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Newsletter | December 2014, Issue 4
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LABOR & EMPLOYMENT
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Updates Regarding Employee Retirement Benefit Plans in Korea
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We provide an update on the Korean government’s proposed amendment to the Guarantee of Employee’s Retirement Benefits Act (the “Act”) and introduce a recent court decision on the scope of attachment permissible on employee retirement benefits.
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Government’s Plan to Promote Employee Retirement Pension Plans
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The Korean government recently announced a proposed amendment to the Act to promote the implementation of employee retirement pension plans and to gradually phase-out lump-sum severance payment schemes. The proposed amendment, along with the current Corporate Income Tax Code which will no longer recognize severance payment reserves as deductible corporate expenses after January 1, 2016, will likely incentivize companies to introduce employee retirement pension plans.
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Gradual Phase-out of Severance Payment Schemes
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In order to expand the implementation of employee retirement pension plans as a replacement for lump-sum severance payment schemes, the Korean government is considering amending relevant laws and regulations to require all companies to phase-out lump-sum severance payment schemes starting from 2016 and to mandatorily adopt employee retirement pension plans by 2022. However, in order to reduce the financial burden related to such transition, companies will be allowed to maintain severance payment reserves accrued prior to the effective date of the proposed amendment to the Act.
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In addition, while the current Act automatically deems all companies established after July 2012 that do not adopt an employee retirement pension plan within 1 year from their establishment to have adopted a lump-sum severance payment scheme, the proposed amendment to the Act will instead impose an administrative fine on companies for failing to adopt an employee pension plan within 1 year from the company’s establishment.
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Employee Retirement Benefits Applicable to Employees with Less Than 1 Year of Service
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Whereas employees must have worked for at least 1 year to be eligible for employee retirement benefits under the current Act, the proposed amendment to the Act provides employees the opportunity to obtain employee retirement benefits, even if they have worked for less than 1 year.
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Greater Protection for Receiving Retirement Pension
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In order to protect employees’ right to receive retirement benefits from the employer’s bankruptcy risk, employers implementing the “defined benefit pension plan” will be required to gradually increase the portion of retirement benefits reserved outside the company from the current 70% to 100% by 2020.
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Clarification on the Scope of Attachment Permissible on Employee Retirement Benefits
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Earlier this year, the Supreme Court of Korea ruled that employee retirement pension pursuant to the Act may not be subject to any attachment. Meanwhile, the Daegu District Court recently held that given that the Act distinguishes employee retirement pension and severance pay, attachment on up to 50% of severance pay will be valid unlike retirement pension.
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The Daegu District Court’s ruling is significant because it reinforces the Supreme Court’s decision that prohibits any attachment on retirement pension and also clarifies that, unlike retirement pension, attachment on up to 50% of severance pay is permissible pursuant to the Civil Procedure Act. It will be important to see if this approach is affirmed by the appellate court.
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