How to calculate retrenchment benefits

It may not be mandatory, but severance payouts can help ease the burden on employees

BY Nurhuda Syed 02 Nov 2020

Retrenchment benefits are not mandatory in Singapore but are highly encouraged to ensure a fair and responsible exercise.

Leaders from the Ministry of Manpower (MOM) and the city-state’s labour union, NTUC, has frequently urged employers to treat retrenched employees with empathy and care.

“Retrenchment is never easy and affects the livelihoods of employees,” said Then Yee Thoong, Divisional Director of Labour Relations and Workplaces Division at MOM.

“Hence, it is important that companies handle them responsibly and treat their employees with respect and compassion.”

Retrenchment benefits are an essential part of the process as it can help employees ease the financial burden of a layoff, even if temporarily, while they seek out their next opportunity.

However, if the business was struggling financially and cannot afford pay outs, MOM has suggested offering employees services such as training or linking them up with a new job opportunity.

So how do you calculate an amount that’s fair for employees as well as the business? HRD finds out.

How to calculate redundancy payments
Due to the impact of the pandemic, Singapore released an update on the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment. In addition, MOM released guidelines on how to support retrenched employees amidst a crisis.

Despite all the advisories, MOM and the tripartite partners remain firm that retrenchment should only a “last resort”.

MOM advised that instead of retrenching employees to manage manpower costs, employers should tap on government financial support packages and consider implementing cost-saving measures. This could include the Jobs Support Scheme, as well as mutually agreed pay cuts and flexible working arrangements.

However, MOM understands that these measures may not be enough and employers may still have to carry out retrenchments to manage costs in the current economic climate.

“Some employers may still face severe financial difficulties and/or may be on the brink of ceasing business,” said MOM. “Retrenchments may thus be necessary in such cases to keep the business afloat and to preserve some jobs.

“If retrenchment is inevitable, employers should provide retrenchment benefit depending on their financial position.”

If you’re ‘doing okay’ financially, MOM advised to continue to pay retrenchment benefits according to existing employment contracts, collective agreements, or the prevailing norms for retrenchment benefit – between two weeks and one month salary per year of service.

This applies to employees who have been working for the company for at least two years.

For employers struggling financially
But what if you’re not ‘doing okay’? MOM and the tripartite partners acknowledged that some businesses may be doing worse than others. They advised accordingly:

If the business is adversely affected:

Hard-hit employers can work with the union or employees to renegotiate a fair retrenchment benefit linked to the employee’s years of service.

For those facing severe financial difficulties:

Employers that are unionised should negotiate with their unions for a mutually acceptable retrenchment benefit package.

Non-unionised employers should support their retrenched employees by providing a lump sum retrenchment benefit.

Instead of linking retrenchment benefit to employees’ years of service, a lump sum of between one and three months of salary could be provided.

Besides a retrenchment package, MOM urged employers to help retrenched staff seek new employment, either through their business networks, or by referring them to Workforce Singapore (WSG) or Employment and Employability Institute (e2i) for employment facilitation.

Employers planning to undergo a restructuring and/or retrenchment exercise should also join NTUC’s Job Security Council (JSC), which offers support to both employers and displaced employees, such as outplacement services that match staff to other firms within the network.

Retrenchment benefits across Asia
Singapore’s clear guidelines aside, HRD also looked at how other countries in Asia are handling retrenchments.

Malaysia:
Retrenchment benefits are an entitlement in Malaysian employees who fall under the Employment Act. Eligible staff include those employed under a contract of employment for at least 12 months.

The amount to be paid is as follows:

Employees with less than two years of service: 10 days’ wages for every year of employment.
Two years or more but less than five years: 15 days’ wages for every year of employment
Five years or more: 20 days’ wages for every year of employment.

For employees are not under the Act, retrenchment benefits are dependent on the terms of their employment contract. If there is no contract, it is up to the employer’s discretion to mete out any benefits.

Despite this, failure to provide any retrenchment benefits could lead to legal trouble. Employers must offer a sufficient reason for the decision. If they fail to do so, employees have a right to file a complaint against an unfair and unjust dismissal.

If found guilty of an unfair dismissal, employers may be ordered to reinstate or compensate the employee, including paying backdated wages.

Hong Kong:
Redundancy payments are mandatory in Hong Kong. Under the city’s Employment Ordinance, an employee is eligible for a pay out if they’ve been employed for at least 24 months.

Employees with at least two years of service: Entitled to two-thirds of their monthly salary, or HK$22,500 ($3,965), whichever is lower. This is then multiplied by the number of years of service.
The amount is pro-rated for ‘shorter’ years.
The cap on statutory payments is HK$390,000 ($68,700).
This excludes additional contractual severance payments, which are paid separately.

An employer who fails to make payments within seven days after the day of termination may be liable to criminal prosecution. If found guilty, the maximum penalty is a fine and/or up to three years in prison.