How to pay an employee leaving my company?

When an employee resigns or is terminated, certain payments like Severance pay, Payment in lieu of notice and Leave pay may become payable.

Severance pay

When an employee is terminated, they may be paid severance pay. Severance pay is exempt from EPF and SOCSO/EIS. In addition any part of the severance pay which is considered to be compensation for loss of employment (as opposed to a gratuity paid for past services) will be fully or partially exempt from PCB* as follows:

  • if the Director General of Inland Revenue is satisfied that the payment is made on account of loss of employment due to ill health, the compensation is fully exempted; or

  • in the case of a payment made in connection with a period of employment with the same employer or with companies in a group, an exemption of RM10,000 is given for each completed year of service if the employment is with the same employer or with companies in the same group. Please note that a further RM10,000 for each full year of service is to be exempted for any employee who has ceased employment between 1 January 2020 and 31 December 2021, giving a total exemption of RM20,000 for each full year of service.

In Payroll Panda, you can use the preset item ‘Severance’ if the severance pay is fully subject to PCB. If the severance pay is partially or fully exempt from PCB, please read here to find out how to create a custom item.

*please note that the PCB exemption does not apply to compensation payments by a controlled company to a director who is not a full-time service director

Payment in lieu of notice

When an employee is terminated, payment in lieu of notice is considered by LHDN to be included as compensation for loss of employment subject to the same PCB exemption as described above. Payment in lieu of notice is also exempted from EPF and SOCSO/EIS.   

Please read here to find out how to create a custom item for Payment in lieu of notice to an employee. If the payment in lieu of notice is payable to the company by an employee who is resigning and not serving their notice, you can use our preset Net Salary Deduction to deduct the employee's salary.

Leave pay

Employees leaving your company may be compensated for any unutilised annual leave. For an employee covered under the Employment Act, the minimum leave pay should be calculated using 26 workdays to arrive at the ordinary rate of pay (wages* /26). However, any amount more favourable to the employee than the minimum leave pay is also acceptable. So for an employee who works 5 days a week, it is usual to use 22 workdays instead (or 21.75, which is 261 annual workdays divided by 12 months).

Leave pay is subject to all statutory deductions.

In Payroll Panda, you can use the preset item ‘Leave Pay’ to add the payment to your payroll.

*wages for this purpose are defined as:

basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service but not including:

(a) the value of any house accommodation or the supply of any food, fuel, light or water or medical attendance, or of any approved amenity or approved service;

(b) any contribution paid by the employer on his own account to any pension fund, provident fund, superannuation scheme, retrenchment, termination, lay-off or retirement scheme, thrift scheme or any other fund or scheme established for the benefit or welfare of the employee;

(c) any travelling allowance or the value of any travelling concession;

(d) any sum payable to the employee to defray special expenses entailed on him by the nature of his employment;

(e) any gratuity payable on discharge or retirement; or

(f) any annual bonus or any part of any annual bonus.

Was this article helpful?

Download The Free Guide