Voluntary Separation Scheme (VSS) Agreement (Malaysia)
VOLUNTARY SEPARATION SCHEME (VSS) AGREEMENT
Employment Act 1955 (Act 265) | Industrial Relations Act 1967 (Act 177) | Income Tax Act 1967 (Act 53) | Employment Insurance System Act 2017 (Act 800)
THIS VOLUNTARY SEPARATION SCHEME AGREEMENT is entered into on [Agreement Date]
BETWEEN:
(1) [Employer Name], of [Employer Address] (hereinafter referred to as the "Employer"); AND
(2) [Employee Name] (NRIC: [Employee NRIC]), [Designation] (hereinafter referred to as the "Employee").
The Employer and the Employee are hereinafter collectively referred to as "the Parties".
BACKGROUND
The Employer has implemented a Voluntary Separation Scheme in connection with [VSS Reason]. The Employer has offered the Employee the option of voluntary separation on the terms set out in this Agreement. The Employee has voluntarily and freely elected to accept the VSS offer.
1. VOLUNTARY ACCEPTANCE
1.1 The Employee confirms that the Employee has been employed by the Employer since [Commencement Date], a total period of [Years of Service] completed years of service.
1.2 The Employee confirms that the Employee has voluntarily elected to accept the VSS offer made by the Employer. This acceptance is made freely, without duress, coercion, undue influence, misrepresentation, or mistake within the meaning of Sections 14–22 of the Contracts Act 1950 (Act 136). The Employee has been given adequate time to consider the VSS offer and to seek independent legal advice.
1.3 The Employee's employment with the Employer shall terminate on the separation date of [Separation Date] (the "Separation Date").
2. EX-GRATIA PAYMENT
2.1 In consideration of the Employee's acceptance of this VSS Agreement, the Employer agrees to pay the Employee the following ex-gratia payment within 14 days of the Separation Date:
Statutory retrenchment benefit (Employment (Termination and Lay-Off Benefits) Regulations 1980): [Statutory Benefit]
Ex-gratia enhancement above statutory minimum: [Ex-Gratia Enhancement]
Salary in lieu of notice: [Notice Pay]
Annual leave encashment: [Leave Encashment]
TOTAL EX-GRATIA PAYMENT: [Total Ex-Gratia]
2.2 Income Tax: The total ex-gratia payment constitutes compensation for loss of employment under Section 13(1)(e) of the Income Tax Act 1967 (Act 53). The tax-exempt portion is [Tax-Exempt Portion], calculated at RM10,000 per completed year of service in accordance with LHDN Public Ruling No. 1/2021. The Employer shall report the payment correctly in the Employee's EA Form (Borang EA) submitted to LHDN by 28 February of the following year.
3. EMPLOYMENT INSURANCE SYSTEM (EIS) ENTITLEMENT
3.1 The Employer shall notify SOCSO (PERKESO) of the Employee's separation through the EIS online system within 30 days of the Separation Date, recording the reason for separation as [VSS Reason].
3.2 The Employee is hereby notified that, subject to the EIS contribution qualifying period of at least 12 months within the preceding 24 months, the Employee may be eligible to claim EIS Reduced Income Benefit from SOCSO (PERKESO) under the Employment Insurance System Act 2017 (Act 800). The Employee must register the EIS claim within 60 days of the Separation Date at www.perkeso.gov.my or at the nearest SOCSO office. EIS benefits are not subject to income tax.
4. RETURN OF PROPERTY AND HANDOVER
4.1 The Employee shall return the following company property on or before the Separation Date: [Property Return]
4.2 The Employee shall complete a structured handover of all responsibilities, documents, and work-in-progress to the Employer's nominated successor before the Separation Date.
5. FULL AND FINAL RELEASE
5.1 In consideration of the Ex-Gratia Payment, the Employee hereby irrevocably and unconditionally releases and discharges the Employer and its officers, directors, and employees from all claims, demands, actions, and proceedings of any nature arising from or in connection with the employment and its termination, including but not limited to claims under the Employment Act 1955 (Act 265), the Industrial Relations Act 1967 (Act 177), the Employment Insurance System Act 2017 (Act 800), the Personal Data Protection Act 2010 (Act 709), and any other applicable Malaysian law.
