Ending an employment relationship is rarely straightforward. Beyond managing the employee experience, employers must navigate a complex web of legal, commercial, reputational and tax considerations. Missteps can expose organisations to wrongful dismissal claims, regulatory scrutiny, unexpected tax liabilities, and reputational damage.
Employers in Singapore need to be aware of the key legal and employment tax issues when handling termination scenarios, including routine resignations, performance-related departures, and workforce restructuring. Understanding these considerations is essential to navigate the complexities of ending employment relationships effectively and responsibly.
Understanding termination of employment
Termination of employment occurs when either the employer or employee brings the contract of service to an end. In Singapore, this generally happens in one of two ways: termination with notice or termination without notice (also referred to as summary dismissal). Each route carries different legal and tax implications, and understanding the framework early helps employers manage risks, ensure compliance, and maintain workplace harmony.
The legal framework governing employment in Singapore
Singapore Employment Act 1968
The Employment Act is the primary legislation governing employment in Singapore. It sets out minimum standards relating to matters such as notice periods, salary payments, leave entitlements and wrongful dismissal protections.
Where the Act is silent, the relevant terms are left to agreement between the parties and are typically set out in the employment contract and employee handbook. These documents therefore play a critical role in safeguarding an employer’s interests. Poorly drafted contracts can expose organisations to avoidable disputes, financial liabilities and reputational harm.
Tripartite Alliance for Fair and Progressive Employment Practices (TAFEP)
TAFEP was formed by the tripartite partners (MOM, National Trades Union Congress (NTUC), and Singapore National Employers Federation), to promote fair and progressive employment practices in Singapore. While TAFEP guidelines are not legally binding, they are highly influential. Employees may lodge complaints with TAFEP for breaches, and serious cases may be escalated to MOM for enforcement action. As such, failing to follow tripartite advisories can have very real regulatory and reputational consequences for employers.
Employment contracts and employee handbooks
Together with the Employment Act, employment contracts and employee handbooks have legal force. Employers should ensure that these documents are clearly drafted, internally consistent and regularly reviewed so that they accurately reflect the organisation’s intentions and align with fair employment practices. Ambiguous termination clauses are a common source of wrongful dismissal claims.
Types of termination
Termination with notice
The key principle governing termination with notice is that the party receiving the termination has the right to notice or salary in lieu of notice. Where an employee resigns, the employer is entitled to notice or salary in lieu. Conversely, where an employer initiates termination, the employee holds that right. Only the party entitled to notice may waive it. Importantly, the Employment Act requires notice periods to be mutual for both parties.
There is no legal requirement for an employer to state reasons for termination in a termination letter. Employers should therefore avoid providing written reasons unless they are well documented and defensible, as poorly substantiated reasons increase the risk of a wrongful dismissal claim.
As an alternative to payment in lieu of notice, employers may include a garden leave clause in the employment contract. This requires the employee to serve their notice period without, or with limited, work. Garden leave is commonly used to protect confidential information, minimise disruption during the notice period, and prevent employees from immediately joining competitors with the most up-to-date business knowledge.
While retrenchment and redundancy fall under termination with notice, there are additional requirements that must be fulfilled for an employer to meet this threshold. Employers must have regard to the Tripartite Advisory on Managing Excess Manpower and Responsible Retrenchment (TAFEM), provide reasonable retrenchment benefits, and notify MOM if the organisation employs ten or more employees.
In September 2025, Agoda was reported to have retrenched around 50 employees in Singapore in August 2025. Their severance agreements allegedly prohibited employees from reporting the matter to MOM, TAFEP or trade unions, with severance benefits to be revoked if they did so. This attracted public criticism from NTUC and subsequent regulatory scrutiny, leading Agoda to issue a public apology. The case illustrates how failure to follow tripartite advisories can result in regulatory intervention and significant reputational damage.
Termination without notice
Employers may dismiss an employee without notice in cases of serious misconduct, such as theft, fraud, dishonesty, gross misconduct, insubordination, or wilful breach of contract or company policies.
