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2. Labor Pension Act
In Taiwan, labor can be divided into two groups: those to whom the Labor Standards Act (LSA) is applicable and those not covered by LSA. The latter group includes occupations such as teachers, doctors and employees in the public sector;
these occupations have their corresponding regulations of labor contracts. However, employees covered by LSA still account for bulk of the labor force.
LSA, which was implemented in July 1984, regulated all labor contracts (except for employees to whom LSA is not applicable) until implementation of the Labor Pension Act (LPA) in July 2005. The two major policy changes after implementation of LPA are the retirement pension system and the severance payment system.
The severance payment system of LSA requires the employer to pay a severance pay pursuant to Article 11, Article 13, Article 14 and Article 20 (Table 1). According to these regulations, one can divide the obligation of severance pay into two situations.
First, severance pay is mandatory when the layoff is caused by reasons such as business contraction, shutdown or personnel adjustment. Second, the employer has to pay a severance pay when the employee voluntarily leaves the firm due to negative effects on his/her life or health.
The amount of severance pay depends on the period of time for which the employee has worked in the firm continuously. According to Article 17 of LSA, the employee has to be paid a severance pay equal to the average monthly wage drawn during his/her tenure at the firm for every year of the tenure. Thus there are no constraints on the amount of severance pay; the severance pay can be a large amount if the employee has worked at the firm for a long time.
The retirement pension system in LSA is defined benefit plan (DB), and it requires that the employee work in the same firm. That is, the job seniority used to
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measure the retirement pension payment will be zero once the employee leaves the firm. However, in Taiwan, most of the firms are medium or small sized enterprises and they operate for only about 13 years on average. Besides, employees change jobs every eight years on average. As a result, more than 75% of the employees cannot receive the retirement pension payment offered by the firm under the pension system of LSA (Chang 2004).
Since retirement pension pay is difficult to receive, the expensive severance pay can be regarded as the compensating payment for the laid off employee. Also, the Employment Insurance Act had not been implemented until 1999 and thus severance pay can be viewed as a substitute of unemployment insurance as well. And, to avoid the fact that firms might tend to lay off employees who are going to retire, severance pay can reduce such incentives to some extent.
To improve the retirement pension system, the LPA has changed the system from defined benefit plan (DB) to defined contribution plan (DC). Under the defined contribution plan, the employer has to contribute 6 % of the monthly wage of the employees to their individual accounts for labor pension at the Bureau. And the most important change is that employees can leave the firm without breaking off the accumulation of the job seniority. That is, the job seniority can be accumulated across different jobs. As a result, the employees can receive the retirement pension for sure once they reach the required age and job seniority in the new pension system.
However, implementation of LPA does not force every employee who was originally covered by LSA to choose the new pension system. In fact, employees can decide whether the plan can bring more benefits, depending on the current job seniority or some other factors. Employees who opted for the old pension system (LSA) were also allowed to switch to the pension system until June 2010. Only employees who had never worked before or had changed jobs after implementation of
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the LPA had to choose the new pension system (LPA).
Since the pension system has been reformed and unemployment insurance is implemented by the Employment Insurance Act in 1999, severance pay seems to have a much lower utility. Therefore, the amount of severance pay is inevitably reduced after the improvement of the pension system. According to Article 12 of LPA, for each year of work by the employee, severance pay is now only half of monthly wage.
Moreover, severance pay cannot be more than six months of average wage. Compared to the LSA, the reduction in severance pay is obviously very large.
As a measure to discourage arbitrary layoffs and to address the weak substitution of unemployment insurance (Lin 2000, Chang 2004), severance payment system has still been retained in LPA, and the requirements of severance pay are the same as LSA.
Besides, an employee can either receive the retirement pension pay or the severance pay when he/she leaves the firm before implementation of LPA. However, it is possible for employees to receive both retirement pension and severance pay by choosing LPA. Moreover, LPA enables employees to change job without worrying about loss of job seniority, thus increasing the dynamics of the labor market. However, at the same time, whether the reduced severance pay increases the incentive for firing has become an important topic which deserves to be analyzed.
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Table 1: Comparison of Severance Payment Systems between LSA and LPA
LSA (1984) LPA (2005)
1. Where the employers' business is suspended, or has been transferred.
2. Where the employers' business suffers an operating loss, or business contraction takes place.
3. Where force majeure necessitates the suspension of business for more than one month.
4. Where the change of the nature of business necessitates reduction of workforce and the terminated employees cannot be reassigned to other suitable positions.
5. A particular worker is clearly not able to perform satisfactorily the duties required of the position held.
Article 13
…the employer cannot continue operating the business due to an act of God, catastrophe or other force majeure and a prior approval has been obtained from the competent authorities.
Article 14
A worker may terminate a labor contract without giving advance notice to the employer in any of the following situations…
Article 20
When a business entity is reorganized or transferred, …, the employer … shall pay severance pay in accordance with Article 20.
Article 12
…when the labor contract is terminated in accordance with Article 11, the proviso of Article 13, Article 14 and Article 20 of the Labor Standards Act…
Calculation of the severance payment
Article 17:
When an employer terminates a labor contract…
1. A worker who has continuously worked for a business entity owned by the same employer shall be entitled to severance pay equal to one month of average wage for each year of service.
2.…
Article 12
…when the labor contract is
terminated…, …by the criterion that each full year of service shall be paid one half month of average wage and …the foresaid severance shall not be paid more than six months of average wage…
Source: Labor Standards Act and Labor Pension Act of Taiwan (translated by council of labor affairs)
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