Severance Pay & Ordinary Wages in Korea: What's Included and How to Calculate

Why Is Severance Pay and Ordinary Wages So Confusing?

When calculating severance pay (퇴직금), two concepts come up: ordinary wages (통상임금) and average wages (평균임금). Many workers confuse the two, but the actual basis for calculating severance pay is average wages. However, because ordinary wages serve as a floor — meaning if ordinary wages are higher than average wages, ordinary wages are used instead — understanding ordinary wages precisely is extremely important.

Note for foreign workers: Your employment contract may specify wage components differently from the statutory minimum. Always check your contract alongside the legal standards below.

The Difference Between Average Wages and Ordinary Wages

Average wages are calculated by dividing the total wages paid during the 3 months before retirement by the total number of calendar days in that period (Article 2, Paragraph 1, Item 6 of the Labor Standards Act / 근로기준법 제2조 제1항 제6호). All wages actually paid — including bonuses and overtime allowances — are included.

Ordinary wages are wages that have been set to be paid to workers on a regular, uniform, and fixed basis (Article 6 of the Enforcement Decree of the Labor Standards Act / 근로기준법 시행령 제6조). The standard is wages "agreed to be paid," regardless of whether they were actually paid.

Article 34 of the Labor Standards Act (근로기준법 제34조) stipulates that severance pay is calculated using average wages, but if average wages are lower than ordinary wages, ordinary wages are treated as the average wages. In other words, ordinary wages serve as the minimum baseline for severance pay.

Items Included in Ordinary Wages

In its 2013 en banc ruling (Supreme Court 2013Da4969 / 대법원 2013다4969), the Supreme Court clarified the criteria for determining whether an item qualifies as ordinary wages. All three requirements — regularity (정기성), uniformity (일률성), and fixedness (고정성) — must be satisfied for an item to be recognized as ordinary wages.

In particular, bonuses paid only to employees who remain employed at the time of payment have been excluded from ordinary wages on the grounds that they lack fixedness. However, this area requires caution, as judicial interpretation may differ depending on the individual case.

Common Disputes in Practice

① Whether meal and transportation allowances are included in ordinary wages
Meal or transportation allowances paid to all employees in the same fixed amount each month are included in ordinary wages. By contrast, transportation costs that require submission of receipts as expense reimbursements are excluded.

② Bonuses paid every other month or quarterly
Even if the payment cycle exceeds one month, the regularity requirement is met as long as payment is made on a regular basis. However, if conditions are attached to payment, fixedness may be denied.

③ Retroactive claims based on ordinary wages
If the scope of ordinary wages is expanded, not only severance pay but also overtime allowances and annual leave allowances (연차수당) may be applied retroactively. The statute of limitations is 3 years (Article 49 of the Labor Standards Act / 근로기준법 제49조), so claims can be made even after retirement.

Calculate Your Severance Pay — Check It Yourself

If you're unsure whether ordinary wages or average wages are higher, or how much severance pay you're actually entitled to, try the Bylaw (workbylaw.com) severance pay calculator. Enter your period of employment and the amounts for each wage item, and it will compare average wages and ordinary wages to calculate your exact severance pay. Based on the results, you can also use the AI search feature to find additional information tailored to your situation.

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