MSS, VSS and Retrenchment: Understanding the Key Differences

When a company needs to restructure its workforce, reduce operating costs or reorganise its business operations, employers may consider different methods of managing the workforce. Two terms commonly used are Mutual Separation Scheme (MSS) and Voluntary Separation Scheme (VSS). Although both involve an employee leaving the organisation, MSS and VSS are not necessarily the same in terms of how the separation is initiated and implemented.

What Is Voluntary Separation Scheme (VSS)?

A VSS is generally used when an employer intends to reduce its workforce by inviting employees to voluntarily leave the organisation.

Under a VSS, the employer typically announces the scheme and sets out the eligibility criteria, application period and separation package. Employees who are interested may apply to participate in the scheme.

The employer will then consider the applications and decide whether to approve the employee’s participation.

The Jabatan Tenaga Kerja Semenanjung Malaysia (JTKSM) describes VSS as a situation where an employer intends to reduce the number of employees by encouraging employees to leave voluntarily. JTKSM also notes that employees are commonly offered termination benefits or compensation that may be better than the statutory minimum.

001

What Is Mutual Separation Scheme (MSS)?

Under an MSS, the employer and employee mutually agree to end the employment relationship based on agreed terms.

Unlike a general VSS invitation, an MSS may be used for an individual employee or a specific group of employees, depending on the employer’s circumstances.

The parties may agree on matters such as:
• Last day of employment
• Notice period or payment in lieu of notice
• Separation compensation
• Outstanding salary
• Unused annual leave
• Benefits and other contractual entitlements
• Return of company property
• Confidentiality obligations
• Full and final settlement terms
The terms should be clearly documented so that both parties understand what has been agreed.

002

Retrenchment

Retrenchment generally occurs when an employer terminates employment because the employee’s position or work is no longer required due to reasons such as redundancy, restructuring or business circumstances.

The employee does not necessarily agree to the termination.

JTKSM states that employees affected by retrenchment may, where applicable, be entitled to statutory benefits such as payment in lieu of notice, termination benefits, payment for unused annual leave and outstanding salary.

Is There a Minimum Compensation for VSS or MSS?

There is no single standard VSS/MSS compensation amount that applies to every situation.

The amount may depend on:
• The employee’s length of service
• Salary
• Employment contract
• Company’s separation scheme
• Collective agreement, where applicable
• Terms negotiated between the employer and employee
• Applicable statutory requirements

JTKSM states that VSS commonly offers termination benefits or compensation that are better than the applicable statutory provisions.
For employees who are covered by the relevant statutory termination-benefit provisions, JTKSM currently states the minimum termination-benefit rates as:
• 10 days’ wages for each year of service for service of less than 2 years;
• 15 days’ wages for each year of service for service of 2 years or more but less than 5 years; and
• 20 days’ wages for each year of service for service of 5 years or more.
The calculation is subject to the applicable legislation and circumstances.

Statutory termination benefits and a VSS/MSS package should not automatically be treated as identical. The terms of the particular separation arrangement need to be reviewed.

Is VSS/MSS Compensation Taxable?

Compensation for loss of employment may qualify for tax exemption under Malaysian income tax rules, subject to the applicable conditions.

LHDN’s current information states that for cessation of employment on or after 1 July 2008, is eligible for an exemption of RM10,000 for each completed year of service with the same employer or companies within the same group.

This does not mean that every payment made when an employee leaves is automatically tax-exempt.

For example, salary, bonus, leave pay and other payments may have different tax treatment from compensation for loss of employment. The nature of each payment should therefore be identified separately when preparing the employee’s final payroll and tax documentation. Employers should also ensure that the relevant cessation documentation is properly prepared and reported to LHDN where required.

Can Employees Claim EIS/Lindung Kerjaya After VSS or MSS?

PERKESO currently lists VSS or MSS as categories of loss of employment that may qualify for Employment Insurance System / Lindung Kerjaya benefits, subject to the applicable eligibility requirements.

PERKESO’s current information also states that eligible applicants generally need to satisfy requirements such as:
• Being an insured person under the applicable legislation;
• Meeting the applicable age requirements;
• Having sufficient qualifying contributions;
• Applying within the required period; and
• Being able, available and actively seeking work.

Not every type of resignation or mutual termination automatically qualifies as a loss of employment for EIS / Lindung Kerjaya purposes. PERKESO distinguishes VSS/MSS from ordinary voluntary resignation and certain other situations.

Employees should therefore check their eligibility directly with PERKESO rather than assuming that any resignation or separation agreement will qualify.

What Should Employers Consider Before Implementing MSS or VSS?

Before implementing a separation scheme, employers should carefully consider the following:

  1. Business reason
    Clearly identify the reason for the workforce reduction or restructuring.

  2. Eligibility criteria
    Define which employees are eligible to participate and whether there are any exclusions.

  3. Separation package
    Clearly state how the separation payment is calculated and what other payments or benefits are included.

  4. Employment documentation
    Prepare the appropriate offer letter, separation agreement or other supporting documents.

  5. Statutory compliance
    Review the applicable requirements under employment legislation and relevant regulations.
    JTKSM currently requires employers to submit the relevant Borang PK notification for certain actions including retrenchment and separation schemes. For the relevant actions, Part I to IV must generally be submitted at least 30 days before the action is implemented.

  6. Payroll and tax
    Ensure final salary, leave balance, notice payment, compensation and other payments are correctly calculated and treated for payroll and tax purposes.

  7. EIS considerations
    Employees should be provided with appropriate information concerning their employment separation and relevant documentation for any application they may make to PERKESO.

Guidelines on Retrenchment Management: https://jtksm.mohr.gov.my/sites/default/files/2023-01/garis_panduan_pemberhentian_pekerja.pdf
Employment (Termination and Lay-off Benefits) Regulation 1980: https://jtksm.mohr.gov.my/sites/default/files/2023-03/8.%20EMPLOYMENT%20%28TERMINATION%20%26%20LAY%20OFF%20BENEFITS%29%20REGULATIONS%201980_0.pdf
Compensation for Loss of Employment: https://www.hasil.gov.my/wp-content/uploads/PR1_2012.pdf
Employment Insurance / Lindung Kerjaya: https://www.perkeso.gov.my/en/our-services/protection/employment-insurance.html
Borang PK: https://jtksm.mohr.gov.my/sites/default/files/2023-06/borang_pk_0.pdf

*This article is intended for general HR information and does not constitute legal or tax advice. Employment and tax requirements may vary depending on the facts of each case and may be updated from time to time. Employers and employees should obtain appropriate professional advice or refer to the relevant authorities for their specific circumstances.