Sometimes, an employee just isn’t right for the job. They might not have the necessary skills to do the jo properly. They might lose motivation, and their work quality might suffer. Other times, companies might not be in good financial shape, and be forced to cut manpower costs. There’s a million different reasons why companies may have to let their workers go.
Whatever the specific reason for ending an employee’s contract, it’s important to know how to do it legally. In Singapore, there are 4 legal reasons that employers can use to end an employment contract. If you don’t want to get sued by your employee for illegal dismissal, make sure that you know what these legal reasons for terminating employees are.
In this guide, we’ll explain:
- Summary of legal vs illegal reasons for termination
- What are the 4 legal reasons for terminating employees?
- What are some important guidelines to follow when terminating employees?
- What method of termination carries the least legal risk?
- What are the 6 steps to terminating employees smoothly?
- How should I protect myself from employee termination lawsuits?
Summary of legal vs illegal reasons for termination
|Legal dismissal||Illegal dismissal|
|Right to dismiss under employment contract||Dismissal based on discriminatory grounds (e.g. age, disability, gender, ethnicity, etc.)|
E.g. stealing, fighting in workplace
|Dismissal for misconduct without holding inquiry|
e.g. missing KPIs, lack of skills, poor attitude, etc.
|Dismissal for performance without evidence of poor performance|
|Retrenchment||Using the excuse of retrenchment to dismiss employee for illegal reasons|
|Dismissal to punish employee for exercising employment rights|
|Dismissal to deprive employee from claiming entitlements|
If you’d like to know more about the illegal reasons for dismissing employees, read our excellent guide on Unfair and Illegal Dismissals in Singapore.
What are the 4 legal reasons for terminating employees in Singapore?
The dismissal of employees is governed by the Employment Act. This is a piece of legislation first passed in 1968, and was most recently amended in 2019. The Employment Act stipulates 4 legal reasons for terminating employees from your company.
These 4 permissible reasons are:
#1. Right to dismiss under employment contract
Singapore is an at-will employment jurisdiction. This means that the employer-employee relationship can end at any time, for any reason (as long as it’s not a reason that’s considered illegal). Either the employer or employee has the power to terminate the relationship.
This means that employers can terminate employees by simply relying on their right to end the employment contract. No other reasons (e.g. “you’re not performing well”, “management doesn’t think you can make it”, etc.) have to be explicitly cited.
In such dismissals, notice must be given. The notice period should follow the period stated in the employment contract (e.g. 1 month notice, 2 months’ notice, etc.).
Misconduct refers to behaviour that does not fulfill the terms of the employment contract.
Examples of misconduct include:
- Lying or displaying unethical behaviour
- Taking MCs by feigning illness
- Aggressive/threatening behaviour
- Negatively affecting the company’s reputation
- Disruptive behaviour
- Sexual harassment
Misconduct is the only reason that does not require a notice before dismissal. However, a due inquiry must be conducted by your employer, on the alleged act of misconduct, prior to making a decision on dismissal.
Employers can dismiss employees for performance-related reasons. For instance, if your employee is not meeting KPIs, is lazy, is not producing quality work, or is just generally not capable of meeting the demands of the job, you can dismiss them.
However, if you dismiss an employee for poor performance, you must provide evidence of their sub-par performance. This means that if you are preparing to dismiss someone for not meeting the demands of the job, start collecting evidence now.
Examples of evidence to prove lacklustre performance include:
- Missed goals, missed sales targets, missed KPIs, etc.
- Negative performance reviews
- Feedback from superiors about poor performance
- Cuts in bonuses or other performance-related pay
- Lack of promotions compared to other employees
Have this evidence clearly documented in writing, because you will have to provide this evidence when you terminate the employee.
If the dismissed employee files an unfair dismissal claim against you later on, you must show this evidence to prove that the dismissal was fair. If you have properly document evidence of the employee’s poor performance, then your dismissal will be considered permissible and you won’t run into thorny legal issues.
If employers need to cut costs due to financial difficulties, they can perform retrenchments.
There are certain legal procedures that you must follow if you perform a retrenchment:
1. Notify MOM, if you have at least 10 workers, and you’re retrenching 5 or more workers:
Employers who meet the following criteria must notify MOM of retrenchments that they are undertaking/have undertaken:
- Your company has at least 10 employees
- You have retrenched 5 or more employees within a 6-month period
2. Provide your employees with notice
You must provide notice to your retrenched employees, in accordance with their employment contracts.
FAQs on Conducting Retrenchments:
Are retrenchment benefits compulsory?
No. Unless the employment contract you’ve issued to the employee contains a retrenchment benefit clause, there is no legal requirement to pay retrenchment benefits. Employers are encouraged to pay retrenchment benefits out of fairness and recognition for their employees’ contributions. However, this is not compulsory.
Retrenchment benefits are governed by Section 45 of the Employment Act. This section states:
“No employee who has been in continuous service with an employer for less than 2 years shall be entitled to any retrenchment benefit on his dismissal on the ground of redundancy or by reason of any reorganisation of the employer’s profession, business, trade or work.”
As you can see, it does not mandate employers to make payment of retrenchment benefits.
How much retrenchment benefit to pay:
If retrenchment benefit is stated in the employment contract:
If you’ve stated in the contract how much you will pay during a retrenchment exercise, then you must pay that amount. For instance, if the employment contract states that retrenched workers will be entitled to 1 months’ retrenchment benefit, and the retrenched worker’s salary is $4,000/month, then you owe the retrenched worker that $4,000 sum.
If retrenchment benefit is not stated in the employment contract:
If you choose to pay the benefit out of goodwill, then the market norms are between 2 weeks to 1 months’ salary, per year of service.
Are retrenchment benefits subject to CPF contributions?
No. Both the employer and employee do not have to make CPF contributions for retrenchment benefits.
The TADM has release guidelines on performing retrenchments. These guidelines are not legally binding, but employers should take heed of them:
What are important guidelines to follow when terminating employees?
If you want to avoid legal trouble when terminating employees, make sure you follow the guidelines below.
#1. Terminating foreign employees
Foreign workers on Employment Pass/S-Pass:
Employers must cancel the Employment Pass/S-Pass within seven days of firing the workers. The Employment Pass/S-Pass holder will receive a 30-day short term visit pass, after which they must leave Singapore. If the Employment Pass/S-Pass holder has other passes attached to it, e.g. a Dependent’s Pass, all such other passes will also be cancelled.
The employer must notify IRAS of the termination. The employer must withhold all payments due (e.g salary, bonus) to the foreign employee from the day the employee is notified of their termination. This is to perform the tax clearance proceducre. IRAS will make sure that all taxes have been paid by the foreign employee. Once IRAS completes their tax clearance procedure, they will issue a tax clearance certificate. The employer can then release the payments due to the employee.
#2. Provide the proper notice period
In most cases, the employment contract with the worker will state the required notice period. Most notice periods are usually 1 month, although some contracts will stipulate notice periods of 2 or 3 months.
The employee is still entitled to their salary during the notice period. This includes CPF contributions. Just treat notice period pay as regular pay.
When the decision to terminate the employee has been made, give notice to the employee that their employment is terminated in writing. Note that the notice period includes the day on which the notice is served onto the employee.
If the employment contract doesn’t state the notice period, then use the following notice periods:
|Employment duration||Minimum required notice period|
|Under 2 weeks||1 days’ notice|
|26 weeks – 2 years||1 weeks’ notice|
|2 – 5 years||2 weeks’ notice|
|5 years and more||4 weeks’ notice|
#2. If you don’t serve the employee notice, you have to pay salary in-lieu
Sometimes, employers don’t want the terminated worker to serve their notice period. For instance, financial firms or technology companies may deal with highly sensitive information, and terminated workers must immediately be barred from receiving such information.
If you don’t allow the employee to serve their notice period, then you must pay them salary in-lieu. This is also commonly known as letting them take “gardening leave”. You will have to pay the salary that’s equal to the notice period. For instance, if a terminated employee earns $5,000/month, and their notice period is 1 month, you’ll have to pay $5,000 to them as salary in-lieu.
CPF contributions do not have to be made for salary in-lieu of notice. This means that if you don’t require the terminated employee to stick around to get work done, it is more cost-effective to pay them salary in-lieu, rather than have them serve the notice period.
#3. Offsetting notice period with annual leave
Employees can use their annual paid leave to offset (i.e. shorten) the notice period served.
#4. Offset notice period vs being on annual leave during notice
There is a difference between offsetting the notice period versus simply being on annual leave during the notice period.
Offsetting the notice period means to shorten the notice period. For instance, if a worker’s notice period is 1 month, and the worker has 15 days of annual leave, they can shorten the notice period by 15 days. The employer will only have to pay for 15 days’ of salary, since that is the notice period served. Offsetting is often used if the worker has gotten another job, and wants to start employment at the new company ASAP.
If the worker does not offset the notice period, they can simply choose to take annual leave. The employer must pay the salary for the full notice period. For instance, if the notice period is 1 month, a worker can choose to take 15 days of annual leave during the notice period. The employer will have to pay for 1 months’ salary.
For terminated workers who leave with unused annual leave, they can encash the unused leave. The employer must pay the terminated worker for each day of unused annual leave.
|Type of leave that can be used to offset notice period||Type of leave that cannot be used to offset notice period|
|Annual paid leave||Maternity/paternity leave|
#6. Sick leave during notice period
Sick leave cannot be used to offset/shorten notice periods. However, sick leave that’s taken will be counted towards an employee’s notice period.
#7. Maternity Leave and termination
An employer cannot terminate an employee who is on maternity leave. This is illegal. Read more about this in our guide on unfair dismissals, or our maternity leave guide for employers.
Employees cannot use their maternity leave to offset their notice period. However, employees can still apply for maternity leave while they’re serving their notice period. Each day that the employee is on maternity leave will count as part of their notice period.
All maternity leave that is not consumed before the end of the notice period will be forfeited. Outstanding maternity leave cannot be transferred to the new company.
Example: Jane is a new mother who’s unfortunately been retrenched. Jane’ notice period is 1 month. Jane still has 2 months of maternity leave remaining. Jane can apply for 1 months’ maternity leave. This way, she can stay home to take care of her child, while still serving her notice period. The remaining 1 month of her maternity leave will be forfeited once she leaves her current company.
An employer must pay maternity benefits that his/her employee would otherwise be eligible for if a notice of dismissal is given without sufficient cause within 6 months of an employee’s confinement if the employee is retrenched within 3 months of her confinement. This payment is in addition to any retrenchment benefit which the employee is entitled to.
#8. Childcare/Infant care leave and notice period
Childcare leave to offset/shorten the notice period.
#9. Employee cannot start work with another company until the end of the notice period
When an employee is serving their notice period, the employment contract is still live. The employee cannot start working for their new company until the date of termination. The employee must continue to fulfill their responsibilities until the notice period ends.
What method of termination carries the least legal risk in Singapore?
Since Singapore is an at-will employment jurisdiction, you have a right to terminate the employment contract simply because you want to. So, if you need to dismiss an employee, an employer can simply say: “I’m exercising my right to terminate your employment contract.” That’s it. No long stories about not meeting expectations, or not doing this or that. End it there.
Simply exercising your right to end the employment contract is the legally safest method to terminate an employee. You do not have provide any other reasons. Remember, if you cite poor performance as a reason, you must provide evidence. If you don’t have proof of poor performance, your employee can sue you for illegal dismissal.
When you rely on your right to terminate the employment contract, and provide the proper notice period, it becomes much more difficult to build a legal case against you for unfair dismissal.
Some legal risks remain, which employers should be wary of:
- Ensure that you are not terminating the employee for illegal reasons, such as discrimination or deprivation of entitlements (e.g. maternity leave). If you are in fact dismissing a worker for such reasons, and there is strong evidence to prove this, you can be sued. In our guide on whether you can terminate employees during medical leave, we explain how it is not difficult to sue employers for firing workers to deprive them of medical leave entitlements.
- If you are conducting a retrenchment, state this openly. Do not disguise a retrenchment as individual terminations, as there is little benefit in doing so. It’s also illegal, and MOM will take enforcement action against errant employers.
How to terminate employees (relatively) smoothly?
Letting someone go is tough. Here’s how to get your dismissal right. Remember that it’s not personal – it’s just business.
Step 1: Inform HR
Let HR know that you need to terminate an employee. HR will be most familiar with the legal procedures for terminating someone. They’ll make the necessary arrangements for terminating workers. For instance, they’ll inform IT to cut the employee’s access to digital materials.
Step 2: Plan transitions
Have discussions with the relevant stakeholders if you want to terminate an employee. It’s good to get team buy-in if a worker needs to go, so that other stakeholders (e.g. team leaders) can make the necessary arrangements to find replacements.
Get started on finding a replacement once the decision has been made internally to terminate the employee. You don’t have to wait till after they’re gone to look for new candidates.
Step 3: Do it at the end of the work day
If you’re in the office, do it when most other employees have left. This minimises the amount of embarrassment for the employee.
Step 4: Get straight to the point
“Tim, it’s been a pleasure working with you. I need to let you know that you’ve been let go.”
Different managers will handle employee terminations differently. Some managers like to engage in small talk first to sooth nerves (usually, their own!) before dropping the inevitable bombshell. That isn’t technically wrong – everyone has their own style of handling delicate issues. However, there isn’t really a lot of meaning behind engaging someone in friendly banter, if at the end of it you’re going to fire them. Small talk makes them think that this is just going to be another nice “chat with the boss”, which heightens the disappointment later on. You’re going to make a decision that will significantly alter the course of their careers (at least temporarily). The sooner you let them know, the quicker you can both move on with your professional lives.
When informing an employee that they’re being let go, remember that you don’t need to provide explanations. If you cite poor performance, remember that you are legally required to provide evidence. If you cite misconduct, remember that you are legally required to have held an inquiry before the termination. If you don’t have the required evidence for either of these reasons, simply say that you’re letting them go and leave it at that.
Step 5: Cover specifically what happens next
Lay out specifically the employee’s notice period, their pay, consumption of any remaining company benefits, unused annual leave, employment references, explanations to clients and co-workers, handovers of projects, etc.
Step 6: Thank the employee and wrap up
Keep it cordial. Terminations are not personal, but professional. Let the employee know that their contributions are appreciated, and wish them the best for their next job.
How should I protect myself from employee lawsuits?
Workers who are terminated can respond in highly unpredictable ways. Disgruntled employees can launch employment-related lawsuits against you. Whether the case has merits or not is a separate matter – once the lawsuit hits your door, you’re going to have to spend money defending it!
A particularly damaging way for lawsuits to be launched is to personally target the company’s directors and officers. Directors include board directors, and officers include people inthe company with managerial authority (e.g. C-Suite down to junior HR managers who handle employees’ termination matters). When directors/officers are targeted personally in lawsuits, the limitation of liability offered by a “Private Limited” entity won’t protect them.
That’s why having a good Directors and Officers Liability Insurance policy is critical. This type of insurance protects you from many types of lawsuits, such as:
- Unfair dismissal lawsuits
- Employee harassment lawsuits
- Oppression and other shareholder lawsuits
- Negligence lawsuits
- Defamation lawsuits
- …and more
Directors and Officers Liability Insurance pays for your lawyer’s fees (which can be hundreds of thousands), plus court damages/settlements. Having a Directors & Officers Liability policy could save you huge sums of money – millions, even.