5.2 The Employee acknowledges that this release is final and binding and that the Employee will not, after the Separation Date, commence or pursue any proceedings against the Employer in any forum, including the Industrial Court of Malaysia, the Labour Department (JTK), or any civil court, arising from the employment or its termination.
5.3 Notwithstanding this release, the Employee's rights to claim EPF savings under the Employees Provident Fund Act 1991 (Act 452) and EIS benefits under the Employment Insurance System Act 2017 (Act 800) are not affected.
6. GENERAL PROVISIONS
6.1 This Agreement is governed by the laws of Malaysia and the Parties submit to the exclusive jurisdiction of the courts of Malaysia.
6.2 The Parties shall keep the terms of this Agreement confidential, except where required by LHDN reporting, SSM statutory filings, or disclosure to legal advisers.
6.3 This Agreement constitutes the entire agreement between the Parties with respect to the VSS and supersedes all prior discussions, letters, and the VSS offer letter.
6.4 If the Employee is a foreign national employed under an Employment Pass, the Employer shall submit LHDN Form CP21 (Borang CP21) to obtain tax clearance under Section 83 of the Income Tax Act 1967 (Act 53).
Employer (Authorised Representative)
________________
Signature
Employee
________________
Signature
What Is a Voluntary Separation Scheme (VSS) Agreement (Malaysia)?
A Voluntary Separation Scheme (VSS) Agreement in Malaysia fixes the respective duties and entitlements of the parties to the arrangement.
VSS agreements in Malaysia are recognised under the Industrial Relations Act 1967 (Act 177) and have been upheld by the Industrial Court of Malaysia as a legitimate mechanism for employers to restructure their workforce provided the scheme is genuinely voluntary and adequately compensated. The Industrial Court in MAS-Ericsson Sdn Bhd v Raveendrhen Veeramah [2003] 2 ILR 503 held that an employee who freely accepts a VSS cannot subsequently claim constructive or unfair dismissal under Section 20 of the Industrial Relations Act 1967, as the employee has consented to the separation.
The Inland Revenue Board of Malaysia (LHDN) treats ex-gratia payments made under a VSS as compensation for loss of employment under Section 13(1)(e) of the Income Tax Act 1967 (Act 53), which qualifies for a tax exemption of RM10,000 per full year of service completed with the employer. This exemption was reconfirmed in LHDN Public Ruling No. 1/2021. The Employment Insurance System (EIS) under the Employment Insurance System Act 2017 (Act 800) allows employees who separate under an employer-initiated VSS to claim Reduced Income Benefit — equal to 80% of the insured monthly salary for a specified number of months — from the Social Security Organisation (SOCSO/PERKESO), subject to meeting the EIS contribution qualifying period of at least 12 months.
For companies in Malaysia's manufacturing sector employing more than 100 workers, the Code of Conduct for Industrial Harmony 1975 — issued by the Ministry of Human Resources (Kementerian Sumber Manusia) — recommends that employers notify the Director General of Labour under the Employment Act 1955 before implementing a major VSS affecting a significant number of workers.
The legal framework governing the Voluntary Separation Scheme (VSS) Agreement (Malaysia) in Malaysia draws on several key statutes and regulatory bodies. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Parties executing a Voluntary Separation Scheme (VSS) Agreement (Malaysia) in Malaysia should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Employment Act 1955 (Act 265) sets the foundational requirements.
When Do You Need a Voluntary Separation Scheme (VSS) Agreement (Malaysia)?
A VSS Agreement is required in Malaysia whenever an employer implements a voluntary workforce reduction programme and an employee accepts the employer's offer of voluntary separation.
A VSS Agreement is needed when a publicly listed company on Bursa Malaysia undertakes a corporate restructuring or business transformation exercise that requires a reduction in headcount, and wishes to avoid compulsory retrenchment by offering enhanced voluntary separation packages to selected employees.
A VSS Agreement is required when an employer in the manufacturing sector — regulated by the Pembangunan Sumber Manusia Berhad Act 2001 (Act 612) HRD Corp framework — reduces its workforce following a decline in production orders, and the VSS ex-gratia payment is structured to qualify for the RM10,000 per year of service tax exemption under the Income Tax Act 1967.
