Starting on July 26, 2012, the revised Employee Retirement Benefit Security Act (“ERBSA”) and its Enforcement Decree strictly limits the circumstances in which interim severance payments may be made.

Prior to the amendment, interim severance payments were permitted regardless of cause, provided that there was an agreement between the employer and the employee. However, under the revised ERBSA, interim severance payments are allowed only for a limited number of reasons that are listed in the Enforcement Decree, such as when necessary for the purchase of a residence, etc. Any payment of interim severance payment in violation of the revised ERBSA would not be recognized as a valid severance payment and would thus not relieve the employer of any accrued severance payment obligations. In such case, the amount paid out as interim severance payment would constitute unjust profits for the employee.

The list of recognized reasons for making valid interim severance payments are as follows:

  • An employee who does not own a house intends to purchase a house under his/her own name;
  • An employee or his/her dependent is ill and requires at least 6 months of treatment;
  • An employee has been declared bankrupt or the employee has been placed into rehabilitation proceedings during the past 5 years;
  • An employee has incurred a loss, due to a force majeure event, exceeding a specified threshold amount (as published by the Ministry of Employment and Labor);
  • An employee who does not own a house intends to lease a house or pay a security deposit for the lease (interim payment of severance pay for this reason is permitted only once for any specific employee); or
  • When the employer has adopted a ‘wage peak system’ under relevant laws.

The introduction of such strict restriction in the ERBSA was prompted because abuses/excessive use of the interim severance payment system tended toundermine the severance payment system’s original purpose, which is to serve as a form of retirement security for employees.