Understanding severance pay
Layoffs can occur unexpectedly to anyone. When you experience a layoff, it is important to know what benefits you have under employment law. These benefits can protect you during a time of crisis. One important benefit to be aware of is severance pay.
Severance pay is money that employers give to affected employees in the event of employee layoffs.
In Singapore, employees terminated for valid reasons are entitled to a severance pay, also known as retrenchment benefits.
Both employers and employees must understand the practices governing retrenchment benefits. This understanding enables them to take appropriate steps and conclude their employment relationship in a just and harmonious manner.
In this article you will get an in-depth look at severance pay in Singapore, including how it works, who is eligible for it, and how to calculate it.
- What is severance pay?
- Company's legal obligations for severance pay in Singapore
- Employee's eligibility and entitlement during a retrenchment
- How to calculate severance pay during a retrenchment
- Factors affecting severance pay
- Conclusion
- FAQs
What is severance pay?
A severance pay refers to the compensation an employer pays an employee who was terminated for certain authorized causes. It is sometimes referred to as “redundancy pay,” or “separation pay.” In Singapore it is commonly known as “retrenchment benefits.”
This compensation softens the blow for the employees. It acts as a financial support to help ease the burden on employees as they cover their expenses while searching for another job.
Separation 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 Singapore
In Singapore, the Ministry of Manpower mandates that employers terminate employees in a responsible and sensitive manner. They are encouraged to practice responsible retrenchment. Employees must be treated with dignity and respect during the retrenchment exercise.
This means using objective factors, like the employee's potential to help the company. Employers cannot discriminate based on age, race, gender, religion, marital status, ability to support a family, or disability.
Employers should consider their long-term manpower needs, company's future business and maintain a strong Singaporean workforce. They should prioritize merit and skills when choosing employees to terminate. Layoffs should not reduce the percentage of local workers.
Moreover, companies are advised to help the affected employees look for alternative jobs. These could be in associate companies, other companies or through outplacement assistance programmes, e.g. job fairs, career fairs, career advice.
Employee's eligibility and entitlement during a retrenchment
Employee's eligibility for severance pay
In Singapore, you become eligible for severance pay or retrenchment benefits if you have worked for the employer for a minimum of 2 years.
Those with less than 2 years of service may receive a goodwill payment known as ex gratia payment.
Employers should give mandatory retrenchment notifications, following the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment. Moreover, it is mandatory for employers with at least 10 employees to notify the Ministry of Manpower, of their plans to terminate employees.
Ideally, employers should give longer notice than required during retrenchments to help them look for new jobs. You can see the length of service and notice period requirements in the table below:
Exceptions and exclusions
In Singapore, there is a provision of severance pay. However, there are exceptions and exclusions that can make you ineligible for termination pay. If you fall under these exceptions, the company is not obligated to pay severance.
- Misconduct
In the event of misconduct or poor performance, you will not be eligible for severance pay. Examples of workplace misconduct include disclosing trade secrets, poor performance, discrimination, sexual harassment, unethical practices, theft, fraud, and insubordination. - Voluntary resignation
Termination pay is typically reserved for employees who are involuntarily dismissed. If you resign from your job voluntarily, you will not be eligible for a severance package. - Contract renewal
If your employer wishes to extend your tenure or change the terms of your contract, they may terminate your current contract and offer a new one. This type of contract termination does not qualify you for severance pay, provided the new employment contract offers equal or better terms.
How to calculate severance pay during a retrenchment
The length of the employee's employment, their position level, and the company's financial status are some variables that typically determine how much severance compensation is given.
The common practice is to pay a retrenchment benefit of 2 weeks to one month’s salary per year of service, depending on the company’s financial position and the industry. In unionised companies with a stated amount in the collective agreement, the norm is one month’s salary per year of service.
All salaries, including unused annual leave, notice pay, etc., are to be paid to the terminated employees on their last day of work.
Factors affecting severance pay
There are a few key points to be aware of regarding severance pay in Singapore. To begin with, if your employer has included a severance pay clause in your employment agreement or has previously provided severance pay, they are required to continue providing it to eligible employees.
The amount of retrenchment benefit depends on the employment contract. For unionised companies, it depends on the collective agreement. In the event of there being no provision, the severance pay must be negotiated between the employees (or their union) and the employer.
If the retrenchment comes shortly after a salary cut, the salary before the cut should be used to determine the compensation amount. Neither the employee nor the employer has to pay CPF contributions for retrenchment benefits.
Example on how to calculate severance pay
Here is an example of how severance pay is calculated based on common industry practices. Let us consider an example of a Marketing Manager earning $5,000 per month and having worked for the company for 5 years and 6 months.
Monthly salary: $5,000
Total years of service: 5 years and 6 months (5.5 years)
Severance Pay Range: 2 weeks to one month’s salary per year of service, depending on the company’s financial position and the industry.
- Minimum Severance Pay (2 weeks per year of service):
- Weekly salary: $5,000 / 4 = $1,250
- Severance pay = 2 weeks × 5.5 years × $1,250 per week
- Severance pay = 11 weeks × $1,250
- Severance pay = $13,750
- Maximum Severance Pay (1 month per year of service):
- Severance pay = 1 month × 5.5 years × $5,000 per month
- Severance pay = 5.5 months × $5,000
- Severance pay = $27,500
Therefore, the amount of severance pay a Marketing Manager might receive based on 5 years and 6 months of service, would range from $13,750 to $27,500.
Conclusion
In conclusion, employers and employees need to understand severance pay in Singapore. It is crucial for navigating fair and clear terminations. Severance pay, also called retrenchment benefits, cushions employees between jobs. It fosters security and goodwill between the parties.
Employers must ensure fair treatment and give reasonable notice when terminating employees. Also, employers should consider keeping a strong Singaporean workforce. They should do this even during layoffs. It fosters a balanced approach to workforce management.
Overall, understanding severance pay helps. It makes the termination experience less painful. It keeps employer-employee relationships positive. And it upholds employment practices in Singapore.
FAQs
Here is a list of frequently asked questions about severance pay:
- 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, duration, and the reason for letting you go.
- Can an employee negotiate their severance pay with their employer?
Yes, as an employee, you can negotiate your severance package. The amount of the retrenchment benefit is set by the employment contract or collective agreement. This is especially true for unionised companies. If there is no clear provision, it must be discussed and agreed upon between the employees (or their union) and the employer.
- Are there any legal requirements for employers to provide severance pay?
In Singapore, the Ministry of Manpower mandates that employers terminate employees in a fair and responsible way. They are encouraged to practice responsible retrenchment. Employees must be treated with dignity and respect.
- How does severance pay differ for part-time and full-time employees?
Severance pay for part-time and full-time employees depends on the company and the employment contract that an employee agrees to.