A VSS Agreement is needed when a bank or financial institution regulated by Bank Negara Malaysia (BNM) under the Financial Services Act 2013 (Act 758) implements a digital transformation initiative requiring reduction of branch-level and back-office staff, and the VSS offer includes EIS Reduced Income Benefit eligibility information.
A VSS Agreement is required when an employee covered by a collective agreement negotiated under the Trade Unions Act 1959 (Act 262) and the Industrial Relations Act 1967 is offered a VSS that differs from or exceeds the terms of the collective agreement, requiring a separate individual agreement documented in writing.
A VSS Agreement is needed to confirm that the employee executes a full release and discharge of all employment claims — including claims under the Employment Act 1955, the Industrial Relations Act 1967, and the Discrimination in Employment (Prohibition) Act — in exchange for the ex-gratia payment, to protect the employer from future litigation.
Parties in Malaysia should prepare a Voluntary Separation Scheme (VSS) Agreement (Malaysia) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.
What to Include in Your Voluntary Separation Scheme (VSS) Agreement (Malaysia)
A valid Malaysia VSS Agreement must contain the following essential elements to be enforceable and to activate the employee's EIS and income tax entitlements.
Parties: Full legal name and SSM registration number of the employer, the employee's full name, NRIC number, designation, department, and date of commencement of employment.
Acceptance of VSS Offer: A statement that the employee has voluntarily chosen to accept the employer's VSS offer and that the acceptance is free from duress, undue influence, or misrepresentation, consistent with the requirements of the Contracts Act 1950 (Act 136).
Separation Date: The specific date on which the employee's employment terminates, expressed in DD/MM/YYYY format, which must fall on or after the employee completes the contractual notice period or after the employer pays salary in lieu of notice.
Ex-Gratia Payment: The total ex-gratia payment in Malaysian Ringgit (RM), stated in full with a breakdown showing: statutory minimum retrenchment benefit under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (10 to 20 days' wages per year of service depending on service length); ex-gratia enhancement above the statutory minimum; annual leave encashment; and any other payment. The total amount subject to the RM10,000 per year of service tax exemption under Section 13(1)(e) of the Income Tax Act 1967 should be stated separately.
EIS Entitlement Notice: A statement informing the employee of their right to claim EIS Reduced Income Benefit from SOCSO (PERKESO) within 60 days of the separation date under the Employment Insurance System Act 2017 (Act 800) by registering at the EIS portal or at the nearest SOCSO office.
Release and Discharge: A full and final release by the employee of all claims against the employer arising from or related to the employment and its termination, including claims under the Employment Act 1955, the Industrial Relations Act 1967, and any other applicable Malaysian law.
Signatures: Signatures of the employer's authorised representative and the employee, with independent witness signatures and dates in DD/MM/YYYY format.
Additional compliance elements for a Voluntary Separation Scheme (VSS) Agreement (Malaysia) used in Malaysia include: Under Malaysian law, the Contracts Act 1950 (Act 136) governs contractual obligations. The Companies Act 2016 (Act 777) regulates corporate entities through the Companies Commission of Malaysia (SSM). The Employment Act 1955 (Act 265) and the Department of Labour govern employment matters. The Personal Data Protection Act 2010 (Act 709) and the Personal Data Protection Department protect personal data. The Inland Revenue Board of Malaysia (LHDN) administers tax obligations. The Industrial Court adjudicates employment disputes under the Industrial Relations Act 1967 (Act 177). Forms-legal.com provides this template as a starting point for Malaysia-compliant documentation.
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Forms Legal. (2026). Voluntary Separation Scheme (VSS) Agreement (Malaysia) (Malaysia) [Legal document template]. Forms Legal. https://forms-legal.com/malaysia/employment/termination/voluntary-separation-scheme-malaysia
"Voluntary Separation Scheme (VSS) Agreement (Malaysia) (Malaysia)." Forms Legal, 2026, https://forms-legal.com/malaysia/employment/termination/voluntary-separation-scheme-malaysia.
