What is severance payment? Who is eligible for severance? How to calculate severance?

Severance payment is the compensation an employer provides to an employee if they have been dismissed due to redundancy or laid off, so only these employees are eligible for a severance payment.

Redundancy

An employee is dismissed due to redundancy if the dismissal is because:

• the employer closes or intends to close the business;
• the employer has ceased, or intends to cease, the business in the place where the employee was employed; or
• the requirement of the business for the employer/ employee to carry out work of a particular kind, ceases or diminishes or is expected to cease or diminish.

Lay-off

If an employee is employed on such terms and conditions that the remuneration depends on the amount of work provided by the employer, the employee will be considered to be laid off if the total number of days on which no work is provided or no wage is paid exceeds:

• half of the total number of normal working days in any four consecutive weeks; or
• one-third of the total number of normal working days in any 26 consecutive weeks.

Rest days, annual leave and statutory holidays should not be counted as normal working days during the above periods.

How much should be paid

Monthly-paid employee(Last month of wages × 2/3) × Reckonable years of serviceDaily-rated/ piece-rated employee(Any 18 days’ wages chosen by the employee out of the last 30 normal working days) × Reckonable years of service

The maximum amount of payment is $390,000.

When employers should pay

Employees who wish to claim severance payments should serve written notice to their employers within three months after the dismissal/layoff takes effect.

The employers must make the severance payments to their employees not later than two months from the receipt of such notice. An employer who fails to pay a severance payment to an employee is liable to prosecution and, upon conviction, to a fine of $50,000.

Key takeaways

• Employees who are dismissed due to redundancy or laid off are eligible for severance pay
• Payment calculation depends on the previous wages and years of service
• It must be paid within 2 months of receiving the notice from the employee
• The penalty for non-payment upon receiving the notice may include a fine of $50,000

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