Retrenchment benefits guide for employers in Singapore
Retrenchment is a challenging process for both employers and employees, but it is crucial that employers handle this process with care, empathy, and in compliance with Singapore's legal requirements. This guide aims to provide a comprehensive understanding of retrenchment benefits, eligibility criteria, and best practices for employers navigating this complex process.
What is retrenchment benefit?
Retrenchment benefit refers to the compensation provided to employees who are let go due to redundancy. Redundancy occurs when a job is no longer needed, often due to restructuring, technological changes, or economic downturns. The purpose of retrenchment benefits is to offer financial support to affected employees as they transition to new employment opportunities. In Singapore, while retrenchment benefits are not strictly mandated by law for all employees, they are highly recommended as part of responsible retrenchment practices. This support not only eases the financial burden on the retrenched employee but also helps maintain a positive relationship between the employer and the broader workforce.
Who is eligible for retrenchment benefits?
In Singapore, eligibility for retrenchment benefits depends largely on the length of service with the company. Employees who have served the company for at least 2 years are eligible for retrenchment benefits. Those with less than 2 years’ service could be granted an ex-gratia payment out of goodwill.
For more details of ex-gratia payments, explore our comprehensive “Ex-gratia payment guide” to help employees during difficult times or to recognise their contributions to the organisation.
How much is the amount of retrenchment benefits?
In Singapore, there is no statutory requirement specifying the exact amount to be paid. However, the Ministry of Manpower (MOM) suggests that a reasonable amount is between 2 weeks to 1 month's salary per year of service. This guideline serves as a benchmark, but employers can choose to offer more, depending on the company's financial situation and the terms agreed upon in the employment contract. In unionised companies where the amount of retrenchment benefit is stated in the collective agreement, the norm is 1 month’s salary for each year of service.
Note:
If the retrenchment comes shortly after a salary cut, the salary before the cut should be used to determine the amount of compensation.
Both employee and employer don’t have to pay CPF contributions for retrenchment benefits.
What should employers do during retrenchment exercise?
Retrenchment is more than just a financial transaction; it’s a process that requires careful planning and sensitive handling. Here are the key steps employers should follow during a retrenchment exercise:
Step #1: Selection criteria
Employers should establish clear, fair, and non-discriminatory criteria for selecting employees to be retrenched. Factors such as performance, skills, experience, and the business's future needs should guide the decision-making process. Avoiding any form of discrimination based on age, gender, race, or other protected characteristics is paramount.
Step #2: Notification to MOM
Employers must notify the Ministry of Manpower (MOM) within 5 working days after affected employees are notified of their retrenchment. This requirement is crucial as it allows the MOM to monitor retrenchment trends and offer timely assistance to retrenched workers through career support programmes.
Step #3: Consultation with employees
Before proceeding with retrenchment, employers should engage in consultations with employees or their representatives. This step is essential to explain the reasons for retrenchment, explore possible alternatives, and address any concerns employees might have. Transparent communication can help mitigate the negative impact of retrenchment on employee morale and trust.
Step #4: Payment of all outstanding salaries and benefits
Employers must ensure that all outstanding salaries, including unused annual leave and other benefits, are paid to the retrenched employees on their last working day. This step is critical in fulfilling the employer’s legal obligations and maintaining goodwill.
Step #5: Support for affected employees
Employers should consider offering outplacement services to help retrenched employees find new employment. This could include career counselling, job fairs, and providing references. Offering such support demonstrates the company’s commitment to its employees even in difficult times.
In Singapore, retrenchment benefits are generally not taxable as they are considered a form of compensation for the loss of employment. However, this exemption applies only to the portion of the payment that represents compensation for the loss of employment. Refer to the breakdown table below to understand which parts are taxable and which are not.
No
Types of retrenchment benefits
Is it taxable?
1
Compensation for loss of employment Loss of employment means that the job is no longer available due to reasons such as company downsizing, restructuring, etc.
Not taxable It is capital in nature.
2
Payment for restrictive covenants A restrictive covenant is an agreement that restricts what someone can do (e.g. the employee is not to compete with his/her employer).
Not taxable It is capital in nature.
3
Outplacement support Generally, it may include providing counselling and moral support to affected employees and to assist them in their search for jobs.
Not taxable when the following conditions are met: The outplacement support is provided to compensate for loss of employment and is only available to employees who are retrenched;The only expense incurred by the employer to provide the outplacement support is the fees paid to the outplacement agents or the cost incurred to provide other forms of outplacement support, whichever the case may be; andAny employee who is eligible for outplacement support but chooses not to accept it is not entitled to any other compensation in lieu, whether in cash or otherwise.
4
Payment in lieu of noticeEx-gratiaGratuity
Taxable These payments are made to recognise the past services provided, not payments for loss of employment.
Retrenchment benefits are not subject to CPF (Central Provident Fund) contributions. This is because retrenchment benefits are not considered wages but rather a form of compensation for the loss of employment. Therefore, neither the employer nor the employee is required to make CPF contributions on retrenchment benefits.
However, if the retrenchment package includes any payments that are considered wages, such as salary in lieu of notice or payment for accrued leave, CPF contributions would be required for those components.
Is it compulsory for employers to pay retrenchment benefits?
Retrenchment benefit depends on what is provided for in the employment contract, memoranda of understanding, or collective agreement (for unionised companies). If there is no contractual provision, it is to be negotiated between employees (or their union) and the employers.
Are my employees who are aged 63 or above eligible for retrenchment benefit or Employment Assistance Payment (EAP)?
If you are retrenching employees who are aged 63 or above, you can consider offering the EAP recommended in the Tripartite Guidelines for Re-employment of Older Workers, unless retrenchment benefit is stated in the collective agreement or individual employment contract.
My employment contract with my employee states that I can provide 1-month notice to terminate employment at any time. Would I still need to notify MOM in this case?
Yes, your company must notify MOM if your employee is terminated on the ground of redundancy or by reason of any reorganisation of the employer's profession, business, trade, or work and has met the mandatory retrenchment notification requirements.
An employer who terminates an employment contract with no plan to fill the vacancy any time soon is presumed to have retrenched the employee.
One of the employees being retrenched is pregnant. Is she entitled to maternity and retrenchment benefits?
Before proceeding with retrenchment, employers should explore alternative measures that could help reduce costs while preserving jobs. Some of the alternatives include:
Redeployment: employers can consider redeploying employees to other roles within the company that are less affected by the downturn. This allows the company to retain valuable talent while adapting to changing business needs.
Flexible Work Arrangements: Implementing flexible work arrangements, such as reduced working hours or temporary layoffs, can help manage costs without permanently losing employees. Find out everything you need to know about the upcoming Flexible Working Arrangement (FWA) policy in our guide.
Salary adjustments: Temporarily adjusting salaries or implementing pay cuts across the organisation can also be a viable alternative to retrenchment. However, this should be done in consultation with employees and with their agreement.
Cost-cutting measures: Employers can explore other cost-cutting measures, such as reducing discretionary spending, freezing hiring, or deferring non-essential projects, to mitigate the need for retrenchment.
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