Wage Components Used as the Basis for Calculating Severance Pay upon Termination of Employment
In the event of termination of employment, an employee is, in principle, entitled to certain statutory entitlements depending on the grounds for termination and the employee’s length of service. Such entitlements may include severance pay, long-service pay, and compensation pay for entitlements.
Employees’ statutory entitlements arising from termination of employment are governed by Law Number 13 of 2003 concerning Manpower, as most recently amended by Law Number 6 of 2023 concerning Job Creation (the “Manpower Law”), and are further regulated under Government Regulation Number 35 of 2021 (“GR 35/2021”).
Severance Pay Based on Length of Service
The basic amount of severance pay is determined based on the employee’s length of service, as follows:
| Length of Service | Severance Pay Entitlement |
|---|---|
| Less than 1 year | 1 month’s wage |
| 1 year or more but less than 2 years | 2 months’ wages |
| 2 years or more but less than 3 years | 3 months’ wages |
| 3 years or more but less than 4 years | 4 months’ wages |
| 4 years or more but less than 5 years | 5 months’ wages |
| 5 years or more but less than 6 years | 6 months’ wages |
| 6 years or more but less than 7 years | 7 months’ wages |
| 7 years or more but less than 8 years | 8 months’ wages |
| 8 years or more | 9 months’ wages |
However, the above table only sets out the basic severance pay entitlement. The actual amount payable to an employee will depend on the grounds for termination, as GR 35/2021 stipulates different multipliers applicable to severance pay depending on the relevant grounds for termination.
What Wage Components Are Included in the Basis for Calculating Severance Pay?
One of the key considerations in calculating severance pay is determining which wage components should be included in the calculation basis.
Pursuant to Article 157 paragraph (1) of the Manpower Law, the wage components used as the basis for calculating severance pay and long-service pay consist of:
- basic wage; and
- fixed allowances provided to the employee and his or her family.
Accordingly, not all income, allowances, or benefits received by an employee are automatically included in the basis for calculating severance pay. The determination depends on the nature of the relevant payment, particularly whether it qualifies as a fixed allowance.
Where an employee is paid on a daily basis, the monthly wage is calculated as 30 times the daily wage. Where an employee is paid based on output or units of production, the monthly wage is calculated based on the average income received during the preceding 12 months.
If the resulting monthly wage is lower than the applicable minimum wage, the wage used as the basis for calculating severance pay shall be the minimum wage applicable in the region where the company is domiciled.
Fixed Allowances as Part of the Severance Pay Calculation Basis
Referring to Circular Letter of the Minister of Manpower Number SE-07/MEN/1990, a fixed allowance is, in principle, a regular payment related to employment that is provided on a fixed basis to an employee and his or her family and is paid within the same payment period as the basic wage.
Examples of payments that may be classified as fixed allowances include:
- spouse allowance;
- child allowance;
- housing allowance;
- regional allowance; and
- other allowances paid on a fixed and regular basis.
However, meal and transportation allowances are not automatically classified as fixed allowances.
Such allowances may qualify as fixed allowances if their payment is not conditional upon the employee’s attendance and they are paid regularly based on a specified period, whether daily or monthly.
Conversely, if a meal or transportation allowance is paid solely based on the employee’s actual days of attendance, it is more likely to be classified as a non-fixed allowance and, in principle, will not form part of the wage components used as the basis for calculating severance pay.
Accordingly, the substance and payment mechanism of an allowance are more determinative than the name or designation given to such allowance.
Severance Pay Entitlements Vary Depending on the Grounds for Termination
GR 35/2021 provides that an employee’s termination entitlements vary depending on the grounds for termination. Some of the key provisions are as follows:
1. Severance Pay at 1 Time the Applicable Rate
An employee may be entitled to 1 time the applicable severance pay + 1 time the applicable long-service pay + compensation pay for entitlements, including under certain circumstances involving a merger, consolidation, spin-off, or acquisition of the company, as regulated under GR 35/2021.
2. Severance Pay at 0.5 Times the Applicable Rate
An employee may be entitled to 0.5 times the applicable severance pay + 1 time the applicable long-service pay + compensation pay for entitlements, including where:
- an acquisition of the company results in changes to the terms and conditions of employment and the employee is unwilling to continue the employment relationship; or
- the company carries out an efficiency measure due to losses suffered by the company.
3. Severance Pay at 0.75 Times the Applicable Rate
Where employment is terminated due to a force majeure event that does not result in the closure of the company, the employee is entitled to 0.75 times the applicable severance pay + 1 time the applicable long-service pay + compensation pay for entitlements.
4. Severance Pay at 1.75 Times the Applicable Rate
An employee whose employment is terminated upon reaching retirement age is, in principle, entitled to 1.75 times the applicable severance pay + 1 time the applicable long-service pay + compensation pay for entitlements, subject to the applicable provisions concerning pension programs.
5. Severance Pay at 2 Times the Applicable Rate
Under certain circumstances, an employee or his or her lawful heirs may be entitled to 2 times the applicable severance pay + 1 time the applicable long-service pay + compensation pay for entitlements, including where:
- the employee passes away; or
- the employee suffers from a prolonged illness or disability resulting from an occupational accident and is unable to perform his or her work after a period exceeding 12 months.
6. Compensation Pay for Entitlements and Separation Pay
For certain grounds of termination, an employee may not be entitled to severance pay or long-service pay but may instead be entitled to compensation pay for entitlements and separation pay, provided that the separation pay is stipulated under the Employment Agreement, Company Regulation, or Collective Labour Agreement.
One example is an employee who voluntarily resigns and satisfies the applicable statutory requirements for resignation.
Conclusion
In calculating an employee’s statutory entitlements arising from termination of employment, two key elements must be distinguished.
First, the employee’s length of service determines the basic amount of severance pay. The longer the employee’s period of service, the greater the number of months’ wages used as the basis for severance pay, subject to a maximum of 9 months’ wages for employees with 8 years of service or more.
Second, the grounds for termination determine the multiplier applicable to such basic severance pay. Accordingly, employees with the same length of service and wage may not necessarily receive the same amount of severance pay if their employment is terminated on different grounds.
Furthermore, the basis for calculating severance pay and long-service pay is, in principle:
Basic Wage + Fixed Allowances
Therefore, where an employee receives a housing allowance, spouse allowance, meal allowance, transportation allowance, or other allowances on a fixed and regular basis and such payments are not conditional upon attendance or the achievement of certain targets, the relevant allowances should be assessed to determine whether they qualify as wage components to be included in the severance pay calculation basis.
Conversely, payments that are non-fixed, dependent upon attendance, or provided only upon the occurrence of certain conditions will, in principle, not automatically form part of the wage components used as the basis for calculating severance pay.
Accordingly, in practice, the calculation of termination entitlements cannot be determined solely by reference to an employee’s monthly salary. It is also necessary to examine the employee’s wage structure, the nature of each allowance, length of service, grounds for termination, and the applicable provisions of the Employment Agreement, Company Regulation, or Collective Labour Agreement.
Legal Basis
- Law Number 13 of 2003 concerning Manpower, as most recently amended by Law Number 6 of 2023 concerning the Stipulation of Government Regulation in Lieu of Law Number 2 of 2022 concerning Job Creation into Law;
- Law Number 6 of 2023 concerning Job Creation;
- Government Regulation Number 35 of 2021 concerning Fixed-Term Employment Agreements, Outsourcing, Working Hours and Rest Periods, and Termination of Employment; and
- Circular Letter of the Minister of Manpower Number SE-07/MEN/1990 concerning the Classification of Wage Components and Non-Wage Income.
- Hukum Online
