Severance Pay: What is It and How to Calculate It?

![Severance pay.jpg](https://clockster-blog.storage.yandexcloud.net/Severance_pay_e16712151b.jpg) Employment can be over due to many reasons. When this moment comes, an employee has the right to receive severance pay to appreciate his contribution to the company. Severance pay is compensation that a company gives to the employee when the working relationship ends. However, you need to highlight that this payment is different from pension pay. Here are some things that you must know about severance pay. ## What is Severance Pay? Termination of employment is rigorously controlled by the government as part of the government's attempts to enhance the welfare of employees in Indonesia. In this scenario, Government Regulation Number 35 of 2021 covering Work Agreements for Specific Time, Outsourcing, Working Time and Rest Time, and Termination of Employment becomes the guideline for termination conditions and compensation. So, what is it? Severance compensation is a type of compensation that must be provided by the employer as a sign of appreciation for the employee's time on the job. This is mentioned in Government Regulation 35/2021, Article 40, Paragraph 1: "In the case of employment termination, the company is obligated to provide severance pay and/or service award money, as well as reimbursement for entitlements that should have been earned." Severance pay is also taxable under the legislation. A specific portion of gross income will be subject to severance tax deductions. Severance tax is calculated in accordance with what has been stated in the PPh 21. ### Differences between Severance and Pension Pay The term of pension pay is used by Civil officials, but severance pay is a type of remuneration in the private sector. However, now all employees from any sector can get pensions as well. In this scenario, the distinction between pension and severance compensation is in the timing or purpose for payment. When an employee is terminated for whatever reason, he or she is entitled to severance compensation. Meanwhile, pension funds are distributed when an employee retires due to his age. ## Purposes of Severance Pay Apart from being a legal requirement, it is a kind employer’s obligation to his employees. This is owing to the fact that employees need some time to locate new jobs. Thus, he can still support his family's financial and his own needs until he finds a new job. ### See also: <u>[What is Compensation? Definition, Types, and Purpose](https://clockster.com/en/blog/what-is-compensation/)</u> ## How is Severance Pay Calculated Indonesia Government Regulation Number 35 of 2021 provides 15 reasons why a company can terminate employees: business is no longer operating, personal resignation, reaching retirement age, and/or passed away. The steps on how to calculate severance compensation in practice can be found in Article 40, paragraph 2 of Indonesia Government Regulation 35/2021: 1. working period of less than 1 (one) year, 1 (one) month Wage; 2. working period of 1 (one) year or more but less than 2 (two) years, 2 (two) months Wages; 3. working period of 2 (two) years or more but less than 3 (three) years, 3 (three) months Wages; 4. working period of 3 (three) years or more but less than 4 (four) years, 4 (four) months Wages; 5. working period of 4 (four) years or more but less than 5 (five) years, 5 (five) months Wages; 6. working period of 5 (five) years or more, but less than 6 (six) years, 6 (six) months Wages; 7. working period of 6 (six) years or more but less than 7 (seven) years, 7 (seven) months Wages; 8. working period of 7 (seven) years or more but less than 8 (eight) years, 8 (eight) months Wages; and 9. working period of 8 (eight) years or more, 9 (nine) months Wages. Furthermore, the method for calculating severance compensation depends on the cause of employees’ resignation. Below are the regulation: ### Resignation Severance Pay Calculation The calculation of severance compensation for resignation is defined in Article 50 of Indonesia Government Regulation 35/2021, which states: "Workers/Labourers who voluntarily retire and meet the qualifications mentioned in Article 36 letter I are entitled to: 1. Compensation for rights in accordance with Article 40 paragraph (4); and 2. Separation money, the amount of which is regulated in the Employment Agreement, Company Regulations, or Collective Labor Agreement.” ### Early Retirement Severance Pay Calculation The term "early retirement" refers to the decision to cease working before reaching the standard retirement age. Each institution has its own rules on the minimum age and years of service required to apply for early retirement. In this situation, the early retirement severance compensation will be calculated using the standard pension amount. The method of determining severance compensation in regular retirement conditions is outlined in Article 56 of Indonesia Government Regulation 35/2021: "Employers may end the Worker/Labourer relationship because the Worker/Labourer is approaching retirement age, in which case the Worker/Labourer is entitled to: 1. 1.75 (one point seventy-five) times the requirements of Article 40 paragraph (2) in lieu of severance compensation 2. duration of service award of 1 (one) time as specified in Article 40 paragraph (3); and 3. Compensation for rights in line with Article 40, paragraph (4)." ### Severance Pay Calculation for Deceased Employees The calculation of severance compensation for deceased workers is outlined in Article 57 of Indonesia Government Regulation 35/2021, which states: "In the event that the employment is terminated due to death, the heirs shall be granted an amount of money calculated as follows: 1. severance compensation of 2 (two) times of the provisions of Article 40 paragraph (2); 2. period of service award in the amount of 1 (one) time as stipulated in Article 40 paragraph (3); and 3. compensation for rights in accordance with the provisions of Article 40 paragraph (4).” ### Severance Compensation Calculation for Layoffs because the Business is No Longer Operating The calculation of severance compensation for layoffs owing to the company's closure, whether due to loss or not, is detailed in Article 44 of PP 35/2021, which states: "Employers may terminate the employment of workers/labourers if the company s closed owing to continuous losses for two (two) years or non-continuous losses for two (two) years, in which case the worker/labourer is entitled to: 1. severance compensation of 0.5 (zero point five) times the one stated in the Article 40 paragraph (21); 2. period of service award in the amount of 1 (one) times the one stated in the Article 40 paragraph (3); and 3. compensation for rights in accordance with the one stated in the Article 40 paragraph (4). Employers may end the employment relationship if the Company is closed for any reason other than a loss, in which case the Worker/Labourer is entitled to: 1. severance compensation of 1 (one) times the one stated in the Article 40 paragraph (21); 2. period of service award in the amount of 1 (one) times the one stated in the Article 40 paragraph (3); and 3. compensation for rights in accordance with the one stated in the Article 40 paragraph (4).” That’s all about severance compensation and how to calculate it. Severance compensation is a sensitive subject for both employers and employees. Therefore, the calculation must be done in the right way. The technique of calculating severance compensation described above might serve as a reference for determining the amount of money you will receive when you end your working relationship.