A business downturn, a restructuring or the loss of a major client can leave an employer with no option but to reduce headcount. Retrenchment and redundancy: legal requirements and best practices is a topic that every Singapore employer should understand before the first conversation with an affected employee, because errors in process tend to cost far more than the exercise was meant to save.
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This article explains what retrenchment means in Singapore, what the Employment Act and the tripartite guidelines expect, and how to run the process in a way that is fair, documented and compliant.
Who this applies to
Retrenchment, also called redundancy, happens when an employer ends employment because the role is no longer needed. It is not a dismissal for misconduct or poor performance, and it is not the same as the end of a fixed-term contract.
- Employers of any size, including private limited companies, sole proprietorships and partnerships that employ staff under a contract of service.
- Employees covered by the Employment Act, which today includes managers and executives as well as rank-and-file staff.
- Employers with at least 10 employees, who have an additional duty to notify the Ministry of Manpower (MOM).
- Foreign employees on an Employment Pass, S Pass or Work Permit, who are covered by the same fairness principles and by extra administrative steps.
Key rules and requirements in Singapore
Notice of termination
The notice period is whatever the employment contract states. If the contract is silent, the Employment Act sets default periods that rise with length of service, from one day for service of under 26 weeks to four weeks for service of five years or more. Either party may instead give salary in lieu of notice, provided the contract allows it.
Retrenchment benefit
The Employment Act does not set a fixed formula for retrenchment benefit. Entitlement depends on the contract, the company handbook or any collective agreement. The Act does provide that an employee with less than two years of service is not entitled to retrenchment benefit. For employees with longer service, the tripartite guidance referred to by MOM suggests a range of between two weeks and one month of salary per year of service, depending on the company’s financial position and industry norms.
Mandatory Retrenchment Notification
An employer with at least 10 employees must report retrenchment exercises to MOM if it retrenches five or more employees within any six-month period. The notification is generally due within five working days after the affected employees are told. It is made online and includes the number and profile of employees affected.
Fair selection and non-discrimination
The Tripartite Guidelines on Fair Employment Practices require that selection be based on objective, job-related criteria such as skills, experience and performance, and not on age, race, gender, religion, marital status, disability or nationality. Employers should also be aware of the workplace fairness legislation being phased in, and should check its current status before an exercise.
Final payments
Salary, accrued and unused leave (where the contract provides for payment), salary in lieu of notice and any retrenchment benefit should be paid promptly. The Employment Act expects salary to be paid within seven days after the last day of employment.
Step-by-step process
- Explore alternatives first. Consider shorter work weeks, redeployment, retraining, a hiring freeze or temporary salary adjustments. Singapore’s tripartite guidelines expect retrenchment to be a last resort.
- Define the roles affected. Document the business reasons and the roles that are no longer required, ideally in a short paper approved by the directors.
- Set selection criteria. Write the criteria down before the names are chosen, apply them consistently and keep the scoring.
- Check each contract. Confirm the notice period, any retrenchment clause, bonus terms and restrictive covenants for every affected employee.
- Inform employees in person. Hold a private meeting, explain the reason and the selection basis, and follow up with a written letter setting out the last day, notice, benefit and final pay.
- Notify MOM. Where the thresholds are met, submit the Mandatory Retrenchment Notification within the deadline.
- Keep records and handle foreign employees. Retain the decision paper, selection scores and letters. Cancel passes and permits on the MOM portal within the prescribed time after the last day. Where a foreign employee is leaving Singapore, an employer generally needs to file Form IR21 with IRAS at least one month before the cessation date.
- Close out payroll. Process final salary, leave payout and the retrenchment benefit, and submit the correct CPF contributions for the final wage months.
Common mistakes to avoid
- Calling a termination a retrenchment when the real reason is performance or conduct, then replacing the role shortly after.
- Selecting employees without written criteria, which makes it hard to rebut an allegation of discrimination.
- Assuming a retrenchment benefit is never payable because the contract is silent. The tribunal and the tripartite guidance will still look at what is fair.
- Missing the MOM notification deadline or forgetting to cancel foreign employees’ passes.
Practical examples
Example 1: A small services firm loses its largest client
A company with 14 employees loses a contract that accounted for 40 per cent of revenue. After trying a temporary pay reduction, the directors decide to retrench six staff. Because the company has at least 10 employees and is retrenching five or more people, it files the notification with MOM within five working days. It offers affected employees one month of notice and a benefit of two weeks of salary per completed year of service, as stated in its handbook.
Example 2: A start-up with a short-tenure employee
An employee has served 18 months when the role is made redundant. Under the Employment Act the employee is not entitled to retrenchment benefit, since service is under two years. The employer still gives full contractual notice and pays out accrued leave, and, as a goodwill gesture, offers a modest ex gratia payment in exchange for a clear exit letter.
Example 3: An Employment Pass holder
An overseas manager on an Employment Pass is retrenched. The employer pays the contractual notice and benefit, cancels the pass on the MOM portal after the last day and files Form IR21 with IRAS so that tax clearance is handled before the final payment is released.
How a corporate secretary can help
Retrenchment touches employment law, corporate governance, payroll and tax at the same time. A corporate secretary in Singapore can prepare the board resolutions that record the business case, check that directors’ duties under the Companies Act have been properly considered, and update ACRA records if an officer is affected. Raffles Corporate Services can also support payroll and CPF computations for the final month, tax filings such as Form IR21 for foreign employees, and the accounting treatment of retrenchment costs in the financial statements. For specific employment disputes, we will refer you to a suitable lawyer.
Frequently Asked Questions
Is a retrenchment benefit compulsory in Singapore?
Not by a fixed statutory formula. Employees with less than two years of service are not entitled to it under the Employment Act. For others, entitlement depends on the contract, company policy or collective agreement, and the tripartite guidance sets out an expected range.
When must an employer notify MOM of a retrenchment?
Employers with at least 10 employees must notify MOM when five or more employees are retrenched within six months, generally within five working days after the employees are informed.
Can an employer retrench someone on maternity leave or medical leave?
Retrenchment must be based on genuine business reasons and fair criteria. Employees on protected leave are covered by additional protections, so an employer should take advice before proceeding.
Can a retrenched employee make a claim?
Yes. Disputes may go to the Tripartite Alliance for Dispute Management and, if unresolved, the Employment Claims Tribunals. Good documentation is the best protection.
Should the company replace the role afterwards?
Re-hiring for substantially the same role soon after a retrenchment can suggest that the exercise was not genuine. Employers should be prepared to explain any such hiring.
Key takeaways
- Retrenchment should be a last resort, supported by a documented business reason.
- Selection criteria must be objective, written down and applied consistently.
- Employers with at least 10 employees must notify MOM when the reporting threshold is reached.
- Retrenchment benefit is not fixed by statute, but employees with under two years of service are not entitled to it, and the tripartite guidance provides a benchmark for others.
- Foreign employees require pass cancellation and, where relevant, an IRAS Form IR21 filing.
Requirements may change, so always check the latest guidance from ACRA, IRAS or MOM, or consult a professional adviser.
If you would like to find out more about how Raffles Corporate Services can assist with your company’s compliance and corporate secretarial requirements, please get in touch with the team at [email protected].
Yours sincerely,
The editorial team at Raffles Corporate Services
Disclaimer: This does not constitute legal advice. If you require legal advice, please contact a lawyer.