When a factory in Thailand goes through a workforce reduction, the arithmetic of severance pay is honestly not hard. Divide the monthly salary by 30 to get a daily wage, look up the statutory number of days for the employee’s length of service, and multiply. That is all. You can do it on a calculator, and you can build it in a spreadsheet in a few minutes. And yet Thailand’s Labour Court sees a steady stream of claims over unpaid severance. The cause is almost never a mistake in the multiplication. It is that an entire item that should have been calculated never entered the calculation at all. Using a model case — a Japanese-owned automotive parts factory in Rayong province — this article counts precisely what that blind spot is worth in a 50-person reduction. The short answer, up front, is 3,582,000 baht.
The Hard Part of Severance Pay Calculation Is Not the Math
Talk to the HR and general affairs teams at Japanese-owned factories in Thailand and the severance conversation almost always starts with the table of days — so many days of pay for so many years of service. That table is written plainly into the Labour Protection Act (LPA) and leaves almost no room for interpretation. So the moment people see it, many of them think, “Well, that looks simple.” And that instinct is half right.
The problem is that the table is only the entrance to severance calculation. Termination payments under Thai labour law are built from several provisions of genuinely different character stacked on top of one another. One provision is determined by length of service. Another is determined by the reason you are letting the person go. A third body of rules determines how the payment is taxed. Different people decide each one, each needs different information, and each carries a different kind of risk when you get it wrong.
And the middle layer of that stack sits in a position that is hard to see from either side. From the Japanese head office, severance looks like “a local labour matter.” From the Thai payroll desk, it looks finished once “we calculated it according to the table.” Nobody is lying, and yet the amount paid ends up below the statutory level.
This article separates that structure into three layers. On top of that, it draws an honest line around what you may and may not expect from the phrase “severance pay calculation AI.” Let me say up front that this article does not argue that adding AI solves the severance problem. If anything, the real subject is separating the layer you may safely automate from the layer a human absolutely has to judge.
Why This Matters Now — Workforce Reductions Are a Live Agenda in Thai Manufacturing
The method for calculating severance has not changed in years. The reason to raise the topic now is that in Thai manufacturing, workforce reduction has stopped being a hypothetical.
The figures reported by the Federation of Thai Industries and local media point to a genuinely difficult picture. In the five months from January to May 2024 alone, 561 factories closed in Thailand and 15,342 jobs were lost — an average of roughly 3,000 people out of work every month. Going back a year, 1,337 factories closed across the whole of 2023, against 997 factories in 2022 — 1,337 factories minus 997 factories, an increase of 340 factories. The pace of closures is clearly trending upward.
Individual cases have surfaced too. Yarnapund (YNP), a Thai automotive parts maker with more than 70 years of history, moved to terminate its entire workforce of 900 employees starting 26 November 2024 as its cash position deteriorated. Even a company with a long record and a recognised name in its region could not hold out against a structural shift in demand.
That shift in demand is symbolised by the changing cast of the passenger car market. At the 2026 Thailand International Motor Show, BYD recorded 17,354 bookings, beating Toyota’s 15,750 to take first place for the first time. Eight of the top ten brands were Chinese manufacturers. One trade show does not describe an entire market, but the fact that Japanese makers and their supply chains are under structural pressure will match what people feel on the shop floor.
In this environment, the options open to a Japanese-owned factory are limited. Consolidating production lines, reducing headcount through automation investment, restructuring sites. Each is a rational management decision, and each involves cutting the number of employees. And as we will see, a headcount reduction carried out because of automation receives special treatment under Thai labour law. In other words, the very moves that many Japanese-owned factories are weighing right now are the trigger that raises the difficulty of severance calculation by a full notch.
