What Is the Formula for Voluntary Separation Scheme (VSS)?

In this article, we will go through the steps for the Voluntary Separation Scheme and how to calculate the formula for VSS.

When your organisation has reached a point where retrenchment is the only solution, you must follow these seven steps to ensure that your retrenchment process abides by labour law.

Step 1: Ascertain whether the company can continue to operate.

This is usually determined by the asset value and cash flow. Retrenchment will be necessary if your organisation cannot continue operating as it is now.

Severance pay is a strategy that businesses can use to guarantee that a terminated employee won't be left with anything. There are two ways to move ahead:

The Mandatory Separation Scheme (MSS), where the employer has the right to force employees to leave the company, or
The Voluntary Separation Scheme (VSS), where the employer gives employees a choice if they want to be separated from the company.

Step 2: If required, set up a retrenchment committee.

The retrenchment committee consists of employees who will decide on these matters:

How much will every employee be compensated during retrenchment,
How long will the employees be retrenched, and
The amount of severance pay given to every employee.

The employer must then notify the authorities by filling up the PK Form, a.k.a the Employment Notification Retrenchment Form. They must then deliver the form to the nearest Labour Office. The PK form has three sections:

Sections 1–4: Must be completed 30 days before the retrenchment date.
Section 5: Must be completed 14 days after the retrenchment date.
Section 6: Must be completed 30 days after the retrenchment date.

Step 3: Decide the retrenchment date and the employees up for retrenchment.

Depending on the business situation, you can set it up as early as 30 days following the first retrenchment notice.

Employee selection procedure

Based on the Code of Conduct for Industrial Harmony, there are guidelines for retrenchment exercises. Though it is not legally enforceable, it can be a factor that the court will consider when assessing whether the employer carried out the retrenchment exercise fairly.

When selecting employees for retrenchment, employers need to carefully review the criteria specified in the Code, which are:

Experience
Service duration
Skills and occupations qualifications
Age and family situations
Present situation (non-citizen, temporary, or permanent).

There are two principles used to retain employees, they are:

FIFO (First In, First Out) applies to foreign workers.
LIFO (Last In, First Out).

The LIFO principle is a common practice in most companies nowadays as it is more efficient to retrench the last employee than the first employee.

Employment retrenchment benefits for Employment Act (EA) employees

Employees who earn up to RM2,000 will receive a minimum notice period of two months. If they earn more than the amount, they need to serve at least a month's notice.

The employees' notice time covered by the EA is decided by their service length:

Employees who have remained with the organisation for less than 2 years: at least a month.
Employees with 2-5 years of tenure at the company: 6 weeks minimum.
Employees with 5 years of tenure at the company: 5 years or more

Step 4: Inform employees who will be retrenched

Employers must inform the employees of the retrenchment date and what they must do to be considered for rehiring.

If there is a need to rehire, then the employer must give specific dates and times the employee can return to work, receive their job title again, and compensation.

Step 5: Terminate employment contracts

Ensure that all employment contracts are terminated before the retrenchment is done. If a worker has an employment contract, you must terminate them before the retrenchment date.

If not, the employment contract's termination will be considered a breach of contract and may cause you headaches with legal action.

Step 6: Deliver the final paychecks

The employer must deliver the last paychecks to employees who will be retrenched. Under the Employment Insurance System (EIS), private sector employees can collect unemployment benefits.

EA employees who have worked for the company for 12 months minimum are entitled to termination benefits based on the Employment (Termination and Layoff Benefits) Regulations 1980.

The Voluntary Separation Scheme (VSS) formula

Year x ((monthly wage / 30 days) x 15) = Total Compensation

For instance, an employee's monthly wage is RM1,600, and they have worked for the company for four years:

4 x ((1,600 / 30 days) x 15) = RM 3,200.

Non-EA employees will be compensated at the employer's discretion.

Step 7: Say final farewells to employees

Staff members may be under stress due to the retrenchment. The employer should develop an exit strategy for their employees to ease their anxiety. An exit strategy is a documented plan outlining your communication with the staff members.

You can also use this time to offer your staff counselling and other services. It will guarantee the most value from your resources and improve your bond with your staff.

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