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title = {Voluntary Separation Scheme (VSS) Agreement (Malaysia) (Malaysia)},
year = {2026},
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note = {Free legal document template. Based on Employment Act 1955 (Act 265)}
}Frequently Asked Questions
A VSS ex-gratia payment in Malaysia qualifies as compensation for loss of employment under Section 13(1)(e) of the Income Tax Act 1967 (Act 53) and benefits from a tax exemption of RM10,000 per completed year of service with the employer. LHDN Public Ruling No. 1/2021 on Compensation for Loss of Employment confirms this treatment. For example, an employee with 15 years of service who receives a VSS ex-gratia payment would be entitled to a tax exemption of RM150,000 (15 x RM10,000), meaning only the amount above RM150,000 would be taxable as employment income. The exemption applies separately from the retirement gratuity exemption under Paragraph 25 of Schedule 6 to the Income Tax Act 1967. Employers must report the VSS payment in the employee's EA Form (Borang EA) using the correct LHDN codes and must submit Form CP21 (Borang CP21) to LHDN when the employee's employment ceases.
Yes. Under the Employment Insurance System Act 2017 (Act 800), an employee who separates from employment under an employer-initiated VSS is eligible to claim EIS Reduced Income Benefit from SOCSO (PERKESO), provided they have made at least 12 months of EIS contributions within the 24 months before the separation date. The Reduced Income Benefit under EIS pays 80% of the insured daily wage for a benefit period that increases with the number of contribution months — from 1 month of benefit for 12 months of contributions up to a maximum of 6 months of benefit for 36 months or more of contributions. The employee must register the EIS claim within 60 days of the separation date at the SOCSO portal (www.perkeso.gov.my) or at any SOCSO office. EIS benefits do not affect the VSS ex-gratia payment and are not subject to income tax. The employee must actively seek reemployment and participate in EIS re-employment support programmes to continue receiving EIS benefits.
A VSS and retrenchment are legally distinct in Malaysia, although both result in termination of employment. Retrenchment (also called redundancy) occurs when an employer compulsorily terminates employees because their positions have been made redundant, entitling the employee to statutory retrenchment benefits under the Employment (Termination and Lay-Off Benefits) Regulations 1980 — typically 10 days' wages per year for the first two years of service, 15 days' per year for years 3–5, and 20 days' per year thereafter. A VSS, by contrast, is a voluntary offer by the employer that the employee is free to accept or reject — the employee cannot be forced to accept a VSS, and refusal of a VSS offer does not constitute misconduct or grounds for dismissal. The Industrial Court of Malaysia has held in numerous cases that the distinction between VSS and retrenchment is important for determining whether the employee has waived their right to claim unfair dismissal under Section 20 of the Industrial Relations Act 1967 (Act 177).
Malaysian law does not prescribe a specific mandatory notice period specifically for a VSS programme, unlike the notice of retrenchment that the Code of Conduct for Industrial Harmony 1975 recommends be given to the Director General of Labour and trade unions (where applicable) before major retrenchment exercises. In practice, employers implementing a VSS typically announce the scheme at least 30 days before the application deadline, giving employees sufficient time to consider the offer and seek independent advice. Where the employees are covered by a collective agreement negotiated under the Industrial Relations Act 1967 (Act 177), the employer must consult with the recognised trade union under Section 13 of the Industrial Relations Act 1967 before implementing significant changes to employment conditions — including VSS terms — that may affect union members. The individual employee's notice period specified in the employment contract still applies to the date of actual separation following VSS acceptance.
An employee who voluntarily and freely accepts a VSS and signs a full release and discharge of all employment claims generally cannot subsequently claim unfair dismissal under Section 20 of the Industrial Relations Act 1967 (Act 177) before the Industrial Court of Malaysia. The Industrial Court in MAS-Ericsson Sdn Bhd v Raveendrhen Veeramah [2003] 2 ILR 503 confirmed that a voluntary acceptance of a VSS with full knowledge of the terms constitutes a consensual termination that bars a subsequent dismissal claim. However, the employee retains the right to challenge the VSS Agreement if the acceptance was procured by duress, undue influence, or misrepresentation under the Contracts Act 1950 (Act 136). The Industrial Court has set aside VSS agreements where employees were pressured to accept under threat of compulsory retrenchment or where material information about the employer's financial position was withheld. Giving employees adequate time to review the VSS offer — typically 14 to 21 days — and recommending they seek independent legal advice reduces the risk of such challenges.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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