Retrenchment & Severance Pay

There are many soft terms for being fired. The more popular ones: constructive dismissal; realignment of resources; progressive redundancy (???)... Locally, the Employment Act in Malaysia is quite reasonable.

Statutory notice periods, applicable to all dismissals, including those for operational reasons, but except dismissals for misconduct, are as follows (sec. 12(2), EA, as amended):

• four weeks for employees with less than two years of service;
• six weeks for employees with two to five years of service; and
• eight weeks for employees with more than five years of service.

These provisions are merely statutory minima, and it is open to employers and employees to agree on greater periods of notice, which must be determined in writing in the contract of employment.

Either employers or employees may make a payment in lieu of notice (sec. 13, EA, as amended).

Severance pay

The Employment (Termination and Lay-Off Benefits) Regulations, 1980, provide for statutory severance pay in the event of terminations for operational reasons or performance, on the following scale (sec. 6(1)):

• ten days’ wages for each completed year of service of less than two years;
• 15 days’ wages for each year of two to five years’ service; and
• 20 days’ wages for each year of service exceeding five years.

These Regulations apply to employees with more than one year’s service (sec. 3(1)) and, again, set out statutory minima only, which the parties are free to increase by agreement. They do not apply to:

• dismissals for misconduct, after due inquiry;
• terminations upon the employee attaining retirement age; or
• voluntary terminations by the employee (sec. 4).

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Recent article on retrenchment in financial industry by Finance Asia.

Finance Asia: It's natural to assume that those who are fired early get the worst deal - after all, they've been out of work longest. But when it comes to severance packages, on average, those who were the first victims of the subprime-sparked crunch got better deals.

At Goldman Sachs, for example, those who were retrenched in the summer got statutory severance plus a pro rata bonus for the months they had worked, based on 2007 levels of incentive compensation. In the third quarter, those who were laid off at Merrill Lynch and UBS also got severance pay plus a payout to compensate them for the fact that they would not be on the payroll at bonus distribution time. But by then, the percentage of last year's bonus had dropped to around 25%, pro-rated.

Things went downhill quickly thereafter for bankers in the firing line. In the large round of layoffs at Citi towards the end of the year, different parts of the bank got different packages, with the statutory severance the only thing consistent between divisions. Some parts got a one-time payout of one month's pay for every year worked, while others received only 20 days for every year worked. The payout was generally capped at one year's salary - so if you had more than 12 years' service in the former instance, you still got only 12 months' salary. No-one got a payout to compensate them for the bonus they would forego for the year.

Deutsche Bank was a little more generous and in addition to one month for every year worked, employees who were let go in December got 10% of the 2007 bonus. This all seems set to change with lay-offs still to come. Cash bonuses for 2008 at firms such as UBS were capped, while others, including the Royal Bank of Scotland, paid no cash bonus for 2008 performance. At Goldman Sachs and other US investment banks there is a move to pay as much incentive compensation for 2008 as possible in stock, both to bind employees to the firm and to reduce cash outflow.

Employees who are laid off this year will probably just get the statutory minimum due to them, based on the jurisdiction in which they are employed.

p/s photos: Jessie Chiang Yu Chen