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Severance Pay in Malaysia and How to Calculate It

Venus Low
by Venus Low
Jun 11, 2024 at 10:17 AM

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Navigating severance pay is important when an employee is let go, and it can be a tough situation for everyone involved. In Malaysia, companies might have to give severance pay by law when they terminate someone. This money helps the employee financially while they look for a new job. Having a clear severance pay policy shows that the company cares about its employees and can also prevent legal problems later on.

To handle the situation fairly, both the employer and the employee need to know the rules set by Malaysian labor laws about severance pay. Here's an in-depth look at severance pay in Malaysia, covering how it functions, who qualifies for it, and how to calculate it.

What Is Severance Pay?

Severance pay is the compensation and/or benefits an employer gives to an employee when their job ends. It might include extra benefits like health insurance or help finding a new job. Employers offer it to laid-off, downsized, or retiring employees. Sometimes, even those who quit or are fired can get it. It's a way for employers to be kind and help employees during the transition from work to not working. Employees who earn RM4000 or less and have been with the company for at least two years get severance pay.


Legal Requirements for Severance Pay by Malaysia Companies

The obligations of Malaysian companies are outlined in the Employment Act (EA) 1955 and the Industrial Relations Act 1967. Previously, the EA only applied to manual laborers or those earning below RM2,000 monthly. However, amendments in 2023 extended its coverage to all employees. As per the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees under the EA are entitled to severance pay upon contract termination.

In addition to mandating severance pay, Malaysian labor law provides criteria for determining the compensation amount based on employment duration. While companies must adhere to these criteria, they have the option to offer more than the legally mandated minimum.


Who is entitled to severance pay in Malaysia?

If you're unsure if you are eligible for a severance package in Malaysia, there are a few things you should think about.

Employment Status

During a probation period, if your employer decides to terminate your employment, you usually won't receive any termination pay. Probationary periods in Malaysia typically last one to three months and can be extended for another three months. Generally, only confirmed employees are entitled to termination pay.

Length of Service

The duration of your employment also plays a role in determining if you qualify for severance pay. If you've worked for your company for more than one year at the time of dismissal, you may be eligible for compensation.

Reason for 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.


Severance Pay Laws in Malaysia

EA Employees

The Malaysian employment and industrial relations framework is primarily based on two key laws: the Employment Act 1955 and the Industrial Relations Act 1967. The Employment Act sets out the minimum benefits and allowances that employers must provide.

However, the majority of provisions in the Employment Act apply only to workers covered by it, known as EA employees. An EA employee typically falls into one of these categories:

  • Someone whose monthly income is below RM2,000.
  • Someone who performs manual work, regardless of income.


Non-EA Employees

For employees not covered by the Employment Act, their entitlement to severance pay is determined by their employment contract. It's expected that financially stable companies will offer fair severance pay in such cases.

In a "silent" contract, certain terms may not be explicitly stated. This could include assurances regarding local labor conditions or ongoing practices. In cases of silent contracts, employers must adhere to the notice period outlined in Section 12(2) of the Employment Act 1955.


How to Calculate Severance Pay in Malaysia?

If you're losing your job without wanting to, it's important to know how much money you might get as severance pay. This helps you plan your money while you look for a new job. You can figure out how to calculate this money by looking at the rules in the Employment (Termination and Lay-Off Benefits) Regulations 1980. Here's how it works:

  • If you've worked for the same boss for less than two years, you get 10 days' worth of wages for each year you've worked.
  • If you've worked between two and five years, you get 15 days' worth of wages for each year.
  • If you've worked for five years or more, you get 20 days' worth of wages for each year.
  • If you haven't worked for a full year, they'll figure out your pay based on the time you did work, rounding it to the closest month.

These guidelines apply to all workers with a contract. But different companies might offer different amounts of money. Some might give you more than what the rules say. You can ask your boss to know for sure how much money you'll get when you lose your job.


Severance Pay Calculator Malaysia

If you're struggling to figure out how much severance pay you might get, you can use a severance pay calculator provided by the Ministry of Human Resources of Malaysia (MOHR). Here's step of how to use severance pay calculator:

  1. Input your starting date of work: This is the date you began working for the company.

  2. Enter your last date of work: This is the date your employment with the company ended.

  3. Put in your total earnings in the last year: This includes all the money you earned in the past year, like your regular pay, overtime, bonuses, and other payments, except for those that are exempt under the Employment Act 1955.

  4. Click "Calculate": After filling in these details, click the "Calculate" button to find out your severance pay.

The calculator will show you:

  • Your total service time: This is how long you worked for the company, usually in years.
  • Your eligibility for termination benefits: This tells you how many days of severance pay you're entitled to for each year you worked.
  • Your severance pay amount: This is the total amount of severance pay you'll get based on the information you provided.

Remember, this calculation is just an estimate and shouldn't be the only thing you rely on for your payment claim. Always double-check with your company's policy or talk to HR/legal experts for accurate calculations.


Example of How to Calculate Severance Pay

Imagine you're a sales executive earning RM4,500 per month and have been working at your company for three years and nine months.

If you typically work 25 days a month, your daily wage would be approximately RM180.

Since you've worked for nearly four years, you're entitled to 15 days' wages for each year of service.

So, your severance pay calculation would be RM180 x 15 x 3.75, which equals RM10,125.


Is Severance Payment Taxable in Malaysia?

Yes, severance pay is generally subject to taxation in Malaysia. However, certain portions of the severance payment may be exempt from taxation, depending on specific circumstances outlined in the tax laws. Some portions of this payment can be exempt from taxation:

  • In cases where an employee is unable to work due to illness, a full tax deduction is allowed.

  • For other situations, a relief of up to RM10,000 (USD 2,230) is granted for each consecutive year of service with the same company.

Gratuities, which are set amounts given as appreciation for an employee's service, may also be exempt from tax under certain circumstances:

  1. Gratuity given upon resignation or as a pension after long service is fully exempt from tax if:

  • Retirement is due to illness, as per the Inland Revenue Board's definition of "ill-health."
  • Retirement gratuity is fully deductible at or after the age of 55.
  • Mandatory retirement age is reached after 10 years of service with the same company.

If none of the above conditions are met, employees may still claim tax relief. The relief amount is RM1,000 ($223) for each year of service on gratuities.

The termination process is usually very stressful. Knowing about severance pay can make it easier for both the employee and the employer. Getting severance pay gives the employee some money to rely on for a bit. It's also a nice thing for the employer to do, which can keep everyone feeling good about each other. This helps both the employee and the employer end things nicely.


Have some questions about Severance Pay?

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