How To Calculate Employee Termination Benefits?

Employee termination is never a positive experience. Nonetheless, employers and HR professionals must be aware that certain laws, for example, the Labour Relations Act (LRA) 1967 and the Employment Act 1955, in addition to contract and case law in Malaysia, govern the process.

These rules are based on the basic principle of fairness and are intended to reconcile both edges of any employer-employee relationship. As a result, an employee can be fired only for "just cause or excuse," failing which the employee can file a complaint with the Director-General of Industrial Relations.

What about situations in which an employee is legally terminated? What categories of compensation or redundancy pay should Malaysian employees receive? 

 

Which employees are eligible for termination benefits?

Employees are entitled to termination benefits payments under the Employment (Termination and Layoff Benefits) Regulations 1980 when their contract of employment is terminated for any reason, except:

• When an employee's contract is terminated due to reaching retirement age (if the contract contains a clause
• When an employee's contract is terminated due to misconduct
• When an employee leaves terminates their own employment contract
• If the employee's service contract is renewed with equal or better terms (with the renewal going into effect immediately)

 

How to Calculate Termination Benefit Payment

The Employment (Termination and Layoff Benefits) Regulations 1980 establishes a formula for calculating termination or layoff benefits payments, which must not be less than:

• Ten days' compensation for each year of employment under an ongoing service contract with the employer if he has worked with that employer for less than two years; or
• Fifteen days' salaries for each year of employment under a continuous service contract with the employer if he has been with that employer for two years period of at least but less over five years; or
• Twenty days' salaries for each year of employment under a specific set of conditions of service with the employer if he has been with that employer for five years or more, and pro-rata in the case of an incomplete year, calculated to the nearest month.

 

‍What are other benefits available to a terminated employee?

Every employment contract under the Employment Act of 1955 must include a one-month notice period. This lease term applies equally to both employers and employees, though either party may elect to pay an amount in lieu of notice to own themselves out of their contract.

Consider the following: Employer A decides to terminate Employee A's contract, which earns a basic monthly income of RM10,000. The conditional employment contract calls for a two-month notice period. If the employer wants (or needs) the employee to leave nearly instantly, they must pay the employee RM20,000 in lieu of notice.

The same applies if an employee leaves before the end of their notice period.

However, there is a catch. The agreement may be terminated without notice if either party violates a contract condition. This would apply in situations of gross misconduct and other willful contract violations such as embezzlement and corporate espionage.

Employees may also be entitled to the encashment of unused annual leave and discretionary prorated incentive pay if terminated. This is also determined by the employment contract, which regulates many payment transactions that may or may not be required upon termination.

Finally, gratuity payments are given ex gratia (Latin for "by favour"), as are retirement plans for employees who already have reached the specified age in certain organisations. 

 

Maintaining transparency

It's essential to keep transparency when terminating employee contracts. Adherence to employment laws and regulations can lead to costly disputes in the Industrial Court, which are rarely in the best interests of the employer or the employee.

Understanding how severance pay is calculated is only one aspect of creating a severance package. It's also essential to consider the other advantages you want to include in your overall package.

The goal is to support the terminated employee financially and holistically in their shift out of your company. Because most laid-off employees want to find new jobs as soon as possible, outsourcing services are a crucial benefit.

 

Separations reached mutually

When an employer is unsure whether the dismissal was fair (if the employee files an unfair termination claim, the responsibility will be on the employer to demonstrate that the dismissal was fair) or when the employer wants the employee to agree to supplemental post-employment agreements, some employers offer an ex gratia payment in exchange for the decision to sign of a mutual separation agreement.

This would then be a mutually agreed-upon separation rather than an employment termination by the employer.

The advantage of a mutual separation agreement is that it reduces the probability of an employee bringing an unfair dismissal claim. However, releasing claims does not prevent an employee from filing such a claim.

 

Claims for Unfair Dismissal

Within 60 days of their last day of employment, an employee may file an unfair dismissal complaint with the Industrial Relations Department. This is a very tight deadline.

When the Industrial Relations Department receives a complaint, it will arrange an unofficial dispute settlement meeting between both the employer and employee to try to mediate a settlement. If the groups cannot agree, the case will be heard in an Industrial Court.

In the case of a successful unfair dismissal claim, an employer could face back wages of up to 24 months and compensation in lieu of reinstatement approximated at one month per year of service.

 

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