Splitting Severance Pay Calculation Into Three Layers
Let us divide termination payments in Thailand into three layers by their character. This split does not follow the numbering of the statute. It follows the practical question of who decides what, and where the mistakes happen.
| Layer | Legal basis | How it is determined | Information needed to decide | Ease of automation |
|---|---|---|---|---|
| Layer 1 Ordinary severance pay | Labour Protection Act Section 118 | Uniquely fixed by length of service and wage | Hire date, termination date, monthly salary | High. A table lookup finishes it |
| Layer 2 Special severance pay | Labour Protection Act Sections 121 and 122 | Determined by the reason for termination and whether notice was given | Reason for the reduction, notice date, filing with the labour inspector | Low. Requires a finding of fact |
| Layer 3 Tax treatment | Revenue Code and related ministerial regulations | Determined by the type of separation and the amount received | Category of separation, amount paid, length of service | Moderate, but needs a specialist’s confirmation |
The most important column in this table is the second from the right, “information needed to decide.” What Layer 1 needs is three items — two dates and a figure — that are guaranteed to already exist in the HR system. What Layer 2 needs, on the other hand, is the substance of a management decision about why this person is being let go, and that is recorded nowhere in the HR system. What Layer 3 needs is a legal characterisation of which statutory category the separation falls into, and that also lives outside the payroll system.
Where the misses happen is, with almost no exceptions, Layer 2. Layer 1 is a table lookup, so there is little to get wrong. Layer 3 feeds straight into a tax figure, so tax advisers and accounting firms tend to have eyes on it. Layer 2 alone falls into the valley between “management decision information” and “payroll practice.”
Layer 1 – Ordinary Severance Pay Ends With a Table Lookup – Section 118
Start with the foundation. Section 118 of the Thai Labour Protection Act sets the severance pay an employer must pay when it terminates an employee.
The provision covers employees with at least 120 days of service who are terminated at the employer’s initiative. Put the other way, a voluntary resignation by the employee, or a disciplinary dismissal for statutory serious misconduct, falls outside this severance entitlement. This part is generally well understood in practice.
The formula runs as follows. Take the daily wage — the monthly salary divided by 30 — and multiply it by the statutory number of days for the employee’s length of service.
And here is the table of statutory days.
| Length of service | Days of pay |
|---|---|
| 120 days up to 1 year | 30 days |
| 1 year up to 3 years | 90 days |
| 3 years up to 6 years | 180 days |
| 6 years up to 10 years | 240 days |
| 10 years up to 20 years | 300 days |
| 20 years or more | 400 days |
The bottom row, 400 days for 20 years or more, is a band added by the 2019 amendment to the Labour Protection Act. Before that, the top band was 300 days, so the older the factory and the more long-tenured staff it carries, the more strongly the amendment bites. Years have passed since the amendment, and yet you still come across internal policy documents and old estimation spreadsheets that were never updated from 300 days.
Let me be blunt about this layer. This is an area with no need for AI whatsoever. The inputs are three items — hire date, termination date, monthly salary — and the output is the result of a table lookup. There are six branches and almost no exceptions. A VLOOKUP in a spreadsheet is plenty, and building it into a payroll system is not difficult either. Calling this “automated with AI” is, frankly, overstating it.
Decide Internally How You Treat Wage Scope and Partial Years
That said, Layer 1 is not entirely free of judgement calls. Two points typically need confirmation in practice.
The first is what counts as “wage.” Base salary only, or base salary plus allowances paid on a fixed basis? Thai practice takes the view that anything paid on a fixed basis as consideration for work is included in wages regardless of what it is called, but whether a specific allowance qualifies depends on how it is actually paid. A housing allowance or a position allowance paid as a fixed monthly amount and a travel expense reimbursed against receipts can be treated differently.
The second is partial years of service. Thai law contains rules under which a remainder above a certain number of days is treated as a full year, and for employees sitting close to a band boundary, that treatment alone can move the payment up a full step.
Both are points you should settle internally against your work rules, your own history of practice, and the current interpretation. Starting the discussion after the reduction has been decided is too late.
