your employment contract may specify terms that differ from the statutory minimum, but the statutory rules below set the floor that cannot be waived.

The Basis for Severance Pay: What Is Average Wage?

Severance pay is calculated using the formula "average wage × 30 days × years of service" (Article 8 of the Act on the Guarantee of Workers' Retirement Benefits (근로자퇴직급여 보장법 제8조)). The key figure here is the average wage.

Article 2(1)(vi) of the Labor Standards Act (근로기준법 제2조 제1항 제6호) defines average wage as "the amount obtained by dividing the total wages paid to a worker during the 3 months preceding the date on which the reason for calculation arose by the total number of days in that period." In other words, the standard is all wages actually paid during the 3 months immediately before the retirement date.

Is Overtime Pay a "Wage"?

Extended-work allowances (overtime pay / 야근수당) are statutory allowances that an employer must pay under Article 56 of the Labor Standards Act (근로기준법 제56조). They must be paid at a rate of at least 50% above the ordinary wage (통상임금), and they constitute wages paid as consideration for work.

The Ministry of Employment and Labor's administrative interpretation (Labor Standards Policy Division-2855, 2018) also expressly states that extended-work, night-work, and holiday-work allowances are wages included in the average wage calculation.

Which Overtime Pay Is Included, and Which Is Excluded?

Included
- Extended-work allowances actually paid within the 3 months before retirement
- Fixed extended-work allowances paid regularly every month
- Amounts expressly designated as extended-work allowances in an all-inclusive wage (포괄임금제) contract

Cases requiring caution
- If overtime was unusually low during the 3 months immediately before retirement, only the allowances from that period are reflected, which can lower the average wage. In such cases, under Article 2(2) of the Labor Standards Act (근로기준법 제2조 제2항), if calculating severance based on the ordinary wage is more favorable, the ordinary wage is used instead.
- If an employer failed to pay overtime allowances, the unpaid amounts may be excluded from the average wage calculation, causing a double loss — both the unpaid allowances and a reduced severance payment.

Disputes That Frequently Arise in Practice

The most common dispute involves all-inclusive wage arrangements (포괄임금제). Companies claim that "overtime pay is already included in the monthly salary" and pay no separate allowance. However, the Supreme Court holds that if the all-inclusive wage is significantly insufficient relative to actual extended-work hours, the arrangement is void and the employer is obligated to pay additional allowances (Supreme Court 2010Da91046, etc.). Once unpaid overtime pay is confirmed, that amount is retroactively reflected in the average wage, and the difference in severance pay can also be claimed.

Check Your Severance Calculation Yourself

To verify that your overtime pay has been properly reflected, carefully collect your pay stubs for the 3 months before retirement and confirm that the extended-work allowance line item is clearly stated. If the calculation is complex, you can use Byro (workbylaw.com)'s severance pay calculator to easily compute your average wage and severance amount. If you suspect your employer omitted overtime pay and underpaid your severance, you can also start the Ministry of Employment and Labor complaint process immediately using Byro's complaint drafting feature.

This article is for informational purposes only and does not constitute legal advice. For specific cases, consult a certified labor attorney (노무사) or lawyer.