Separation Pay Computation Guide in the Philippines

Last Updated – Oct 9, 2023 @ 4:10 am

Breakups are hard – especially when it’s with your job. But aside from the emotional and mental toll it takes, there’s also the financial aspect of separation pay that can be difficult to navigate.

In the Philippines, separation pay is mandated by law and varies depending on the reason for separation and the length of service.

Understanding how separation pay is computed will help you plan your finances and ease your transition into your next career move.

Related: 13th Month Pay Computation

What is Separation Pay?

Separation pay, also known as severance pay, is a financial compensation an employee is entitled to receive upon termination of their employment.

It serves as a form of financial assistance to help the employee cope with the financial loss and provide them with a cushion while they look for another job.

Legal Basis for Separation Pay in the Philippines

The legal basis for separation pay in the Philippines is primarily found in the Labor Code of the Philippines, particularly in its provisions related to termination and separation benefits, such as Articles 283 and 284.

These articles outline the circumstances and calculations for separation pay when employment relationships are terminated.

It’s also essential to note that the legal landscape for separation pay was also significantly shaped by Republic Act No. 6715, also known as the Herrera-Veloso Law.

Enacted in 1989, this law made substantial amendments to the Labor Code to enhance labor standards and protect the rights of employees and employers. It refined the rules governing termination and separation pay and is considered an important update to the Labor Code.

Together, the Republic Act No. 6715 and the Labor Code of the Philippines create a comprehensive framework for separation pay by defining the circumstances under which employees are entitled to separation pay, how it is computed, and the minimum guarantees provided.

Who is Eligible for Separation Pay

To understand who is eligible for separation pay, it’s important to first understand the different circumstances under which employment relationships may be terminated. This includes:

Redundancy 

This is when a job becomes unnecessary because of restructuring or changes in the company’s needs. To justify this, the company must prove that there is good faith in eliminating the redundant position and the dismissal is fair.

Retrenchment to Prevent Losses

A company might need to let go of employees to avoid financial losses.

Closure or Cessation of Business Operations

This is when the company shuts down or stops its operations entirely. Companies are required to submit proof of financial losses to justify the employee’s termination.

Installation of Labor-Saving Devices

Companies may introduce technology or automation that replaces certain jobs.

Employee Health Issues

This happens when an employee suffers from a health condition that either prevents them from working by law or poses a risk to their health or the health of their coworkers.

Companies should only terminate employees due to health issues if there is a certificate by a public health attorney that states that the disease cannot be cured within six months even with medical treatment.

Who is not Entitled to Separation Pay?

Contrary to what many people think, not all employees are entitled to separation pay.

If you’ve resigned, you typically won’t receive separation pay, unless your employment contract or company policy includes this benefit.

However, you’ll still be entitled to receive your back pay after resigning.

If you’re terminated from your job due to any of the “just causes” specified in the Labor Code, you also won’t be eligible for separation pay. These “just causes” include:

• Serious misconduct
• Willful disobedience
• Gross and habitual neglect of duties
• Fraud or willful breach of trust
• Commission of a crime and other analogous causes

Employers are not required to give you a notice period if you’ve been terminated due to these causes.

Difference between Separation Pay and Final Pay

Separation Pay and Final Pay are two different things that employees often confuse.

Think of final pay as the last paycheck you receive when you leave a job. It’s the money your employer owes you for the work you did until your last day at work. This includes:

• Your regular salary or wages for the days you worked up until your departure
• Any unused vacation leave or paid time off that you didn’t use
• Other benefits or allowances you’re entitled to (depends on your employment contract or company policies)
• Prorated 13th-month pay
• Excess tax withheld

Meanwhile, separation pay is the financial cushion you get when your job ends. It is not based on the work you’ve done. Think of it like a “thank you” or “sorry to see you go” gift from your employer.

How to Compute Separation Pay

Here’s how to compute separation pay in the Philippines:

The formula is (Monthly Salary x Years of Service) + Prorated 13th-month pay

Step 1: Determine your monthly salary

Step 2: Calculate your years of service

Step 3: Multiple monthly salary by years of service

Step 4: Add Add prorated 13th-month pay (if applicable)

Separation pay due to redundancy

One-month salary x Number of years served

Example:

Maria has been working as a graphic designer for a small advertising agency. Her basic monthly salary is PHP 30,000 and she has been with the company for eight years.