Layer 2 – The Special Severance Pay Blind Spot – Sections 121 and 122
This is where the heart of the article begins.
Section 121 of the Labour Protection Act imposes obligations, separate from ordinary severance under Section 118, on reductions carried out for specific reasons. Those reasons are as follows.
Introducing machinery, or changing machinery or technology, for the purpose of improving production, sales, or service units. Section 121 applies where the number of employees is reduced because of circumstances like these. (Note that a workforce reduction carried out because a place of business is relocated falls under a separate provision, Section 120, where both the notice deadline and the structure of the compensation are different. What Section 121 covers is strictly the case where a change in machinery or technology is the trigger.)
In plainer language, this is a workforce reduction driven by automation or equipment renewal. Legally, it is treated differently from a simple headcount cut driven by poor results.
The 60-Day Notice Obligation and What It Costs to Miss It
When carrying out a termination that falls under Section 121, the employer takes on an advance notice obligation. There are two recipients — the labour inspector and the affected employee personally. The deadline is at least 60 days before the termination date.
If the employer does not meet this 60-day notice, or gives no notice at all, it must pay special compensation equivalent to 60 days of wages in addition to the ordinary severance pay. This is separate from the Section 118 payment.
In practice, 60 days is not a long window. Decisions to consolidate production lines or invest in automation take time to firm up through internal approval routes and head office sign-off. Once the decision is final, you still have to select the affected employees, and counting 60 days from there routinely lands you well past the changeover date you originally had in mind. Proceed without working the schedule backwards and the extra 60 days lands straight on the cost line.
The 15-Day Add-On for Employees With More Than 6 Years of Service – This Is What Gets Missed
And here is the part that drops out of most estimates.
Among employees covered by a Section 121 reduction, those with more than 6 years of service receive special severance pay under Section 122 in addition to the ordinary severance under Section 118. The amount is equivalent to 15 days of wages for each year of service, subject to an overall cap of 360 days.
Three points deserve attention here.
First, this is an addition, not a replacement. An employee entitled to 240 days under Section 118 does not end up with “either 240 days or 15 days times years of service, whichever is greater.” They get the sum of both.
Second, the cap is 360 days. The top band under Section 118 is 400 days, but the cap here is 360 days — a different number. Confusing the two throws off the calculation.
Third, the threshold is not “6 years or more” but “more than 6 years.” The Section 118 band table gives 240 days for 6 years up to 10 years, but this provision does not reach an employee at exactly 6 years. For anyone sitting on the boundary, careful confirmation is needed, including how partial years are handled.
What happens when you miss this provision? The longer an employee has served, the wider the gap opens between what you paid and what you owed. The next section turns that gap into a number.
The More a Company Automates, the Closer It Moves to This Provision
There is something we have to be honest about here.
TOMAS TECH supports Japanese manufacturers in Thailand with factory automation and system implementation. And what Section 121 describes — “a reduction in headcount through the introduction of machinery or a change in machinery or technology” — is precisely the territory we work in.
The reasons companies consider automation investment are real and pressing: rising labour costs and difficulty hiring. We laid out that background in rising labour costs in Thailand and the automation investment decision. And even when a company decides to automate, it runs into a second wall — a shortage of people inside Thailand who can design and maintain those systems. We covered that in the shortage of automation technicians and realistic ways to close it.
In other words, automation is a rational response to a labour shortage, and at the same time, if the shape of the workforce changes as a result, it can fall within the reach of Section 121. When you calculate the ROI of an automation investment, equipment cost, maintenance cost, and the labour cost you will avoid always make it onto the sheet. But the one-off special severance pay you must pay to realise that reduction is very rarely on the same sheet.
This is not an argument for abandoning automation. It is an argument for putting that one-time cost on the table as a number from the earliest stage of the investment decision. Discovered later, it looks like an unexpected loss. Present from the start, it is simply part of the investment.
