A comprehensive guide to severance pay

Termination is often an unpleasant experience for both the employer and employee. Depending on the circumstances, companies may have a legal requirement to offer severance pay in the event of employee termination. This compensation softens the blow for the employee, as it can help cover their expenses while they search for another job. For the employer, having a severance pay policy ensures their staff's well-being and prevents unnecessary lawsuits in the future.

However, navigating severance pay can be tricky. It's important that the employer and employee learn about the Malaysian labour law governing severance pay. This helps them take the right actions and end their relationship in a fair and amicable manner.

We're giving you an in-depth look at severance pay in Malaysia, including how it works, who's eligible for it, and how to calculate it.

• What is severance pay?
• Company's legal obligations for severance pay in Malaysia
• Employee's eligibility and entitlement during a retrenchment
• Employee's eligibility for severance pay
• Exceptions and exclusions
• How to calculate severance pay during a retrenchment
• Factors affecting severance pay
• Using a severance pay calculator
• Example of how to calculate severance pay
• Conclusion
• FAQs

What is severance pay? 

Severance pay refers to the compensation an employer pays an employee upon termination of employment. Also known as termination pay, the employee receives this benefit after leaving the company if they meet all eligibility requirements. This allows them to take care of their expenses while they're transitioning to a new job.

Severance pay plays a vital role in helping a company maintain good relationships with its employees. It gives employees a sense of security by providing them with a financial cushion if they lose their jobs. This can contribute to a higher level of job satisfaction and can help maintain a positive relationship between the employer and employee when they are let go. This is also beneficial to the reputation of the company, and it reduces the company's chances of getting into legal trouble.

Company's legal obligations for severance pay in Malaysia 

The legal obligations of Malaysian companies are laid out in the Employment Act (EA) 1955 and the Industrial Relations Act 1967. In the past, the Employment Act only covered employees performing manual labour or earning a monthly income not exceeding RM2,000. However, amendments in 2023 have made it applicable to all employees. According to the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees covered under the Employment Act are entitled to severance payment when their employment contracts terminate.

Besides mandating severance pay, the Malaysian labour law also provides guidelines on how much compensation an employee should receive in the event of termination. The amount is based on the duration of employment. Companies are required to comply with these guidelines, but they can offer more than the legal minimum if they choose to do so.

Employee's eligibility and entitlement during a retrenchment 

In Malaysia, "redundancy pay" and "retrenchment benefits" describe severance pay an employer awards to an employee who's lost their job for reasons not related to poor performance. If you've lost your job due to a layoff or downsizing, you can expect to receive termination benefits from your employer.

It's a legal requirement for all Malaysian companies to offer severance pay to employees who have lost their jobs due to retrenchment exercise or redundancy. If your employer chooses not to pay you any retrenchment compensation, they must provide acceptable reasons for their decision. Failure to do so makes them liable for unfair dismissal. In this case, you can lodge an unfair dismissal claim with the Department of Industrial Relations.

If the Industrial Court finds that your employer breached guidelines and unfairly dismissed you, they may order reinstatement or compensation. The compensation may include back wages of up to 24 months.

Employee's eligibility for severance pay 

If you're wondering whether you're eligible for a severance package in Malaysia, there are several factors you need to consider. These include:

Employment status

If you're an employee under a probation period, you shouldn't expect to receive any termination pay if your employer decides to let you go. In Malaysia, probationary periods usually last one to three months but can renew for up to another three months. In most cases, only confirmed employees are eligible for termination pay.

Length of service

Another factor that can affect your eligibility for severance pay is the duration of your employment. If you've been working with your company for more than one year on the date of the dismissal, your employer may grant you compensation.

Reason for employee termination

To qualify for severance pay, you typically have to lose your job through no fault of your own. If your employer ends your employment because they want to downsize or restructure, you have a higher chance of getting compensation. While it's less common, some companies may also give termination pay to poor-performing employees they let go.

Exceptions and exclusions 

Malaysian employment law and company policies mandate the provision of severance pay. However, there are some exceptions and exclusions that can make you ineligible for termination compensation. If you fall under these exceptions, the company is not obligated to pay severance and they will not be liable to unfair dismissal. These exceptions include:

• Retirement: If your employer ends your employment contract after you've reached the mandatory retirement age, you won't be eligible for severance pay. This is true if there's a clause in your employment contract stating it.
• Misconduct: Your company isn't obligated to offer you severance pay if it terminates your employment contract due to misconduct. Some examples of gross misconduct in the workplace include disclosure of trade secrets, poor performance, discrimination, sexual harassment, unethical practices, theft, fraud, and insubordination.
• Voluntary resignation: Termination pay typically goes to involuntarily dismissed employees. If you decide to voluntarily resign from your job, you won't be eligible for a severance package.
• Contract renewal: If your employer wants to extend your tenure or change the terms of your employment contract, they may end your current contract and replace it with a new one. This kind of contract termination doesn't qualify you for severance pay if the new employment contract offers equal or better terms.

