Severance pay is a financial cushion for employees who are let go from their jobs. In Malaysia, companies are often required by law to provide severance pay to help employees manage their finances while they search for a new job. Having a clear policy on severance pay is a sign that a company values its employees and can help avoid legal issues down the road.
What Is Severance Pay?
Severance pay is money or benefits given to employees when their job ends. This can include things like extra pay, health insurance, or job search help. It's usually offered to employees who are laid off, downsized, or retiring. Even employees who quit or are fired might receive severance pay, although it’s more common for those who are let go through no fault of their own.
Who Is Entitled to Severance Pay in Malaysia?
Whether you’re eligible for severance pay depends on a few factors:
Employment Status
During a probation period, you usually won’t receive severance pay if your job ends. Probation periods typically last one to three months, with a possible extension. Only confirmed employees typically receive severance pay.
Length of Service
You’re more likely to get severance pay if you’ve been with the company for over a year.
Reason for Termination
Generally, you’re entitled to severance pay if you’re laid off or the company is downsizing. Some companies may also offer it to employees who are fired, though this is less common.
How to Calculate Severance Pay in Malaysia
To figure out your severance pay, follow these steps:
For less than 2 years of service: You get 10 days’ wages for each year worked.
For 2 to 5 years of service: You get 15 days’ wages for each year worked.
For 5 or more years of service: You get 20 days’ wages for each year worked.
For partial years: Calculate based on the time worked, rounding to the nearest month.
Companies might offer more than the legal minimum, so check with your HR department to confirm.
Legal Requirements for Severance Pay in Malaysia
In Malaysia, severance pay rules are outlined in the Employment Act (EA) 1955 and the Industrial Relations Act 1967. Previously, the EA applied mostly to manual laborers or those earning below RM2,000 a month. However, updates in 2023 extended these rules to all employees. According to the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees covered by the EA are entitled to severance pay when their employment is terminated. Companies must follow these rules but can also offer more than the minimum required.
Severance Pay Laws in Malaysia
EA Employees
The Employment Act 1955 covers employees who earn below RM2,000 a month or do manual work, regardless of pay. These workers are guaranteed certain benefits and allowances.
Non-EA Employees
For employees not covered by the EA, severance pay is usually determined by their employment contract. Well-funded companies often provide fair severance pay even if it’s not legally required.
Severance Pay Calculator Malaysia
To estimate your severance pay, you can use the severance pay calculator from the Ministry of Human Resources Malaysia:
Enter your start and end dates of employment.
Input your total earnings for the past year (excluding exempt amounts).
Click "Calculate" to see your estimated severance pay.
The result will show your total service time, eligibility for benefits, and the amount of severance pay you may receive. Always verify with your company’s HR or legal experts for an accurate calculation.
Example of Severance Pay Calculation
Let’s say you’re a sales executive earning RM4,500 per month and have worked for nearly four years. If your daily wage is RM180 and you’re entitled to 15 days’ wages for each year worked, your severance pay would be calculated as RM180 x 15 x 3.75, totaling RM10,125.
Is Severance Pay Taxable in Malaysia?
Yes, severance pay is usually taxable. However, some parts might be exempt. For example, if you’re unable to work due to illness, you can get a full tax deduction. You may also get tax relief up to RM10,000 per year of service. Gratuities given upon resignation or retirement can be tax-exempt if certain conditions are met, such as retirement due to illness or reaching mandatory retirement age after 10 years of service. If not exempt, you can claim tax relief of RM1,000 per year of service.
Understanding severance pay can make a tough situation a bit easier for both employees and employers. It helps employees financially while they transition to new jobs and reflects well on employers by showing they care about their employees.
Questions About Severance Pay
Welcome to the Ricebowl forum! If you have questions about severance pay, whether it's about your rights, company policies, or how to negotiate, you’re in the right place. Our community is here to help answer your questions and share useful tips. Feel free to ask anything and join the discussion!