Layer 3 – Tax Treatment – The Exemption and Separate Taxation
The third layer is tax. The total the company pays is the same either way, but what the employee takes home changes. And getting it wrong turns into a withholding problem for the employer.
Severance Pay Carries a Tax Exemption
In Thailand, severance pay made under labour law carries a personal income tax exemption. The amount is the lower of an amount equivalent to the last 400 days of wages and 600,000 baht.
This level applies to income received on or after 1 January 2023. Under the earlier rules, the ceiling was the lower of 300 days and 300,000 baht. Both the day count and the monetary ceiling were raised, so calculating from an old reference document means understating the exemption.
The Exemption Does Not Apply to Mandatory Retirement or Contract Expiry
This is the part practitioners most often get wrong.
The exemption applies to severance pay under labour law. Accordingly, cases like the following are not covered.
| Type of separation | Covered by the exemption |
|---|---|
| Redundancy at the employer’s initiative | Covered |
| Retirement at the mandatory retirement age | Not covered |
| Expiry of a fixed-term employment contract | Not covered |
| Voluntary resignation by the employee | No severance pay arises in the first place |
What makes this distinction hard on the ground is that the payments look identical. A goodwill payment to a retiring employee and a statutory severance payment in a redundancy can both land in the payroll system under the same line item, “lump sum on separation.” Same line item, so surely the same tax treatment — and that is how it slides through.
The result is that errors can run in two directions. Either the exemption is wrongly applied to a retiree, or the exemption that should have been applied to a redundancy case is missed. The first becomes an under-withholding problem for the employer, and the second means the employee pays tax they never owed. Both are the kind of error that is expensive to correct once discovered after the fact.
Always Confirm the Treatment Above the Exemption With a Specialist
For the portion above the exemption, there is a mechanism allowing the amount to be calculated separately rather than aggregated with ordinary employment income — so-called separate taxation. It works by applying deductions based on length of service before applying the tax rate, but the fine detail of which deductions apply in what order is explained in subtly different ways even among specialists.
For that reason this article does not construct a worked numerical example for this part. The amounts are large and feed directly into what each individual employee takes home, so please have the actual calculation confirmed by a tax adviser or accounting firm. This is the single most dangerous area in which to take an answer from an AI and use it as-is.
Our Own Estimate – What the Blind Spot Costs in a 50-Person Reduction
Now let us turn all of this into money. What follows is our own estimate and does not reflect any real company’s figures. Rather than the absolute amounts, look at the structure — what drops out, and by how much, when Layer 2 is missed.
The model is a Japanese-owned automotive parts factory in Rayong province, Thailand. Consolidating production lines and automating, it carries out a reduction of 50 employees. This is an automation-driven reduction falling within Section 121, and we assume the 60-day advance notice was given properly. In other words, no additional 60 days of compensation for defective notice arises in this scenario. What we are isolating is only the gap created by missing the special severance pay for employees with more than 6 years of service (15 days per year of service, capped at 360 days).
| Length of service band | People | Monthly salary (baht) | Daily wage | Section 118 days | Section 118 amount per person | Section 121 add-on days | Section 121 add-on per person | Total per person |
|---|---|---|---|---|---|---|---|---|
| 1 to under 3 years | 8 | 13,500 | 450.00 | 90 days | 40,500 | None (not covered) | 0 | 40,500 |
| 3 to under 6 years | 12 | 15,200 | 506.67 | 180 days | 91,200 | None (not covered) | 0 | 91,200 |
| 6 to under 10 years | 15 | 17,800 | 593.33 | 240 days | 142,400 | 120 days (8 years assumed times 15 days) | 71,200 | 213,600 |
| 10 to under 20 years | 12 | 20,500 | 683.33 | 300 days | 205,000 | 210 days (14 years assumed times 15 days) | 143,500 | 348,500 |
| 20 years or more | 3 | 24,000 | 800.00 | 400 days | 320,000 | 330 days (22 years assumed times 15 days, within the 360-day cap) | 264,000 | 584,000 |
Note that the “Section 121 add-on” columns in the table refer to the special severance pay paid, in a reduction carried out under Section 121, to employees with more than 6 years of service. Because the 60-day advance notice was satisfied, no 60 days for defective notice is included.
