VSS: What Is a Voluntary Separation Scheme & How to Calculate It

A Voluntary Separation Scheme (VSS) is common in Malaysian workplaces. It lets a company offer workers the choice to leave their job in exchange for money and other benefits. This guide explains what VSS really is, who can join, what benefits are usually offered, how to calculate it, and — most important — the legal risk if a "voluntary" scheme is not truly voluntary.

What Is a Voluntary Separation Scheme (VSS)?

VSS is usually offered to a group of workers, with the same terms for everyone. Workers choose whether to apply. The company does not have to accept every application. Companies often use VSS before restructuring or reducing staff, because it causes less disruption than retrenchment.

The Legal Basis of VSS: A Contract, Not a Special Law

Here is an important fix to a common mistake. VSS is not a scheme created by the Employment Act 1955 or the Industrial Relations Act 1967. It is a contract. It works under the Contracts Act 1950. For it to be valid, it needs the normal parts of any contract: an offer, an acceptance, something of value given in return, real intent, and — most important — free agreement.

The Employment Act and Industrial Relations Act only become important if someone later says the agreement was not truly free. If a worker says they were pressured, threatened, or misled into "choosing" to leave, the Industrial Court can look at it as a real dismissal. Then the same rules that apply to any dismissal — needing a fair reason and a fair process — will apply.

VSS vs MSS vs Retrenchment: What's the Difference?

People often mix these three up. Here's how they're different:

VSS (Voluntary Separation Scheme): Offered to a group of workers with the same terms. Workers choose to apply. The company can say no to some applications.
MSS (Mutual Separation Scheme): Made between the company and one specific worker. The terms are made just for that person. See our guide, What Is Mutual Separation Scheme (MSS) in Malaysia?, for more detail.
Retrenchment: Started only by the company, because a job is no longer needed. The worker has no choice here. Selection usually follows the "Last-In-First-Out" (LIFO) rule. The company must also tell the Labour Office first.

VSS is usually seen as the friendliest option. It gives workers a real choice, which MSS and retrenchment do not always give in the same way.

Who Can Join a VSS?

This depends on the company's own rules, but usually includes:

Length of service: a minimum number of years working for the company.
Age: workers who have reached a certain age set in the VSS plan.
Job or department: workers in certain roles or departments chosen by the company.

Companies should explain the rules clearly to every worker. This keeps things fair and avoids confusion later.

What Benefits Does VSS Usually Include?

Severance pay: a lump sum based on years of service.
Extra benefits: similar to retrenchment pay, even though VSS itself is not required by law.
Medical and insurance coverage: kept for a set time after leaving.
Help finding a new job: such as career advice or job placement support.

One thing worth knowing: money paid for losing a job (including VSS payouts) may be tax-free up to RM20,000 for every full year worked at the company. This depends on current tax rules. It's worth mentioning this when explaining the offer to workers, since it can make the real value higher than the number on paper.

The Most Important Rule: It Must Be Truly Voluntary

For a VSS agreement to be safe under the law, it needs three things:

Real free choice — no pressure, no threats, no misleading the worker.
A clear end — the agreement should say clearly that this is final, and the worker gives up the right to make further claims.
Fair payment — ideally more than what the law would require anyway. If the payment looks too small, a court may think the company was just trying to avoid a proper retrenchment.

If any of these are missing, the whole agreement can fall apart. In the case Teh Yet Poh v Tropicana Shared Services Sdn Bhd, the company called it a "mutual separation." But really, the worker was told to resign or be retrenched. Even though she signed the agreement and received RM73,706.99, the court said this was not a free choice. The court ruled it an unfair dismissal.

Compare this to Beh Hooi Soik v Century Integrated Sdn Bhd (2025). Here, a worker also said she was forced to sign. But the court found she really did agree freely — she got a real payout, help finding a new job, and she never complained at the time. Her claim was rejected.

The lesson for employers: give workers a real choice and enough time to think (a few days to a week is usually seen as fair). Write everything down clearly. And never make it feel like an ultimatum, even if that's not your intention.

How to Calculate VSS

The calculation usually depends on the worker's years of service, salary, and any extra items in the company's VSS plan. The exact formula is different for each company, but here is a general way to work it out:

Step 1: Work Out the Severance Pay Usually calculated as a number of months' salary, multiplied by the years of service.

Step 2: Add Any Extra Benefits Add in retrenchment-style benefits, medical coverage, or job placement help.

Step 3: Get Legal or HR Advice This matters even more given the risks explained above. Getting it checked properly costs much less than facing a legal claim later.

Example

John has worked at the company for 15 years and earns RM8,000 a month. The VSS plan offers 1.5 months' salary for every year worked, plus an extra one month's salary as a retrenchment-style benefit.

Severance pay = 1.5 × 15 × RM8,000 = RM180,000
Extra benefit = RM8,000
Total VSS payout = RM188,000

What Employers and Workers Should Know

Companies must give clear and honest information about the scheme, treat everyone fairly, and — most important — make sure the offer is a real, free choice, not just something that looks that way on paper. Workers have the right to ask questions, get legal advice, and accept or reject the offer based on their own situation. If a worker has concerns, they should raise them right away. Staying quiet and only complaining later can be seen by a court as agreeing to the deal.

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