Severance Pay

What is severance pay?

Severance pay is a compensation payment made by an employer to an employee upon termination of employment, typically based on the employee's length of service and salary. It serves as financial support during the transition to new employment and is governed by local labor laws, employment contracts, or company policy.

Across the Asia-Pacific region where AYP Group operates, severance pay requirements vary significantly, with some countries mandating substantial payments while others have no statutory requirements. Understanding these obligations is critical for companies managing international workforces.

Types of severance payments

Statutory severance

• Required by local labor law
• Formula typically based on length of service and salary
• Applies to specific termination circumstances
• Cannot be waived or reduced below minimum
• Varies significantly across APAC countries

Contractual severance

• Specified in employment contract
• May exceed statutory minimums
• Part of negotiated employment terms
• Particularly common for senior executives
• Binding on both parties

Ex gratia payments

• Discretionary payments beyond legal requirements
• Goodwill gesture by employer
• Not legally required
• May be company policy
• Can help maintain positive relationships

Retrenchment or redundancy benefits

• Payments when position eliminated
• Often higher than dismissal severance
• May include additional support (outplacement, etc.)
• Required in many APAC countries
• Recognition of involuntary nature

Long service payments

• Recognition of extended tenure
• Separate from or in addition to severance
• Required in some jurisdictions (e.g., Hong Kong)
• Typically for 5+ years service

Severance pay requirements by country

Singapore

• No statutory severance requirement
• Contractual or ex gratia only
• Retrenchment benefit expectations (industry practice)
• Common practice: 2 weeks to 1 month per year of service
• Tripartite guidelines for responsible retrenchment

Australia

• Redundancy pay under Fair Work Act:
  • 4 weeks for 1 year service
  • Scales up to 16 weeks for 9+ years
  • Only for redundancy, not other terminations
  • Small business exemptions (under 15 employees)
• Separate from notice period
• Does not apply for serious misconduct

Hong Kong

• Severance payment:
  • 2/3 month salary per year of service
  • Applies if dismissed for redundancy
  • Minimum 2 years continuous employment
  • Capped at HKD 390,000 (approximately $50,000)
• Long service payment:
  • Same formula as severance
  • For termination after 5+ years (not redundancy)
  • Not payable if severance paid or employee resigns
• Summary dismissal: No severance required

Japan

• No statutory severance requirement
• Strong customary expectation of severance
• Common practice: 1-3 months per year of service
• Dismissal very difficult - severance part of negotiated exit
• Consultation with works council may be required
• Higher amounts for senior employees or long tenure

India

• Retrenchment compensation:
  • 15 days average pay per year of service
  • Applies to workers in industrial establishments
  • Minimum 1 year continuous service
• Gratuity payment:
  • 15 days salary per year of service
  • Payable after 5 years service (4 years 240 days)
  • Applies to all terminations after 5 years, including resignations
  • Capped at INR 2 million
• State-specific variations

Malaysia

• No statutory severance for dismissal
• Industrial Court may award compensation for unfair dismissal
• Common practice for retrenchment: 10-20 days per year of service
• Contractual severance where specified
• Termination and layoff benefits may be negotiated

South Korea

• Severance pay (retirement allowance):
  • 30 days average wage per year of service
  • Applicable to all terminations after 1 year
  • Also applies to resignations
  • Calculated on 3-month average salary
• Mandatory for businesses with 1+ employees
• Cannot be waived

Thailand

• Severance pay scale:
  • 120 days to 1 year: 30 days
  • 1-3 years: 90 days
  • 3-6 years: 180 days
  • 6-10 years: 240 days
  • 10+ years: 300 days (can be up to 400 days)
• Applies to employer termination
• No severance for employee resignation or serious misconduct
• Special termination (400 days for any tenure in certain circumstances)

Philippines

• Separation pay required for:
  • Installation of labor-saving devices: 1 month per year of service
  • Redundancy, retrenchment, or closure: 1 month or 1/2 month per year (whichever higher)
  • Disease: 1 month or 1/2 month per year
• Minimum 6 months service
• Not required for just cause termination
• 13th month pay separate

Vietnam

• Severance allowance:
  • 1/2 month salary per year of service
  • Applies to contracts of 12 months or more
  • For terminations after full year of service
  • Does not apply to employee resignation or serious misconduct
  • Based on average salary of last 6 months

Indonesia

• Complex severance formula under Omnibus Law:
  • Severance pay: scales from 1 month (under 1 year) to 9 months (8+ years)
  • Service appreciation pay: up to 10 months for 24+ years
  • Compensation for rights: up to 15% of severance + appreciation
• Applies to most terminations
• Mutual agreement common to negotiate exit
• Total can be substantial for long-tenured employees

Taiwan

• Severance pay:
  • Old system (pre-2005): 1 month per year, up to 45 months
  • New system (post-2005): 0.5 month per year
  • Employee chooses system
  • Applies to various termination scenarios
  • Not for employee resignation or serious misconduct

