Winning at Separations: Conducting Effective Voluntary Separation Schemes

Ebbs and flows are a normal part of business and there may come a time where a reduction in headcount becomes necessary in order to advance, optimise or save the business. It is never easy or comfortable to terminate the services of an employee. This is more so when the employee is, by all accounts, neither guilty of misconduct nor a poor performer.
A voluntary separation scheme (“VSS”), which is a species of a mutual separation scheme,  may be the effective win-win solution.
What is a VSS?
A VSS is a scheme in which an employer invites the employee to cease employment with the employer voluntarily. As part of this scheme, a compensation package will be offered to the employee in consideration for the employee’s voluntary agreement to cease employment with the employer. It is an effective method to reduce headcount and in gist, involves the employer and employee entering into a separate agreement in order to mutually terminate the employment contract.
How does a VSS work?
An employer will first announce that it wishes to conduct a VSS and invite its employees (whether throughout the company or a specific group) who are interested in ceasing employment with the Company to apply for the VSS. The employer will also furnish the terms and conditions of the VSS to the employee for the employee’s consideration. For the reason set out further below, it is imperative to include a provision in the terms and condition of the VSS that the employer reserves the right to reject or accept the applications at their absolute discretion.
Should the employee be interested in applying for the VSS, the employee should be advised to apply for the same within a certain deadline using a prescribed form, failing which, the employer will deem that the employee is not interested in applying for the VSS. As the VSS is a completely voluntary scheme, the employees cannot be forced or required to apply for the same.
Based on the applications received, the employer will then select employees for separation and will notify each applicant of the outcome of their applications. In short, the employer may choose or accept or reject an employee’s application for separation through the VSS at its sole discretion but must do so in accordance with an objective criteria which is at its discretion to determine.
Why should an employer opt to conduct a VSS instead of a retrenchment exercise?
A VSS may achieve the desired outcome of workforce reduction with minimised risk of unfair dismissal claims being lodged under section 20 of the Industrial Relations Act 1967 following the cessation of employment.
This is because the VSS is a completely voluntary scheme which requires the employee to actively apply to be considered for separation. If the employee is selected for separation, the employee is unlikely to successfully argue that there was dismissal from employment.
It is also especially useful when it is difficult to make selection decision e.g. redundancies occur in many departments and involve a large number of employees.
Who may apply for the VSS?
An involuntary retrenchment requires an employer to select employees for retrenchment based on legal criteria. Such legal criteria include the application of the “Last In First Out” (LIFO) principle, i.e. in a case where there are several employees with the same job scope, the employee with the least number of years of service should be selected for retrenchment over the rest of his peers. Another criteria which must be adhered to is to select a fixed-term employee for retrenchment over a permanent employee. An employer must have a very good reason to depart from such criteria.
However, an employer in a VSS may define the groups or categories of employees who may be considered for VSS. What this means is that an employer can decide to only conduct a VSS for a select group of employees, e.g. based on age group, years of service or department of work, without opening the VSS to the rest of its employment force.
Hence, only employees who fall within the eligible group under the VSS are entitled to apply to be considered for voluntary separation under the VSS.
Is there a minimum compensation which must be offered as part of the VSS?
The law does not prescribe a minimum compensation which must be offered as part of the VSS, and the VSS compensation package is entirely at the employer’s discretion to decide. The employer may even offer different compensation packages to different groups of employees eligible to apply under the VSS. This may be useful if the employer is looking to reduce one group of its workforce more significantly or less significantly than other groups. In order to encourage a significant number of employees in the determined group to apply for the VSS to ensure the success of the scheme, the employer should offer compensation packages which are more attractive than the usual market practice (which is usually one month’s last drawn salary for each year of service) and/or the minimum statutory amount provided under the Employment (Termination and Lay-Off) Regulations 1980.
An employer may also choose to provide other benefits, gifts or awards as part of the VSS as well as to determine the way in which the compensation under the same is to be calculated.
Can companies conduct reductions in workforce or retrenchment exercises after the VSS?
There is no impediment to an employer conducting a retrenchment exercise after conducting a VSS. In fact, the Code of Conduct for Industrial Harmony recommends that a VSS be conducted before an involuntary retrenchment exercise. Some employers also choose to inform their employees upfront that if the VSS is less successful than anticipated, future reductions in workforce may be carried out with less attractive compensation packages.
Is there any requirement to notify the authorities?
An employer is required to notify the Labour Office by completing and submitting the prescribed form at least one month before embarking on a VSS.
As it can be seen from the above, there are several advantages to implementing a VSS that are not available under an involuntary retrenchment exercise. Apart from minimising the legal risk for the employer, a VSS may also be more acceptable to an employee from a psychological perspective as a view can be taken that the employee elected to leave on a voluntary basis rather than be perceived to have been cast out by the employer under a retrenchment exercise.
Article by Foo Siew Li (Partner) and Sara Lau (Partner) of the Employment Practice of Skrine.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact