How to calculate severance pay in Thailand ?

What are the regulations on severance pay in Thailand ?

In Thailand, severance pay is regulated by the 1998 Labour Protection Act. The Act sets out the rules and guidelines for severance pay to ensure that employees receive fair compensation in the event of termination without cause. There are six conditions to consider about severance pay in Thailand:

Eligibility : Employees are eligible if they have completed at least 120 days of continuous service with the employer.

Categories of termination : Severance pay applies to termination without cause, which includes situations where an employee’s contract is terminated for reasons beyond the employee’s control, such as downsizing, closure or restructuring. It does not apply to termination with cause or voluntary resignation.

Calculation formula : The Labour Protection Act provides a standard formula for calculating severance pay:

Severance Pay = (Base Salary + Special Benefits) × Years of Service × Multiplier

Base pay includes the employee’s basic salary and fixed allowances, excluding irregular bonuses or overtime pay. Special allowances such as cost of living, housing or other fixed allowances are also included.

The multiplier varies according to the length of service, as follows : 

• Less than 120 days: No severance pay
• Between 120 days and one year 30 days of base salary
• Between 1 and 3 years: 90 days of basic salary
• Between 3 and 6 years 180 days of basic salary
• Between 6 and 10 years: 240 days of basic salary
• More than ten years: 300 days of basic salary

Payment period : Severance pay should be paid to the employee within three working days of the termination date.

Tax Considerations : Severance pay may be subject to income tax. However, certain exemptions and deductions are available based on length of service, salary level and other factors. The tax implications should be carefully considered and may require consultation with tax advisors or tax authorities.

Collective Bargaining Agreements : Where employees are protected by a collective bargaining or employment agreement that provides for more favorable severance terms than the statutory requirements, the more favorable terms will apply.

Both employers and employees must understand and comply with the provisions of the Labour Protection Act to ensure fair treatment and compensation upon termination of employment in Thailand.

What law applies ? 

The Labour Protection Act of 1998 (the LPA) is the primary law governing severance pay in Thailand. This Act sets out the rules and guidelines for various aspects of employment, including severance pay.

The Labour Protection Act is a comprehensive piece of legislation covering various employment-related matters, including working hours, wages, leave entitlement, termination and severance pay. The primary legal framework governs the rights and responsibilities of employers and employees in Thailand.

The law provides for severance pay in the event of termination without cause, ensuring that employees receive fair compensation when their employment is terminated for reasons beyond their control, such as downsizing or closure of a business. It establishes the formula and criteria for calculating severance pay according to the employee’s length of service and salary components.

In addition to the Labour Protection Act, other related laws and regulations may apply to specific industries or categories of employees. For example, certain sectors may have special rules for civil servants, teachers or employees. However, the Labour Protection Act is the primary legislation that applies to most private sector employees in Thailand and generally governs severance pay.

Employers and employees must familiarise themselves with the provisions of the Labour Protection Act and any relevant regulations specific to their industry or category of employment to ensure compliance with the law and to maintain rights and obligations relating to severance pay in Thailand.

What are the requirements ? 

In Thailand, the requirements for severance pay are outlined in the Labor Protection Act of 1998. The Act establishes the conditions that must be met for employees to be eligible for severance pay. There are four requirements to consider for severance pay in Thailand:

 Minimum Length of Employment : To be entitled to severance pay, an employee must have completed at least 120 days of continuous employment with the employer. Employees must work for the employer for at least 120 days to be entitled to severance pay.

Termination Without Cause : Severance pay applies to termination without cause, which refers to an employee’s contract being terminated due to reasons beyond their control, such as company downsizing, closure, or restructuring. It does not apply to termination with cause, where an employee’s misconduct or breach of contract justifies their dismissal or voluntary resignation initiated by the employee.

 Calculation Formula : The Labor Protection Act provides a standard formula for calculating severance pay in Thailand. The formula considers the employee’s base salary, special allowances, and years of service. The specific calculation formula is as follows:

Severance Pay = (Base Salary + Special Allowances) × Years of Service × Multiplie

The base salary includes the employee’s basic salary and fixed allowances, excluding irregular bonuses or overtime pay. Special allowances, such as cost of living, housing, or any other fixed allowances, are also included in the calculation.

The multiplier varies based on the length of service, as mentioned in the previous response.

 Timely Payment : Severance pay should be paid to the employee within three working days from the termination date. Employers must promptly provide eligible employees with the agreed-upon severance pay amount to fulfill their legal obligations.

It’s significant for employers and employees to understand and comply with these requirements outlined in the Labor Protection Act to ensure fair treatment and adherence to the severance pay regulations in Thailand.

How is calculate severance pay in Thailand ?

Severance pay calculation in Thailand follows a specific formula outlined in the Labor Protection Act 1998. The calculation considers the employee’s base salary, special allowances, years of service, and a multiplier based on the length of service. You must follow these five steps to calculate severance pay in Thailand:

 Step 1: Determine the Base Salary

The base salary includes the employee’s basic salary and fixed allowances. It excludes irregular bonuses, overtime pay, and other variable components. The base salary is the starting point for calculating severance pay.

 Step 2: Include Special Allowances

Special allowances, such as cost of living, housing, or any other fixed allowances specified in the employment contract, are added to the base salary. Special allowances contribute to the overall compensation amount for severance pay calculation.

 Step 3: Calculate Years of Service

 The employee’s total years of service are considered for severance pay calculation. This includes fractional parts of a year. For example, if an employee has worked for three years and eight months, it would be counted as 3.67 years of service.

Step 4: Determine the Multiplier

 The multiplier varies depending on the length of the employee’s service. The Labor Protection Act specifies different multipliers for different ranges of services. The multipliers are as follows

• Less than 120 days: No severance pay

• Between 120 days and one year: 30 days of Base Salary

• Between 1 and 3 years: 90 days of Base Salary

• Between 3 and 6 years: 180 days of Base Salary

• Between 6 and 10 years: 240 days of Base Salary

• More than ten years: 300 days of Base Salary

Step 5: Apply the Formula

To calculate severance pay, use the following formula:

Severance Pay = (Base Salary + Special Allowances) × Years of Service × Multiplier

By plugging in the values for the base salary, special allowances, years of service, and the appropriate multiplier based on the length of service, you can determine the amount of severance pay owed to the employee.

You must note that severance pay may be subject to personal income tax, and certain exemptions and deductions may be available based on the length of service, salary levels, and other factors. Consulting with tax professionals or labor authorities can provide further guidance on tax considerations related to severance pay in Thailand.

Who is subject to severance pay ?

In Thailand, the Labour Protection Act of 1998 provides severance pay for employees meeting specific criteria. The Act defines the persons eligible for severance pay in Thailand as follows :

Employees with 120 days or more of continuous employment : 

Severance pay applies to employees who have completed at least 120 days of continuous employment with the employer. This means individuals who have worked for less than 120 days are not entitled to severance pay under the Act.

Termination without cause :

Severance pay is explicitly linked to termination without cause. It covers situations where an employee’s contract is terminated for reasons beyond their control, such as downsizing, closure, restructuring, or other factors unrelated to the employee’s performance or behavior. Severance pay does not apply to cases of termination for cause, where an employee’s misconduct or breach of contract justifies his or her dismissal or voluntary resignation.

Private sector employees :

The provisions on severance pay under the Labour Protection Act generally apply to private sector employees in Thailand. However, it’s important to note that specific categories of employees may have different rules or requirements based on industry-specific laws or collective bargaining agreements. Examples include civil servants, teachers or employees in particular sectors who may have severance pay governed by separate regulations.

Both employers and employees need to understand whether they fall within the scope of the Labour Protection Act and its provisions on severance pay.

In what cases are you not entitled ?

In Thailand, there are specific cases where an employee may not be entitled to severance pay under the provisions of the Labour Protection Act. Here are some situations where severance pay may not be applicable:

Termination for Cause: If an employee’s contract is terminated for misconduct, breach of contract or any other valid reason specified in the employment contract, the employee may not be entitled to severance pay. Termination for cause refers to situations where the employee’s actions or behavior warrant dismissal under the employment contract terms or labor laws.