Totalled up, the picture looks like this.
| Item | Amount (baht) |
|---|---|
| Total calculated on Section 118 alone (what gets paid when the special compensation is missed) | 6,974,400 |
| Total special compensation added under Section 121 (the part that gets overlooked) | 3,582,000 |
| Correct total | 10,556,400 |
The unpaid gap created by the omission amounts to roughly 33.9% of the correct total. Looked at from the other direction, it is an increase of roughly 51.4% over the total calculated on Section 118 alone. In money, 3,582,000 baht. That is the scale of the difference produced by a single 50-person redundancy.
The difference arises in only the bottom three rows. For the 20 employees with under 6 years of service, the Section 118 figure and the correct figure are exactly identical. You can re-check the arithmetic for those 20 as many times as you like and you will not find one baht of the gap. An omission is a class of error that no amount of added precision in the calculation will surface. That is why the opening line of this article said the hard part is not the math.
One more point. The gap concentrates on long-tenured employees. For the three employees with 20 years or more, the add-on is 264,000 baht each, more than 80% on top of the 320,000 baht due under Section 118. The longer someone has worked for you, the larger the shortfall when the item is missed. This connects directly to the character of the dispute risk described next.
What an Unpaid 3,582,000 Baht Actually Means
You cannot file this amount away as a “calculation slip.” It is worth walking through what can happen if the payment is completed with the shortfall in place.
A Claim in the Labour Court
Thailand has a Labour Court dedicated to employment matters, and it tends to operate with a strong regard for worker protection. Procedurally too, the bar for a worker to bring a claim is deliberately set lower than in ordinary civil litigation. And the fact that interest for late payment can accrue on the delayed amount is something practitioners cannot afford to overlook.
In other words, if an underpayment comes to light, what the company bears may well not stop at the shortfall itself. On top of it come internal hours spent responding, legal fees, and management’s time.
If One Person Notices, Everyone Notices
The employees in a redundancy are colleagues who worked side by side in the same factory for years. They stay in touch after they leave, and the amounts they received will certainly be compared. And as this estimate shows, the gap arises among employees with more than 6 years of service — the people who formed the core of the factory.
If one of them senses that their amount falls short of the statutory level and consults the Ministry of Labour or a lawyer, that information reaches the remaining 29 people in the same position. Thirty out of the 50 filing on the same grounds is a thoroughly realistic scenario. This is not a problem that stays contained through case-by-case handling.
The Employees Who Stay, and Your Reputation Locally
The factory keeps running after the redundancy. The employees who remain are watching how their departing colleagues were treated. If the payments turn into a dispute, that affects the trust the remaining workforce places in the company.
In Thailand’s industrial estates, a company’s reputation travels faster than you would expect. It affects standing in the recruitment market and the relationship with local labour authorities. These are costs that resist being converted into a number, but that does not mean they do not exist.
This 3,582,000 baht is not money you get to avoid paying. It is money owed as a statutory obligation. Miss it, and there is a strong chance you end up paying it later with interest and dispute costs stacked on top. If that is the case, putting the correct amount into the estimate from the beginning is simply the healthier management decision.
What You Can Reasonably Expect From “Severance Pay Calculation AI”
Back to the main question. Across this three-layer structure, where do AI and systems actually help? Let us go layer by layer, honestly.
| Layer | What is needed | Suitable approach | Role of AI |
|---|---|---|---|
| Layer 1 Ordinary severance pay | Table lookup and multiplication | Rule-based calculation logic | Essentially unnecessary. No reason to involve AI |
| Layer 2 Special severance pay | Finding the facts of the termination and applying the statute | Human judgement plus legal review | Raising the question “has this provision been considered?” |
| Layer 3 Tax treatment | Categorising the separation and computing tax | Tax adviser or accounting firm | Detecting a missing category entry. Not the tax figure itself |
There is one thing this table is meant to say. Where AI can add value in severance pay calculation is not the calculation itself, but the completeness of the questions asked before the calculation.
