Separation Pay computation in the Philippines

PUBLISHED ON: November 26, 2020
LAST UPDATED ON: May 1, 2021

Separation Pay is a monetary payment given to employees who were involuntary separated from employment due to authorized causes in which the Computation of Separation Pay is based on the type of Authorized Cause. It is a mandatory severance pay as stated in the provisions of Presidential Decree No. 442, also known as the Labor Code of the Philippines.

The Separation Pay is to be given to employees whose employment has been terminated via authorized Cause.

What is Separation Pay?

Separation Pay is stated in Articles 298 and 299 of the renumbered Labor Code of the Philippines, former Articles 283 and 284 respectively. The following are the provisions:

Art. 298. [283] Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of laborsaving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.

Art. 299. [284] Disease as ground for termination. An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to one-half (1/2) month salary for every year of service, whichever is greater, a fraction of at least six (6) months being considered as one (1) whole year.

Presidential Decree No. 442 also known as the Labor Code of the Philippines

Articles 298 and Articles 299 are the provisions that allows employers to terminate the employment of its employees which are: Installation of labor-saving devices, Redundancy, Retrenchment, Closure or cessation of business operation not due to serious business losses; and Disease.

The term "Separation Pay" is also synonymous with "Retrenchment Pay" and "Redundancy Pay".

Who is entitled to Separation Pay?

An employee is entitled to Separation Pay when the employment is terminated due to an Authorized cause. The payment of Separation Pay is in addition to other pending or due payments to him such as pro-rated 13th Month Pay, unpaid salary, remaining Service Incentive Leaves (SIL) among others.

How is Separation Pay Computed?

Separation Pay is computed based on three (3) aspects: type of authorized cause of termination; years of service; and the salary rate of the employee.

Installation of labor-saving devices or Redundancy

Separation pay equivalent to at least one (1) month pay or at least one (1) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year.

Retrenchment

Separation pay equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year.

Closure or Cessation of business operation not due to serious business losses

Separation pay equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year. Where closure is due to serious business losses or financial reverses, no Separation Pay is required.

Disease

Separation pay equivalent to at least one (1) month salary or one-half (1) month salary for every year of service, whichever is higher, a fraction of six (6) months service is considered as one (1) whole year.

When should Separation Pay be released?

The Department of Labor and Employment (DOLE) has issued Labor Advisory No.6, series of 2020 regarding Final Pay states it should be released within 30 days from the separation of the employee. The Labor Advisory explicitly includes Separation Pay a part of Final Pay.

Miscellaneous

Am I entitled to Separation Pay if my employment has been terminated due to Just Causes?

An employee whose employment is terminated by reason of just causes is not entitled to separation pay except when as expressly provided in the company policy or Collective Bargaining Agreement (CBA).

Am I entitled to Separation Pay if I resigned prior to the retrenchment notice while I am on a floating status?

No, you are not entitled to Separation Pay even if you are on floating status as you have already severed your employment. Your mode of termination is "Resignation" or termination of employment initiated by the employee.

Is Separation Pay different from Retirement Pay?

Yes, Separation Pay is different from Retirement Pay.

Can Separation Pay be paid on an installment-basis?

Separation Pay is only a part of Final Pay and the provisions states that it must be paid within 30 days from separation of employment.

It may be possible to pay an employee on an installment-basis as there is an intention to pay the person. The Court may interpret that an installment-basis is justifiable given that employers may not have sufficient funds at first. Authorized causes is an employer prerogative and often done to prevent further financial losses or to right-size the company. The insistence of a one-time payment will place further financial burden on the employer and may cause more harm than good.

Should an employer pay an employee their Separation Pay on an installment-basis, it should be clearly state in the termination letter, or other memorandum given to the employee, the amount and number of payments to be made.

Employers should be careful of doing this as employees may easily contest the installment-basis to the Department of Labor and Employment (DOLE) and the employer is likely to be penalized.

It is recommend to pay the Separation Pay for only a single time within the mentioned time-frame.


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