Understanding the complexities of severance pay is critical for both Singaporean employers and employees. In this comprehensive guide, we will look at the key aspects that define severance pay in Singapore, from calculation methods to tax and CPF implications. Let us dive in and learn everything you need to know about this critical aspect of job termination to ensure a smooth and amicable transition.

What is severance pay?

Severance pay, also known as termination or redundancy pay, is the compensation provided by an employer to an employee following the termination of their employment contract. It is typically offered as a financial package to assist employees in leaving the company and mitigating the financial impact of job loss.

Who is entitled to severance pay?

Employees who have been with the company for at least 2 years are usually eligible for severance pay. Those with less than 2 years of service may be granted an ex-gratia payment out of goodwill.

Tip: Discover everything you need to know about ex-gratia payments in Singapore in our comprehensive guide!

When is severance pay offered?

Severance pay is typically provided in cases of layoffs, redundancies, company closures, or termination without cause (when the employee is not at fault).

Is severance pay compulsory in Singapore?

There is no legislation establishing a general right to severance pay after termination. However, as part of Responsible Retrenchment Practices, the Ministry of Manpower (MOM) has issued guidelines for retrenchment benefits given to employees to compensate them for the loss of employment in the event of retrenchment.

What are some good practices when retrenching employees in Singapore?

As an employer, if you plan to retrench employees, you should do the following:

Take a long-term perspective on your manpower requirements, including the need to maintain a strong Singaporean core.
Notify MOM before beginning any retrenchment exercise.
Consult the union if your company is unionised.
Do not discriminate against employees or groups of employees, and base your decision on criteria such as their ability to contribute to your company's future business needs.
Treat the affected employees with dignity and respect.
Consider extending the retrenchment notice period for all affected employees.

Throughout the retrenchment process, you should:

Pay all salaries, including unused annual leave, notice pay, and so on, to your employees on their last day of work.
Assist your affected employees in finding alternative jobs in associate companies, other companies, or through outplacement assistance programmes such as job fairs, career fairs, and career advice.

How much is severance pay in Singapore?

In Singapore, it is common practice to pay between two weeks' and one month's salary per year of service, depending on various factors.

How do I calculate severance pay for my employees?

The amount of severance pay can vary depending on several factors, including:

Employee's salary and position: Higher-earning employees often receive more severance pay.
Length of service: Employees with longer tenures might get a higher amount.
Reason for termination: In some cases, the reason for job loss might influence the severance amount.
Company policy and financial health: The employer's financial resources and established policies play a role.

The calculation may be as follows:

Total severance pay = Employee’s weekly salary x Number of weeks x Number of years of service

For example:

If an employee has been serving your organisation for five years on a weekly salary of $300 and you would like to give her four weeks’ pay for every year, she will receive $300 x 4 x 5 = $6,000 as severance pay.

Can employees negotiate severance pay?

While former employees have the right to negotiate severance pay, the company also has the right to reject their requests.

It is important to remember that, while employers should try to reach an amicable settlement, they have the right to accept or reject negotiated terms in order to best serve the company.

Is severance pay subject to CPF contributions?

CPF contributions are not payable on the severance pay that is given as compensation for your employee's loss of employment.

However, CPF contributions are still payable on the wages given to your employee until his last date of employment.

Is severance pay tax deductible for companies in Singapore?

Severance payments are tax deductible when the business continues to operate because they support ongoing income-producing activities.

Severance payments, on the other hand, are not tax deductible if the business is completely shut down. This is due to the discretionary nature of such payments, which are not incurred solely for the purpose of producing income when the business ceases operations.

Is severance pay taxable for employees in Singapore?

Severance payments made to compensate for job losses are not taxable for retrenched employees because they are considered capital receipts.

This applies even if the payments to compensate for the loss of employment are provided for in the contract of service or collective agreement or are computed based on the number of years of service with the employer.

What are the advantages of offering severance pay in Singapore?

Offering severance pay in Singapore can provide several advantages for both employers and employees:

1. Employee morale: Providing severance pay demonstrates empathy and compassion towards employees facing job loss, which can help maintain positive morale within the organisation.

2. Smooth transitions: Severance pay provides financial support to employees during their transition period, helping them cover living expenses and facilitating a smoother exit from the company.

3. Legal protection: Offering severance pay can reduce the risk of potential legal claims or disputes from terminated employees, providing a buffer against litigation and associated costs.

4. Reputation management: Providing adequate severance pay reflects positively on the company's reputation and employer brand, reducing the likelihood of negative publicity or legal disputes arising from termination.

5. Talent retention: Offering fair and generous severance packages can enhance the company's reputation as an employer of choice, helping attract and retain top talent in the long run.

Overall, offering severance pay demonstrates a commitment to fair and equitable treatment of employees during times of transition, fostering goodwill and trust between the employer and its workforce.

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