Layer 1 is not AI’s job to begin with. There is no reason on earth to hand a six-branch decision table to a model that generates answers probabilistically. Conventional logic is faster here, cheaper, and reproducible. If a sales pitch for “AI-automated severance calculation” is pointing at Layer 1, it is putting a new name on something a spreadsheet already does.
Layer 2 is the layer you must not let AI calculate. What is required here is a finding of fact — is this reduction driven by the introduction of machinery, or by a change in machinery or technology? — and the answers live in internal approval memos and investment plans. AI does have a different use, though. Making sure the workflow for a termination reliably poses the questions that prompt those judgements.
Concretely, make it mandatory at the point a termination is raised to select “which of the following is the reason for this separation,” and when automation or equipment renewal is chosen, prompt a review of Sections 121 and 122. Calculate the start date for the 60-day notice and display whether it is achievable. Extract and list the affected employees with more than 6 years of service. None of this processing is sophisticated in itself. But on the single point of structurally closing off the omission, it has a real effect.
Layer 3 is not a layer where AI produces the answer. Its remit stops at consistency checks. Is the separation category filled in? Has the exemption been wrongly applied to a mandatory retirement case? The final confirmation of the tax figure is a specialist’s job.
We Do Not Claim Inflated ROI
Describing this kind of mechanism as “saving you 3,582,000 baht every time” would not be accurate. This 3,582,000 baht is an amount owed under the law, and it is not something you can save.
Put precisely, what such a mechanism prevents is disputes over underpayment, and the late-payment interest, litigation-response costs, and reputational damage that ride on top of them. And, by making the amount visible at the investment-decision stage, it lets you build the one-off workforce reduction cost into the return calculation for an automation investment. The effect is real, but it is not the kind of thing where you can assert a specific multiple of return.
Designing the Omission Out – Who Owns Which Layer
Finally, let us set out how to organise this in practice. At the centre sits a written answer to the question of who owns which layer.
| Layer | Primary owner | Required counterparts | What to record |
|---|---|---|---|
| Layer 1 Ordinary severance pay | HR and payroll | None. Completed within the system | Hire date, termination date, definition of wage scope |
| Layer 2 Special severance pay | Plant manager and management | HR, legal, external counsel | Reason for the reduction, decision date, notice date, filing date with the labour inspector |
| Layer 3 Tax treatment | Accounting and finance | Tax adviser or accounting firm | Category of separation, amount paid, length of service |
What the factories that struggle with this have in common is that the Layer 2 row is blank. “The reason for the reduction” is a management decision, so management owns it. “Calculating the amount” belongs to payroll. But nobody has been assigned to connect the two. The result is that management assumes “HR must be calculating this according to the law,” while HR reasons “we calculated it according to the table using the conditions we were given.”
The way to fill that blank is not to install a system. It is to put a mandatory reason-for-termination selection on the form used to raise a separation. Technically it is a trivial change, but it is the change that finally places the Layer 2 judgement in somebody’s hands.
Draw a Clear Line Between This and Monthly Payroll
One more point that gets conflated. Severance calculation is a fundamentally different kind of processing from monthly payroll.
| Dimension | Monthly payroll | Severance pay calculation |
|---|---|---|
| Frequency | Repeats every month | Once per person, ever |
| Amount per case | Small | Large. Can run to hundreds of thousands of baht |
| How errors are found | Noticed and corrected the following month | The person leaves after payment, so nobody inside notices |
| Main risk | Calculation errors and processing delays | Missed items and legal disputes |
| Suitable countermeasure | Automating and streamlining the processing | Completeness of judgement, and records |
For monthly payroll, the subject is how to streamline processing that recurs. We laid that out as a three-layer structure in payroll calculation AI and how to build monthly processing for a Thai factory, so if you are working on the monthly side of the design, start there.
