Retrenchment: helping to reduce the pain for both sides

There are specific requirements for handling employment restructuring in these circumstances. So what does an employer have to consider when faced with the reality of having to let staff go and what are the legal requirements?

Advance notice

Not only will an awareness of the requirements associated with giving advance notice save employers money, it will also ensure that employees have ample time to find new employment. The law states that employers must provide notice of termination of employment to employees not less than one salary period in advance. It is important to note that in determining what one salary period is, management should consider the date on which salaries are normally paid as well as the number of times per month that payments are made.

Severance payment

When employees are required to be transferred to another legal entity, their employment agreements would be considered as terminated and thus they will be entitled to severance payment according to their years of service with the employer. Severance payments must be made within three days from the effective date of termination.

However, severance payments can be waived if the employees are being transferred to a new legal entity whose employment terms and conditions are the same or better than the existing employment conditions and the employees give their consent to the arrangement. In this case, the number of years of service in the previous employment would continue to be counted with the new employer.

If management decides to make a severance payment in order to clean up the employment obligation, consideration should be given to the components of the payment as there are different tax treatments.

The company's bylaws or policies in respect of the severance payment are generally provided in the work rules and management should ensure that all the necessary items of income are included in the calculation of the one-time payment at the termination date. A payment on the termination date in the nature of salary, employment benefits, etc would be subject to the normal salary tax.

For employees who have been employed by a company for five years or more, a special method according to Section 48 (5) of the Revenue Code can be used to calculate the withholding tax. This can reduce their tax liability. The employees will also be

able to claim tax exemption on the amount of their severance pay that does not exceed the rate of pay for the last 300 days and not in excess of Bt300,000 in total.

Provident fund

If an employee has been a member of a provident for less than five years, and the new employer has a registered provident fund, management should advise and facilitate the transfer of the existing provident fund to the new fund in order to avoid the tax liability on the payment of the employer's contribution and benefits accrued in the existing fund.

The provident fund contributions and payment of the accumulated fund by a provident fund manager could be suspended for a period of not longer than one year if the employee cannot find a new employer or the new employer does not have a registered provident fund.

Why five years? A payment from a provident fund would also be entitled to a special calculation method according to Section 48 (5) of the Revenue Code if the employee has been a member of the fund for more than five years. Furthermore, the payment would be tax exempt in the case of an employee who has reached the age of 55 (and has been a member of the fund for more than five years).

An awareness of and adherence to the above requirements may ease the burden for both the employer and employees under their difficult circumstances.

Prapasiri Kositthanakorn

is a partner of PwC International Assignment Services (Thailand).