Cambodia

• Indemnity for dismissal:
  • 7 days + 1 additional day per year of service (up to 6 months max)
• Indemnity for termination without cause:
  • 5 days for 6-12 months service
  • 10 days for 1-2 years
  • 15 days per year for 2+ years service
• Separate seniority bonus for long service

China

• Economic compensation:
  • 1 month salary per year of service
  • Calculated on average of previous 12 months
  • Capped at 3x local average salary for high earners
  • Maximum 12 months compensation (special circumstances: 24 months)
• Applies to most employer-initiated terminations
• Not for serious misconduct
• Additional compensation if illegal dismissal

When severance is payable

Typically required

• Redundancy or retrenchment (position elimination)
• Company closure or relocation
• Downsizing or restructuring
• Layoffs due to economic conditions
• Termination without cause (in some countries)
• Mutual agreement (may be negotiated)
• Completion of fixed-term contract (some countries)

Typically not required

• Employee resignation
• Termination for serious misconduct or gross negligence
• Summary dismissal for just cause
• Termination during probation (usually)
• Abandonment or desertion
• Retirement (unless specified)

Country variations

• Some countries require severance for most terminations
• Others only for specific circumstances
• Employment contracts may extend beyond statutory requirements

Calculating severance pay

Common formula components

Length of service

• Full years typically counted
• Partial years may be pro-rated
• Start date to termination date
• Some countries round up/down

Salary basis

• Basic salary only (most common)
• Basic salary plus regular allowances
• Average earnings over period (3-12 months)
• Last drawn salary
• Country-specific definitions

Formula examples

• Per year: "1 month salary × years of service"
• Per day: "30 days salary × years of service"
• Fractional: "0.5 month salary × years of service"
• Tiered: Different rates for different service periods

Caps and minimums

• Maximum payment amounts (statutory caps)
• Maximum years counted
• Minimum service requirements
• Maximum salary amounts for calculation

Severance payment timing

Payment deadlines

• With final salary payment (common)
• Within specific days of termination (15-30 days typical)
• On last day of employment
• Country-specific requirements

Final settlement components

• Severance pay
• Outstanding salary
• Accrued annual leave
• Pro-rated bonus (if applicable)
• Notice period payment
• Other accrued entitlements

Tax treatment

Varies by country:

• Tax-free up to certain threshold
• Taxed as regular income
• Special tax treatment or rates
• Affects net amount received

Severance negotiations

When negotiable

• Above statutory minimums
• Senior executive packages
• Mutual separation agreements
• Voluntary redundancy programs
• Settlement of disputes

Negotiation considerations

• Length of service and contribution
• Seniority and position
• Market conditions and alternatives
• Company financial position
• Retention of goodwill
• Non-compete or confidentiality agreements
• References and recommendations
• Release of claims

Enhanced packages may include

• Extended severance multiples
• Continuation of benefits
• Outplacement support
• Equity vesting acceleration
• Bonus payments
• Transition assistance

Severance and other entitlements

Relationship to notice period

• Severance typically separate from notice
• Both may be payable
• Notice can be worked or paid in lieu
• Severance calculated independently

Impact on other benefits

• Pension/retirement contributions during notice
• Health insurance continuation
• Accrued leave payments
• Bonus eligibility
• Equity or stock options

Government support

• Unemployment benefits (separate from severance)
• Job search assistance programs
• Retraining support
• May affect eligibility in some countries

Retrenchment best practices

Planning and preparation

• Business justification documented
• Selection criteria objective and fair
• Legal review of approach
• Communication strategy
• Support programs identified

Consultation

• Employee consultation where required
• Union consultation if applicable
• Government notification (some countries)
• Adequate notice of intention

Selection criteria

• Objective, non-discriminatory
• Business-based rationale
• Skills and performance considered
• Last-in-first-out (LIFO) consideration
• Avoid adverse impact on protected groups

Communication

• Dignified, respectful approach
• Private meetings
• Clear explanation
• Written confirmation
• Support resources provided

Support services

• Outplacement assistance
• Career counseling
• Job search support
• Reference letters
• Extensions of benefits where possible

Documentation

• Thorough record-keeping
• Rationale for decisions
• Consultation records
• Payment calculations
• Acknowledgments and releases

Severance disputes

Common issues

• Calculation disagreements
• Eligibility questions
• Unfair dismissal claims
• Discrimination allegations

Resolution mechanisms

• Negotiation: Direct discussion between parties
• Mediation: Third-party facilitated settlement
• Labor tribunals: Government dispute resolution bodies
• Courts: Civil litigation for breach of contract
• Arbitration: Contractual dispute resolution

Prevention strategies

• Clear employment contracts
• Transparent policies
• Proper documentation
• Legal compliance
• Fair processes
• Professional communication
• Timely payments

Severance tax treatment across APAC

Tax treatment varies significantly:

Singapore

• First SGD 10,000 tax-exempt
• Remainder taxed as regular income
• Includes retrenchment and retirement benefits

Australia

• Employment Termination Payments (ETP) regime
• Tax-free threshold based on years of service
• Concessional tax rates above threshold
• Different treatment for pre/post-July 1983 service