What matters is not treating these two with the same design philosophy. What monthly payroll demands is efficiency. What severance calculation demands is not efficiency but completeness. Speeding up a process that occurs a handful of times a year buys you almost nothing. Meanwhile, missing Layer 2 even once in those few occasions becomes a multi-million-baht problem.
What to Do the Moment a Reduction Enters Discussion
Once a workforce reduction becomes a concrete agenda item, there are things to confirm before you estimate the payment amounts.
Whether the reason for the reduction falls under Section 121. If it does, a schedule worked backwards from the 60-day notice. Whether and how to file with the labour inspector. How many of the affected employees have more than 6 years of service, and a rough figure for their special compensation. The category of separation and whether the tax exemption applies. Whether the work rules or individual employment contracts commit to payments above the statutory level.
These are matters that need to be settled before you refine the payment figures down to the last baht. Do it in the reverse order and you will be redoing a very precise calculation.
Frequently Asked Questions
How far can severance pay calculation be automated with AI?
The calculation itself can be automated, but it does not take AI to do it. Ordinary severance under Section 118 is uniquely determined by three inputs — hire date, termination date, monthly salary — so rule-based logic is entirely sufficient. Where AI adds value is upstream, in preventing gaps in what gets considered. Making the reason for termination a mandatory input, calculating the notice deadline backwards and displaying it, extracting the affected employees with more than 6 years of service — building processing like this into the termination workflow structurally reduces omissions. Conversely, the final judgement on whether a termination falls under Section 121, and the calculation of tax deductions, should not be delegated to AI.
When does special severance pay arise in Thailand?
Section 121 of the Labour Protection Act covers cases where the number of employees is reduced because of the introduction of machinery or a change in machinery or technology (a workforce reduction carried out because a place of business is relocated falls under a separate provision, Section 120, where both the notice deadline and the structure of the compensation differ from the Section 121 rules discussed in this article). In those cases the employer must give notice to the labour inspector and to the affected employee personally at least 60 days before the termination date. If the notice falls short of 60 days, special compensation of 60 days is required in addition to the ordinary severance pay. On top of that, Section 122 gives employees with more than 6 years of service special severance pay of 15 days per year of service, capped at 360 days in total, added separately to the ordinary severance. Note that this is treated differently from a straightforward headcount reduction driven by poor business results.
What is the most commonly made mistake in Thai severance pay calculation?
The add-on of special severance pay for employees with more than 6 years of service. This provision sits in a different section from the Section 118 day table, and because it is an addition rather than a replacement, calculating from the day table alone drops it entirely. In our own estimate, missing it in a 50-person reduction came to 3,582,000 baht, roughly 33.9% of the correct total. Two further points are easy to confuse — the cap here is 360 days rather than the 400 days of Section 118, and the threshold is “more than 6 years” rather than “6 years or more.”
Is severance pay taxable in Thailand?
Yes, but severance pay made under labour law carries a personal income tax exemption. The exemption is the lower of an amount equivalent to the last 400 days of wages and 600,000 baht, and this level applies to income received on or after 1 January 2023. However, the exemption covers severance pay arising from a redundancy at the employer’s initiative. It does not apply to payments on retirement at the mandatory retirement age or on the expiry of a fixed-term contract. For the portion above the exemption there is a mechanism allowing separate taxation to be elected, but the detail — including the order in which deductions apply — is explained differently by different specialists, so have the actual calculation confirmed by a tax adviser.
Can we use our existing payroll system as-is for redundancy pay calculation?
