Retrenchment Compensation Malaysia 2026: The Formula

Retrenchment compensation Malaysia is one of those things people only look up on the afternoon it happens, somewhere between the HR meeting and the drive home. Kena retrench — everyone knows the word, almost nobody has read the rule behind it.

There is a rule, and it is short. The amount is not negotiated down, not at the company’s discretion, and not the same thing as your notice pay — it sits in one 1980 regulation made under the Employment Act 1955, with a salary line drawn through the middle of it. Everything below is what that regulation, the Act and the EIS legislation say, sourced at the bottom. What none of it can tell you is what your case is worth.

Quick Answer: 10, 15 or 20 days’ wages for every year of service, paid within 7 days of your last day — if your wages do not exceed RM 4,000 a month.

• The gate: at least 12 months of continuous service, and wages not exceeding RM 4,000 a month unless you are a manual worker.
• The deadline that costs you money: the EIS claim, 60 days from the date you lose the job.
• The thing nobody asks for: the written calculation. Regulation 12(1) says it comes with the payment.

Who's coveredThe formulaNotice pay

First, the line the formula is drawn on

Since 1 January 2023 the Employment Act covers every person who has entered into a contract of service — the old coverage ceiling is gone. One carve-out survives, and it is the one that matters here. First Schedule paragraph 1A disapplies section 60J to a person whose wages exceed RM 4,000 a month, and section 60J is the section the termination and lay-off benefits regulations were made under. JTKSM puts it plainly on its own labour-case page: above RM 4,000, except manual workers, there is no claim for faedah penamatan kerja.

Three things soften it. Paragraph 2 keeps the Act’s full protection, nothing disapplied, for anyone in manual labour, operating a vehicle carrying passengers or goods for reward, or supervising manual workers employed by the same employer throughout their work — irrespective of the amount of wages. Paragraph 3 says the RM 4,000 test uses wages excluding commissions, subsistence allowance and overtime. And Regulation 6(1) is a floor, not a ceiling. A domestic employee is carved out further still: the First Schedule disapplies section 12 and the whole of Part XIIA — the Part section 60J sits in — along with Part IX, so none of this page reaches them. One boundary: the Act covers Peninsular Malaysia, extended to Labuan from 1 November 2000. Sabah runs on the Labour Ordinance (Sabah) Chapter 67 and Sarawak on Chapter 76 — this page’s Employment Act and 1980 Regulations figures are not theirs; their EIS and unfair-dismissal positions are separate questions this page does not answer.

The formula: 10, 15 or 20 days’ wages a year

Regulation 3(1) sets the gate — a continuous contract of service of not less than 12 months ending with the relevant date (the day the contract actually terminates — or, for a lay-off, when the 4 consecutive weeks in Regulation 5(1) run out). Regulation 3(2) is the part people miss: two or more spells with the same employer count together if the gaps between them do not add up to more than 30 days. Regulation 6(1) then sets the rate, stepping up with service.

Now the awkward bit, and it is why two honest people reach two different answers. Regulation 6(2) says a day’s wages must be computed so as to give you your average true day’s wages over the 12 completed months immediately before the relevant date — and it never says how to turn a monthly salary into that. There is a divisor in the Act: ordinary rate of pay for a monthly-paid employee is the monthly wage divided by 26, under subsection 60I(1A), and subsection 60I(2) lets an employer use another formula only if the result is not lower. But read what it is attached to. Section 60I(1) applies for the purposes of this Part and Part IX, and section 60I sits in Part XII while section 60J — the section the 1980 Regulations were made under — sits in its own Part XIIA. So 26 is the official figure for the ordinary rate of pay, not a stated rule for a termination benefit, and Regulation 12(1) remains how you learn which figure your employer actually used.

Illustration only — not a prediction for anyone

Take someone with 6 years 6 months of continuous service, covered by the Act, whose average true day’s wages works out to RM 100. Five years or more puts them on the 20 days band: six complete years is 6 × 20 = 120 days’ wages, and the remaining 6 months pro-rates to the nearest month, 6/12 × 20 = 10 days’ wages. That is 130 days’ wages, or RM 13,000 at RM 100 a day — with at least 8 weeks’ notice, or an indemnity of at least 8 weeks’ wages if notice is paid in lieu, on top, because Regulation 6(4) makes the benefit additional to any section 13 payment. Change one assumption and the answer changes; that is why the working matters more than the total.

Notice is a second payment, and the contract cannot shorten it

Normally notice is whatever the contract says, falling back to the statutory 4, 6 or 8 weeks only if it is silent. Subsection 12(3) reverses that here. Where the termination is attributable wholly or mainly to the business ceasing, ceasing at that place, the requirements for that kind of work ceasing or diminishing, a refused transfer the contract did not require, or a change in ownership, the employee is entitled to not less than the statutory 4, 6 or 8 weeks — regardless of anything to the contrary contained in the contract of service. A one-week notice clause does not survive a redundancy.

Section 13(1) lets either side skip the notice by paying an indemnity equal to the wages that would have accrued over it. Notice must be written, and subsection 12(4) counts the day it is handed to you as day one. Wages already earned are a third, separate item; where the contract ends under subsection 11(1) or section 12, section 20 fixes the deadline as not later than the day the contract terminates.