Hong Kong

• First HKD 400,000 tax-free
• Remainder taxed at standard rates
• Applies to severance and long service payments

Japan

• Favorable tax treatment for retirement income
• Deduction based on years of service
• Lower tax rates than regular income

India

• Retrenchment compensation tax-exempt
• Gratuity tax-free up to INR 2 million
• Amounts above threshold taxable

Malaysia

• Generally tax-exempt
• Exceptions for certain contractual payments

South Korea

• Retirement allowance has preferential tax treatment
• Separate from regular income taxation

Thailand

• Severance up to 300,000 baht tax-free
• Remainder taxed progressively

Other countries

• Varies from fully taxable to partially exempt
• Depends on nature of payment and circumstances
• Professional tax advice recommended

How EOR providers handle severance

When using an Employer of Record like AYP:

Compliance management

• Ensure calculations follow local requirements
• Apply correct formulas and rates
• Meet statutory minimums
• Handle country-specific rules
• Consider contract terms

Process management

• Coordinate termination procedures
• Calculate severance accurately
• Process payments timely
• Provide required documentation
• Handle tax withholding correctly

Consultation and guidance

• Advise clients on local requirements
• Recommend best practices
• Support difficult situations
• Explain obligations and options
• Facilitate fair treatment

Documentation

• Prepare termination letters
• Calculate and document severance
• Provide payment breakdowns
• Maintain compliance records
• Support potential audits

Risk mitigation

• Professional handling reduces disputes
• Proper procedures followed
• Compliance assured
• Documentation protects all parties

Limitations

• Client decides on termination (EOR executes)
• Enhanced packages require client approval
• Workplace disputes may still arise
• Client responsible for business decisions

Voluntary redundancy programs

Program design

• Enhanced severance multiples (e.g., 1.5-2x statutory)
• Voluntary vs. compulsory approach
• Eligibility criteria
• Application and selection process
• Acceptance deadlines

Benefits

• Reduces forced redundancies
• Maintains morale
• Goodwill preservation
• May attract volunteers
• Smoother transition

Considerations

• Cost of enhanced packages
• Risk of losing critical talent
• Age discrimination concerns
• Selection if oversubscribed
• Legal framework compliance

Severance budgeting and planning

Cost estimation

• Number of potential terminations
• Average tenure of affected employees
• Average salary levels
• Statutory formula application
• Additional costs (notice, leave payouts)
• Tax and statutory contributions on payments

Financial planning

• Reserve funds for restructuring
• Phased implementation if needed
• Cash flow impact
• Accounting treatment (provisions)
• Impact on financial statements

Contingency planning

• Potential disputes or challenges
• Extended notice periods
• Garden leave costs
• Support service expenses
• Legal and advisory fees

Global severance trends

Increasing protections

• Some countries enhancing severance requirements
• Greater employee protections
• Procedural requirements strengthening

Economic pressures

• Severance obligations during downturns
• Impact on business restructuring decisions
• Debates on balancing employer/employee interests

Gig economy implications

• Questions about severance for platform workers
• Contractor vs. employee classification impacts
• Emerging regulations

Regulatory harmonization

• Some regional movement toward standards
• Still significant country variations
• Local laws remain paramount

Best practices for managing severance

Prevention

• Careful hiring decisions
• Performance management
• Documentation
• Early intervention for issues
• Clear expectations

When termination necessary

• Legal compliance review
• Proper procedure followed
• Fair treatment
• Clear communication
• Dignified process
• Support provision

Financial management

• Accurate calculations
• Timely payment
• Clear documentation
• Professional advice when needed
• Budget appropriately

Relationship preservation

• Respectful treatment throughout
• Acknowledge contributions
• Provide references
• Maintain confidentiality
• Support transition

Documentation

• Comprehensive records
• Signed acknowledgments
• Release agreements where appropriate
• Protect against future claims

Common severance mistakes to avoid

Calculation errors

• Wrong service period
• Incorrect salary basis
• Misapplying formula
• Missing components
• Currency mistakes

Procedural failures

• Inadequate notice
• No consultation where required
• Discriminatory selection
• Improper termination process
• Missing documentation

Payment issues

• Late payment
• Incomplete payment
• Wrong tax treatment
• Missing final entitlements
• No payment breakdown

Communication problems

• Unclear explanations
• Insensitive delivery
• Inadequate information
• No written confirmation
• Poor timing

Legal non-compliance

• Below statutory minimums
• Wrong circumstances applied
• Ignoring local requirements
• Improper contracts or waivers

AYP's approach to severance

AYP ensures proper severance handling across Asia-Pacific:

• Compliance expertise: Deep knowledge of 14+ country requirements
• Accurate calculations: Correct application of local formulas
• Proper procedures: Following required termination processes
• Timely processing: Meeting payment deadlines
• Clear documentation: Comprehensive records and explanations
• Client guidance: Advisory support on obligations and options
• Risk management: Professional handling reduces disputes
• Employee support: Fair, respectful treatment throughout process
• Regional consistency: Standardized approach with local compliance

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