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

When an organisation reaches a point where retrenchment is the only viable option, following a clear, lawful process matters just as much as the business decision itself. Here are the seven steps to a compliant retrenchment exercise in Malaysia — including where a Voluntary Separation Scheme (VSS) fits into the picture.

Step 1: Determine Whether Retrenchment Is Necessary

This is usually assessed based on the company's asset value and cash flow position. If the business genuinely cannot continue operating at its current scale, retrenchment becomes necessary — but it shouldn't be the first tool reached for. Employers are generally expected to have considered alternatives first (reduced hours, temporary lay-offs, redeployment) before moving to retrenchment itself.

Once retrenchment is on the table, employers typically have a few paths, each working differently:

Voluntary Separation Scheme (VSS): offered to a group of employees with standardised terms; employees choose whether to apply, and the employer can decline applications. See VSS: What Is VSS & How to Calculate for the full breakdown, including the legal risk if a "voluntary" scheme turns out not to be genuinely voluntary.
Mutual Separation Scheme (MSS): individually negotiated between the employer and a specific employee, with customised terms. See What Is Mutual Separation Scheme (MSS) in Malaysia? for how this differs from VSS.
Standard retrenchment: employer-initiated, with no choice for the employee, following the selection process and statutory benefits covered below.

Step 2: Set Up an Internal Process and Notify the Labour Office

Some organisations set up an internal working group to work through decisions like compensation levels, retrenchment timing, and severance amounts — useful for consistency, though this isn't a specific statutory requirement in itself.

What is a legal requirement is notifying the authorities using the PK Form (Employment Notification Retrenchment Form), submitted to the nearest Labour Office. The form is filed in stages:

Sections 1–4: completed at least 30 days before the retrenchment date.
Section 5: completed within 14 days after the retrenchment date.
Section 6: completed within 30 days after the retrenchment date.

Failing to file this form isn't just an administrative slip — in Industrial Court proceedings, a missing PK Form has been cited as evidence of procedural unfairness, even when the underlying business reasons for retrenchment were genuine.

Step 3: Decide the Retrenchment Date and Select Employees

Depending on the business situation, the retrenchment date can be set as early as 30 days after the first notice.

Selection Criteria

The Code of Conduct for Industrial Harmony sets out selection guidelines. It isn't legally binding, but the Industrial Court frequently references it when assessing whether a retrenchment was carried out fairly. Relevant factors include:

Experience
Length of service
Skills and occupational qualifications
Age and family circumstances
Employment status (non-citizen, temporary, or permanent)

Selection Principles

Two principles matter here, and they're often mixed up:

Foreign workers in similar positions should be retrenched before local employees. This isn't about which foreign worker was hired first — it's simply that non-citizen staff in comparable roles are expected to go before local staff are considered.
LIFO (Last In, First Out) applies among local employees within the same job category — the most recently hired are retrenched first. LIFO isn't legally mandatory, but departing from it requires clear, objective justification (skills, performance, or another defensible criterion) — departing from it without one is one of the more common reasons retrenchments get successfully challenged.

Notice Periods

Statutory notice periods under Section 12 of the Employment Act are based on length of service, not wage level:

Less than 2 years of service: at least 4 weeks' notice.
2 to 5 years of service: at least 6 weeks' notice.
5 years or more of service: at least 8 weeks' notice.

Contracts can specify a longer notice period than this, but not a shorter one.

Step 4: Inform Employees Who Will Be Retrenched

Employers must inform affected employees of the retrenchment date and, where relevant, what's required to be considered for rehiring if the business situation improves — including specific dates, restored job titles, and compensation terms if a return to work is genuinely on the table.

Step 5: Formally Terminate Employment Contracts

Ensure employment contracts are properly terminated as part of the retrenchment process, not left dangling. An employment contract that isn't formally and correctly terminated can leave the employer exposed to a breach of contract claim on top of any retrenchment-related dispute.

Step 6: Settle Final Pay and Statutory Benefits

Employers must deliver final paychecks to retrenched employees. Private-sector employees may also be able to claim unemployment benefits under the Employment Insurance System (EIS).

For employees covered by the Employment Act who've worked at least 12 months, statutory termination benefits apply under the Employment (Termination and Lay-off Benefits) Regulations. This is a minimum, not a scheme unique to VSS, calculated as:

(Monthly wage ÷ 30) × Years of Service × Daily Rate Multiplier

The multiplier scales with service length: 10 days per year of service for under 2 years, 15 days for 2 to 5 years, and 20 days for 5 years or more.

Worked example (15-day tier): an employee earning RM1,600 a month who has worked for the company for 4 years:

4 × ((RM1,600 ÷ 30) × 15) = RM3,200

This is the statutory floor for a standard retrenchment payout at that tenure — not "the VSS formula." If an employer is offering VSS specifically, the whole point is usually to offer something more generous than this minimum, since VSS relies on genuine, voluntary buy-in rather than a legal obligation. Non-EA employees (generally those above the relevant wage threshold) are compensated entirely at the employer's discretion, since the statutory formula above doesn't apply to them.

Step 7: Support Employees Through the Transition

Retrenchment is stressful for everyone involved, not just the employees leaving. A documented exit strategy — clear communication, defined timelines, and where possible, counselling or outplacement support — helps ease the transition and protects the company's relationship with both departing and remaining staff. How this is handled has a real, lasting effect on morale among the employees who stay.

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