How to calculate severance pay during a retrenchment 

If you're facing involuntary job loss, it's essential to know how much severance pay you may get. This allows you to plan your finances while searching for a new job. You can find out how to calculate termination pay by referring to the guidelines in the Employment (Termination and Lay-Off Benefits) Regulations 1980, which are:

• 10 days' wages for each year of service if the employee has continuously worked for the same employer for less than two years.
• 15 days' wages for each year of service if the employee has continuously worked between two and five years.
• 20 days' wages for each year of service if the employee has had a continuous contract for five years or more.
• Pro-rata calculations made to the nearest month for an incomplete year of service.

These guidelines apply to severance pay for all employees who are under a contract of service. However, severance packages may vary from one company to another. Some employers may offer higher amounts of compensation than the minimum legal requirements. You can consult your supervisor to find out how much compensation you'll receive upon losing your job.

Factors affecting severance pay 

The length of your employment is one of the main factors impacting your severance pay. Basically, the longer you've been with your company, the larger the amount you can expect to receive. The reason for your job loss can also make a difference in how much your employer will pay you as compensation. For instance, your employer may be closing a plant or retrenching employees. In this case, they may be more motivated to provide a better severance package to avoid negative publicity.

Also, terminated employees may receive compensation based on their value to the company. If you're a key employee who's contributed significantly to your company's bottom line, your severance pay may reflect your value. Your employer may likely ask you to sign a non-compete or non-disclosure agreement. This prevents you from working for a competitor or giving away sensitive company information. If this applies in your case, you may be able to negotiate a better deal.

Using a severance pay calculator 

If you're having trouble calculating your severance payment, you can use this severance pay calculator from the Ministry of Human Resources of Malaysia (MOHR) to get an estimation on termination benefit payment.  

Here’s how to use the calculator:  

1. Starting date of service: Enter the date when you began working for the company. 

2. Last date of service: Enter the date when your service with the company ended.

3. Total wages received in the last 12 Months: Input the total amount of wages you received over the past year. This should include basic wages, allowances, overtime payments, commissions, and other payments, with the exception of those payments exempted under Section 2 of the Employment Act 1955. 

4. Calculate: After filling in the above fields, click the "Calculate" button to compute the severance pay. 

The results will then be displayed in the following fields: 

1. Service period: This will show the total duration of the employee's service with the company, typically in years. 

2. Eligibility for termination benefits: This field will show the number of days of severance pay the employee is entitled to for each year of service. 

3. Severance pay: This will display the total amount of severance pay calculated based on the inputs provided. 

The calculation is approximate and shouldn't be used as the sole authority or supporting document for any payment claim. Always double-check your company's policy or consult with HR/legal advisors for accurate severance calculations. 

Example of how to calculate severance pay 

Suppose you're a marketing manager earning RM5,000 per month and have been with your company for five years and six months. If you work an average of 26 days a month, your daily wage will be about RM192.30. Since your employment has continued for more than five years, you'll be eligible for 20 days' wages for each year of service. So, the total amount of severance pay you'll receive is RM192.30 x 20 x 5.5, which comes to RM21,153.

Conclusion 

The termination process is often quite stressful. Having a clear understanding of severance pay can help an employee and employer get through it gracefully. Proper handling of severance pay gives the employee financial peace of mind for a while. Severance pay can be a goodwill gesture that can help the employer maintain a positive relationship with their past, present, and future staff. This allows the two parties to part ways respectfully and cordially.

In Malaysia, the government and companies have policies governing severance packages for employees. These rules determine how much termination pay they'll receive and what they need to do to get compensation. Policies can vary from one employer to another. If you're facing termination, make sure you find out how your company handles the process. Then, make the necessary preparations to ensure everything goes smoothly. If you have any questions or concerns, consider seeking advice from legal or HR professionals.

FAQs 

Here's a list of frequently asked questions about severance pay:

1. What are the key factors that determine eligibility for severance pay?
   ⁠There are many factors influencing your eligibility for severance pay. These include your employment status, the duration of your employment, and the reason for letting you go.
2. How is severance pay calculated, and what main components does the calculation consider?
   ⁠In accordance with the Employment (Termination and Lay-Off Benefits) Regulations 1980, your employer will multiply your daily rate by a certain number of days, which depends on your years of service. If your employment is less than two years, you receive 10 days' wages per year of service. Between two and five years, you get 15 days' wages for each year you worked. And working five years or more earns you 20 days' wages per year of service. Your employer may also consider your value to the company and the reason for termination when calculating your severance pay.
3. Can an employee negotiate their severance pay with their employer?
   ⁠Yes, as an employee, you can negotiate for a better severance package. This is especially so if you've signed a non-compete or non-disclosure agreement. You may also get a better deal if you've contributed a lot to the profitability and success of the company.
4. Are there any legal requirements for employers to provide severance pay?
   ⁠Following amendments to the Employment Act in 2023, Malaysian companies are now required to offer severance pay to all employees, regardless of the nature of their work or their salary. However, some employers may grant more termination pay than the minimum amounts specified in the Act.
5. How does severance pay differ for part-time and full-time employees?
   ⁠According to the Employment Act, part-time employees have the same provisions for employment termination as their full-time counterparts. This means they're also eligible for severance payment.