Voluntary resignation: Severance pay is generally not applicable when an employee voluntarily resigns from his/her position. If an employee decides to resign of his own accord, without any external pressure or termination by the employer, he is not entitled to severance pay. Voluntary resignation is considered to be the employee’s personal decision.

Fixed-term contracts : In the case of fixed-term employment contracts with a fixed end date, severance pay may not be required. If the contract expires naturally according to its agreed terms, without premature termination, severance pay may not apply. However, it’s essential to check the specific terms of the employment contract to see if there is any severance pay or compensation for completing the fixed term.

Probationary periods : During the probationary period, usually a fixed period at the beginning of the employment, severance pay may not be applicable. If an employer terminates an employee during the probationary period for performance-related reasons, severance pay may not be required.

Notably, these exclusions may vary depending on the employment contract terms, collective bargaining agreements or specific industry regulations. It is advisable to consult the Labour Protection Act, legal professionals, or labor authorities for clear guidance and to ensure compliance with applicable laws regarding severance pay in Thailand.

How Can Employers Ensure Compliance with Severance Pay Regulations?

Ensuring compliance with severance pay regulations in Thailand is crucial for maintaining positive employer-employee relationships and avoiding legal issues. Here are several key steps employers can take to ensure compliance with severance pay regulations:

Understand Applicable Laws : Employers should thoroughly understand the relevant labor laws, particularly the Labor Protection Act (LPA) in Thailand, which outlines the regulations regarding severance pay. Staying informed about any updates or amendments to these laws is essential.

Establish Clear Employment Contracts : Clearly outline severance pay provisions in employment contracts. From the beginning, communicating the terms and conditions of severance pay helps manage expectations and reduces the likelihood of disputes.

Consistent Application of Policies: Ensure consistent application of severance pay policies across the organization. Treating employees fairly and equally helps build trust and reduces the risk of legal disputes.

Keep Accurate Employment Records: Maintain accurate and up-to-date records of employee tenure, wages, and other relevant details. Accurate record-keeping is crucial for calculating severance pay in compliance with the law.

Regularly Review Severance Pay Policies : Review and update severance pay policies to align with current labor laws and business requirements. This includes staying informed about changes to severance pay regulations.

Seek Legal Counsel : Consult with legal professionals or labor law experts to ensure that severance pay policies and practices are in line with current regulations. Legal advice can help in navigating complex legal requirements and avoiding potential pitfalls.

Provide Clear Termination Notices : When terminating an employee, provide clear and timely notices under the LPA. This includes informing employees about the termination reasons and providing adequate notice periods or payment instead of notice.

Calculate Severance Pay Accurately : Ensure that severance pay is calculated accurately based on the employee’s length of service, wages, and other relevant factors. Consistency and transparency in the calculation process contribute to compliance.

Consider Special Circumstances : Be aware of exceptional circumstances that may affect severance pay entitlements, such as redundancy or business closure. Adjust severance pay calculations accordingly and in compliance with legal requirements.

Provide Comprehensive Employee Handbooks : Include clear information about this subject in employee handbooks. An accessible and comprehensive handbook helps employees understand their rights and entitlements.

Document Termination Processes : Document the termination process thoroughly, including communication with the employee, reasons for termination, and the calculation of severance pay. Detailed documentation can be crucial in case of disputes.

Train Human Resources Personnel : Ensure that human resources personnel are well-trained on labor laws and company policies regarding severance pay. Proper training helps in consistent application and compliance with regulations.

Open Communication Channels : Foster open communication channels with employees. Address any concerns or questions regarding severance pay promptly and transparently to maintain a positive employer-employee relationship.

By proactively addressing these steps, employers can establish robust practices that comply with severance pay regulations and contribute to a fair and transparent work environment. Seeking professional advice and staying vigilant about changes in labor laws are critical elements of a compliant severance pay strategy.