What is often called redundancy pay corresponds to severance pay under Thai law. Most payroll systems hold the Section 118 day table, but few are equipped to determine the special compensation under Sections 121 and 122 automatically. The reason is simple — whether those provisions apply is determined by the reason for the termination, and that reason is not information that gets entered into a payroll system. Treating the system’s output as the final amount is therefore dangerous. You need to add a field that records the reason for termination, and place a mechanism outside the system that prompts a review of the special compensation when the provisions apply.
How long should a Thai factory allow between deciding on a reduction and carrying it out?
Where Section 121 applies, at least 60 days are required between notice to the labour inspector and the affected employees and the termination date. In practice, though, those 60 days are only the floor. The legal characterisation of whether the reason for the reduction falls under Section 121, selection of the affected employees, estimation of the payment amounts, preparation of the notice documents, the filing with the inspector, and individual meetings after notice is given. Including all of that, you should allow substantial margin between the decision and execution. Working backwards from a production line changeover date usually leaves you short, so we recommend building this period into the schedule at the planning stage of the automation investment.
Summary
The hard part of severance pay calculation in Thailand is not arithmetic. It is missing what should have been calculated in the first place.
Ordinary severance pay under Section 118 is uniquely fixed by looking up the length-of-service table. This part is easy to mechanise, and most payroll systems handle it. The problem is the layer stacked on top of it. In a reduction carried out because of automation or equipment renewal, special severance pay arises under Sections 121 and 122. For employees with more than 6 years of service, 15 days per year of service, capped at 360 days, is added separately to the ordinary severance.
In our own estimate, when a Japanese-owned automotive parts factory in Rayong province carries out a 50-person reduction, the correct total was 10,556,400 baht against 6,974,400 baht calculated on Section 118 alone. The difference is 3,582,000 baht, roughly 33.9% of the correct amount. No amount of precision re-checking the Section 118 calculation will surface that difference, because the item itself was never in view.
And in the tax layer, you need to distinguish accurately that the exemption for severance pay is the lower of an amount equivalent to the last 400 days of wages and 600,000 baht, and that this measure does not apply to retirement at the mandatory retirement age or the expiry of a fixed-term contract.
What you should expect from “severance pay calculation AI” is not faster calculation. It is making clear which layer, which person, and which judgement is involved, and stopping the process from moving forward with a judgement missing. Layer 1 is fine with conventional logic, Layer 2 must be judged by a human, and Layer 3 needs a specialist’s confirmation. Translating that line into your design is the practical answer.
Investing in automation is a rational choice for many Japanese-owned factories. But given that automation receives special treatment under Thai labour law, putting the one-off workforce reduction cost onto the investment decision sheet leads, in the end, to a healthier decision.
If you are at the stage of weighing a workforce reduction or an automation investment and want help mapping what the full picture of payments looks like, or where the information inside your own organisation breaks down, we are happy to talk it through. It is fine if nothing has been decided and you are still only exploring — feel free to get in touch through our contact page. Drawing on our experience with system implementation and process design on Thai factory floors, we will work through a realistic path forward with you.
References
- Career Link Asia — Thailand Severance Pay Guide 2026, the Section 118 day table and practical points
- Career Link Asia — Thailand Labour Protection Act Guide 2026, an overview of the Labour Protection Act
- JETRO — Thai Business Information on Labour Affairs, labour practice in Thailand
- GVA Law Office — Practical Commentary on Termination and Severance Pay in Thailand, the handling of Sections 121 and 122
- Tilleke and Gibbins — Thailand Adjusts the Income Tax Deduction for Retirement Payments, the 400-day and 600,000 baht exemption
- The Nation Thailand — Reporting on Factory Closures and Job Losses, the 561 factories and 15,342 jobs figures
- newsclip — Thai Economy Reporting on Factory Closures, the state of factory closures in Thailand
- WithThai — Thailand Market 2026 K-Shaped Divergence and Japanese Companies, the market environment and the automotive industry