When the benefit is not payable

Regulation 4(1) opens generously — payable where the contract ends for any reason whatsoever — then names three exceptions: retirement where the contract stipulates a retirement age, misconduct after due inquiry, and voluntary resignation other than under section 13(2) or for the reasons in section 14(3). Four more situations remove it:

• A re-engagement offer refused. Regulation 4(3): made at least 7 days before the termination date, on terms not less favourable in capacity and place, taking effect on or before that date, and unreasonably refused.
• Walking out early. Regulation 4(4): leaving before the employer’s notice expires without consent, which shall not be unreasonably withheld, or without paying under section 13.
• A change of ownership handled properly. Regulation 8(1): the incoming owner offers within 7 days to keep you on terms not less favourable and you unreasonably refuse. No offer, and Regulation 8(2) leaves the outgoing employer liable.
• Out-workers. Regulation 7 excludes them outright — someone given materials to make up, clean, alter, finish or repair at home, or on premises the employer does not control.

One route most people never hear about: if your pay depends on the employer giving you work and none arrives for at least 12 normal working days within any 4 consecutive weeks — and your contract gives you no right to be paid for that time — Regulation 5(1) deems you laid off — and lay-off benefits use the same rates. Rest days, public holidays and authorised leave are left out of that count.

Probation and foreign employees

On probation. The word probation appears nowhere in the Employment Act 1955, the 1980 Regulations, or the EIS Act 2017 — there is no separate probationer regime to argue about. The only gate is Regulation 3(1)’s 12 months, so someone let go before completing 12 months has no statutory termination benefit, while still being owed notice under section 12 and wages under section 20.

Foreign employees. Two rules point opposite ways. Section 60N says that where a workforce must be cut by reason of redundancy, the employer shall not terminate a local employee unless all foreign employees in a similar capacity have gone first; section 60O takes permanent residents out of that definition. EIS goes the other way: the First Schedule to Act 800 excludes foreign employees except permanent residents and two narrow identity-card categories, so most have no job search allowance to claim. The employer must also report the termination to the Director General of JTKSM within 30 days, or 14 days if the worker resigns or absconds.

EIS: the 60-day clock most people miss

Redundancy usually opens a second, separate door: EIS (LINDUNG KERJAYA), with its own 60-day deadline to apply and its own rate ladder — a late claim under section 29 is rejected and treated as never made. It runs alongside retrenchment benefits, not instead of them. For the eligibility conditions, the full 80/50/40/40/30/30 payment schedule and how to apply, see 👉 EIS Claim Malaysia 2026: Job Search Allowance.

If the money does not come — or it was not really redundancy

Two doors, two departments, two clocks. For the money, the door is the Labour Department under section 69 — the Director General may order payment without limitation of the amount. For an unfair-dismissal claim, the door is the Industrial Relations Department under section 20(1A), on its own 60-day clock. Which door to use, how to file, and what each can order is covered in a dedicated guide to Labour Department complaints.

Walaoeh Verdict

Four things, on the day it happens. Write down your exact start date — the formula hangs on it and pro-rating is to the nearest month. Ask for the written calculation; Regulation 12(1) says it comes with the payment, and the day’s wage figure inside it is the number to check. Diarise two dates 60 days out: the EIS claim and the section 20 window. And do not sign a release before you know which of the three payments it covers — notice, wages and the termination benefit are separate obligations under different sections; Regulation 6(4) is what stops the termination benefit being offset against a section 13 notice payment.

The line worth arguing about is RM 4,000. It is tested not on your gross package but on wages excluding commissions, subsistence allowance and overtime — so someone on a low base with high commission may sit under it while the payslip total suggests otherwise.

One number we deliberately did not turn into an equation: 26. It is the official divisor for the ordinary rate of pay, in a different Part of the Act from the one retrenchment benefits live in — so the article shows it and says where it sits. One thing we did not print at all: the tax treatment of a loss-of-employment payment belongs to LHDN, not the Ministry of Human Resources — check it there before you spend the money. On notice periods generally, including what you owe when you are the one leaving, see 👉 Resignation Letter Malaysia: Notice Period Rules & Template.

Frequently Asked Questions

Sources

Every figure above comes from one of these, all checked on 12 September 2026.

• Laws of Malaysia, Act 265 — Employment Act 1955, updated text as at 1 January 2023, hosted by JTKSM. Sections 12, 13, 20, 60I, 60N, 60O, 63, 69 and the First Schedule.
• JTKSM — Employment (Termination and Lay-Off Benefits) Regulations 1980. The rates, the 12-month gate, lay-off and the 7-day payment rule.
• JTKSM — Employment Act 1955 (Amendment) 2022 FAQ. The RM 4,000 exclusion, territorial scope and foreign-worker reporting.
• JTKSM — Pemberhentian Pekerja, Kes Buruh and Aduan. What must be reported, who may claim, how to complain.
• JTKSM — Borang PK, Employment Retrenchment Notification 2004. The filing deadlines and the section 63 offence.
• PERKESO — Employment Insurance System Act 2017 (Act 800) and Act A1725 of 2024. Sections 16, 28, 29, 30 and the Third and Fourth Schedules.
• PERKESO — Employment Insurance (LINDUNG KERJAYA) and Contribution Rate. Loss of employment, the benefit list, and the RM 6,000 ceiling from 1 October 2024.
• JPPM — EMS: Pembuangan Kerja (Seksyen 20). The 60-day representation window, IRIS, and the rule on advocates at conciliation.