Before proceeding with summary dismissal, employers must conduct a proper inquiry and maintain clear documentation of the findings. Employees may be suspended during the inquiry, subject to statutory limits. A flawed inquiry or an unsubstantiated dismissal may expose the employer to claims for wrongful dismissal.
Employer obligations upon termination
Upon termination, the employer must ensure obligations owed to the employee are provided for in a timely manner.
Notice periods and contractual terms
Employers must comply with the notice provisions set out in the employment contract. Where contracts are silent, statutory minimum notice periods under the Employment Act apply. Payment in lieu of notice may be required where notice is not fully served.
Final salary, bonuses and CPF
Upon termination, employers must settle all final entitlements in a timely manner. This includes final salary, encashment of any unused annual leave, and outstanding CPF contributions. Bonuses must be paid if they are guaranteed or contractual and the relevant conditions have been met. Where bonuses are discretionary, payment remains at the employer’s discretion. All payments should be clearly reflected in a final payslip.
Employees who are retrenched after at least two years of service may also receive severance pay, which is typically negotiated between the parties or determined based on prevailing market practice.
Work pass obligations
Where the employee is a work pass holder, employers must cancel the work pass within one week of the employee’s last day of notice. Under Singapore’s Employment of Foreign Manpower Act 1990, the employer is also liable for the repatriation cost of the employee, unless otherwise stated in the employment contract or mutually agreed in writing.
Managing disputes and escalation
If disputes arise and the parties are unable to agree on departure terms, the matter must first be referred to mediation at the Tripartite Alliance for Dispute Management (TADM). If mediation is unsuccessful, a claim referral certificate will be issued, allowing the matter to be brought before the Employment Claims Tribunal (ECT) within four weeks. This process also applies to wrongful dismissal claims. While parties must represent themselves, legal advice is often sought to prepare for proceedings.
Recommended employer practices
To mitigate risks, employers should regularly review employment contracts and handbooks, maintain proper documentation of employee performance and conduct, and ensure managers understand and follow appropriate termination processes. This preparation is particularly important if matters escalate to TADM or the ECT.
While legal compliance is often front of mind during terminations, employment tax considerations are equally critical, particularly where foreign employees are involved. Oversights can result in tax penalties, delayed payments and disputes between employers and employees.
Key tax considerations for employers
1. Tax and CPF treatment of termination payments
Not all payments made upon termination are treated the same for tax purposes. Payments such as salary in lieu of notice, accrued or guaranteed bonuses, and unused annual leave are generally taxable as they represent remuneration for services rendered and must be reported in the relevant IRAS forms.
By contrast, ex-gratia or goodwill payments may be exempt from tax and CPF if they are capital in nature, such as genuine compensation for loss of employment or payments relating to non-compete obligations. The treatment depends on the purpose and rationale of the payment rather than its label, and employers should clearly document the basis for each payment.
2. Reporting and timing of income
Employment income is generally taxable in the year it is received. All payments made on or after termination, including post-termination bonuses or deferred compensation, must be reported in the appropriate IRAS forms.
3. Tax clearance for foreign employees
For non-Singapore citizens ceasing employment, employers are required to file Form IR21 (Tax Clearance) at least one month before cessation or departure and withhold all monies until tax clearance is obtained from IRAS. Failure to comply can result in penalties, immigration issues for the employee and disputes over withheld payments. Singapore permanent residents who remain in Singapore may be exempt, subject to conditions being met.
4. Equity-based compensation
Termination can complicate the taxation of equity-based awards. Employers should carefully consider how unvested awards are treated on termination, the timing of taxation for vested but unexercised options, and whether deemed exercise rules apply for employees subject to tax clearance. Ongoing coordination between HR, payroll and tax teams is essential to ensure correct reporting even after the employee has left the organisation.
5. Employer best practices for tax risk management
To manage tax and compliance risks, employers should maintain clear documentation of termination payments, regularly review employment contracts, handbooks and equity plans, coordinate closely across HR, payroll and mobility teams, and seek professional advice in complex or cross-border situations.
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