Understanding the Employment Insurance Scheme (EIS) in Malaysia — Is it a boon or a bane?

Understanding the Employment Insurance Scheme (EIS) in Malaysia — Is it a boon or a bane?

After a decade of public discourse, the Employment Insurance Scheme (EIS) is set to be implemented next January. But despite the strong views expressed both for and against it, much about scheme remains unknown.

So, what is the EIS?

Such a scheme is not new. Countries like Japan, Taiwan, Thailand, Chile and South Korea have already adopted it many years ago.

The EIS implemented in the various countries differs slightly from each other but the gist of it is that it is a combination of traditional unemployment benefits and active labour market programmes. The aim is to get retrenched workers back into the workforce as quickly as possible.

All of them have the element of direct contributions by both the employee and the employer, ranging from 0.2% to 1.5%. In some countries, the government contributes directly to the scheme while in others, the state takes care of the administrative costs (for example, South Korea).

Typically, the scheme comes with a cap in respect of the duration of payment and the amount that a retrenched worker will receive.

Monash University Malaysia senior lecturer and deputy director of its Master of Business Administration programme Dr Teh Chee Ghee says the implementation of the EIS in South Korea in 1995 was timely as the Asian financial crisis (AFC) struck in 1997.

“In 1997, a lot of people lost their jobs due to the AFC. The EIS came in handy for the South Koreans as they had a pool of money [to support the retrenched workers], and it was then that they realised the importance of the EIS,” he tells The Edge.

Teh, who is the former head of research at the Socio-Economic Research Centre, points out that the Chilean EIS is a notable model as it comes with an individual savings component and an insurance component. “The Chilean model is good as there is a self-contribution portion whereby if you are unemployed, you can use the money contributed earlier, and in the event that you are always employed, you can withdraw the sum. It is like a life insurance policy.”

However, there have been instances where the EIS has been abused.

“When there is a large informal sector — for example, petty traders and unregistered companies — there may be instances where EIS funds are misused as a retrenched worker may still work in this sector and claim the EIS payment, like in Thailand,” says Teh.

Prime Minister Datuk Seri Najib Razak has said the EIS will benefit 6.5 million Malaysian employees in the private sector and it is aimed at assisting retrenched workers by giving them temporary financial assistance and providing them with opportunities to reskill and upskill.

Unsurprisingly, the Malaysian Employers Federation (MEF), The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), the Federation of Malaysian Manufacturers (FMM), and 88 other organisations have objected to the Ministry of Human Resources’ proposal to implement the EIS as, according to them, it will increase the cost of doing business.

At the same time, the scheme has received unwavering support from the Malaysian Trades Union Congress and Parti Sosialis Malaysia, which believe that it will provide much-needed aid for retrenched workers to get back into the workforce.

While many question the timing of the implementation of the scheme, an economist says, “Why not [implement] it now? After all, like the GST (Goods and Services Tax), we have talked about this for about a decade.”

Definitely a cost to employers and employees

One thing is for certain: The EIS will come as an additional expense to both employers and employees.

“The contribution rate is still uncertain at this point, but it is definitely a new payroll tax for employees and most certainly a cost of doing business for employers,” says a Ministry of Human Resources official.

Employers say the scheme could be collecting too much funds. Furthermore, they argue, most employers pay their employees termination benefits in the event of a retrenchment.

“In terms of economic cycles, a downturn that results in retrenchments does not occur every year, while the EIS, if implemented, will result in both employees and employers having to contribute every year,” reads a March 23 joint statement by MEF, ACCCIM, FMM and the 88 organisations.

“The amount that will be contributed to the fund is no small sum for an employer. Money is cash flow for a business,” says ACCCIM secretary-general Datuk Low Kian Chuan.

Nevertheless, the ministry official says the EIS merely makes companies realise a cost that should have been set aside in the first place.

“Retrenchment benefits are usually contingent liabilities or off balance sheet items recognised by companies. Now with the EIS, they have to recognise them as a cost of doing business, just like the contributions to the Employees Provident Fund and Socso (Social Security Organisation),” he says.

Employers are also concerned about the Active Labour Market Policies portion of the EIS, which will probably include job seeking, job matching, job placement, career counselling and job training, upskilling and reskilling, overlapping the functions of JobsMalaysia and The Institute for Labour Market Information and Analysis, both of which are under the purview of the Ministry of Human Resources.

Businesses also question whether there will be an overlap of the training function under the Human Resources Development Fund (HRDF), which they currently contribute to.

Besides that, a human resources director of a multinational corporation points out, employees will actually be contributing to their own retrenchment under the EIS.

“Think about it, under the existing employment termination and layoff benefits, the burden falls on the company to compensate its employees in the event of a retrenchment. But under the EIS, it looks like you, the employee, will also be contributing to your own retrenchment compensation,” she says.

That said, what employers want now is to have clarity and details of the proposed EIS, which will be tabled in Parliament in July.

“We are not opposing the scheme in its entirety. We can have the scheme, it’s not a big issue. But since we have been told that the EIS is final, we are hoping that we could actually be privy to the details. At this juncture, we do not know for sure the cost implication for businesses or the mechanism of the EIS. What is the final proposal?” asks Low.

Making the EIS more palatable

While the details of the scheme remain vague, businesses have come up with several proposals on how it can be made more palatable to companies and workers.

MEF executive director Datuk Shamsuddin Bardan says a savings scheme via contribution to a proposed third account in the EPF would be more suitable than the EIS.

“The employee can contribute 1% of his monthly salary, and in eight years, he would have accumulated close to his one-month salary. The beauty of it is that if there is no retrenchment, the employee gets his money back.

“Also, the employer could set aside one month of the employee’s wages, which could be invested in a fund such as AmanahRaya and should be disbursed to the retrenched employee should he face difficulty in finding new employment,” says Shamsuddin.

He adds that the government should also contribute by having a fund in which at least one month of the retrenched employee’s salary is saved, thereby ensuring that there is at least a three-month payout for the retrenched worker.

Low suggests that only new workers should be made to contribute to the scheme.

“Why not make only those who are new to the workforce contribute to EIS? The existing employees can continue to receive retrenchment benefits under the terms of their contract should they be let go,” he says.

Monash’s Teh says the pooling of resources by HRDF and Socso, which some quarters believe have been tasked to manage the EIS, could also be an alternative solution.

But at the end of the day, it looks like both employers and employees will just have to wait patiently for the details of the EIS to be made public.

Article Source: http://www.theedgemarkets.com