Unfortunately, due to changes in the company’s structure and the merging of certain departments, Maria was laid off due to redundancy.

Maria’s separation pay computation:

• Basic Monthly Salary: PHP 30,000
• Years of Service: 8 years

Using the formula for separation pay due to redundancy:

Separation Pay = PHP 30,000 × 8 = PHP 240,000

Since Maria was terminated due to redundancy, she is entitled to receive a separation pay of PHP 240,000 from her employer as a financial cushion to assist her during her transition period.

Separation pay due to retrenchment

(One-month salary) ÷ 2 x (Number of years served)

King works for a manufacturing company in the Philippines, earning a basic monthly salary of PHP 40,000. He has dedicated seven years to the company.

Unfortunately, the company is facing financial difficulties, and they had to retrench some employees, including King.

King’s separation pay computation for retrenchment:

• Basic Monthly Salary: PHP 40,000
• Years of Service: 7 years

Using the formula for separation pay due to retrenchment:

Separation Pay = (PHP 40,000 ÷ 2) × 7 = PHP 140,000

King will receive a separation pay of PHP 140,000.

Separation pay due installment of labor-saving devices

One-month salary x Number of years served

Hannah works in a textile factory and earns a basic monthly salary of PHP 20,000. She has been a dedicated employee for nine months.

The company recently introduced advanced machinery that reduced the need for manual labor, leading to Hannah’s termination.

Hannah’s separation pay computation due to the installation of labor-saving devices:

• Basic Monthly Salary: PHP 20,000
• Years of Service: 1 year (equal to one year since it is more than six months)

Using the formula for separation pay due to the installation of labor-saving devices:

Separation Pay = PHP 20,000 × 1 = PHP 20,000

Hannah will receive a separation pay of PHP 20,000.

Separation pay due to business closure

(One-month salary) ÷ 2 x (Number of years served)

Dash has been employed as a manager in a retail store for 10 years, with a monthly salary of PHP 50,000. Unfortunately, the store has decided to close its operations due to financial challenges.

Dash’s separation pay computation for business closure:

• Basic Monthly Salary: PHP 50,000
• Years of Service: 10 years

Using the formula for separation pay due to business closure:

Separation Pay = (PHP 50,000 ÷ 2) × 10 = PHP 250,000

Dash will receive a separation pay of PHP 250,000 to assist her during this transition period.

Separation pay due to health risk

(One-month salary) ÷ 2 x (Number of years served)

Ailyn has been a dedicated nurse at a private hospital in the Philippines for nine years. Her basic monthly salary is PHP 35,000. Unfortunately, she was diagnosed with a severe illness, and her continued employment in the hospital could be prejudicial to her health, as well as the health of her patients and co-workers.

Ailyn’s separation pay computation due to health risk:

• Basic Monthly Salary: PHP 35,000
• Years of Service: 9 years

Using the formula for separation pay due to health risk:

Service Separation Pay = (PHP 35,000 ÷ 2) × 9 = PHP 157,500

Ailyn will get a separation pay of PHP 157,500. This financial assistance will help her as she focuses on her health and recovery.

Special Considerations in Separation Pay Computation

Take a look at some special considerations that may affect the computation of separation pay:

Treatment of fractions of a year in service

The separation pay is calculated as either one month’s pay or at least half a month’s pay for each year you’ve worked, whichever is more.

If you’ve worked for a fraction of six months or more, it’s counted as a full year.

Inclusion or exclusion of bonuses, allowances, and other benefits

Separation pay should include allowances and benefits that are regularly received by the employee.

However, bonuses and other benefits that are not part of the employee’s regular compensation (such as performance bonus) may be excluded from the computation of separation pay unless otherwise stated in the employee’s contract or company policies.

Situations when an employee is not entitled to separation pay

While separation pay is a right of employees who have been terminated due to certain circumstances, there are some situations where an employee may not be entitled to receive it. These include:

• Resignation
• Termination due to just cause
• Completion of contract
• Temporary or casual employment

Separation Pay FAQs

Still got questions about separation pay? We’ll answer them below.

Can you get separation pay if you resign? 

If an employee voluntarily resigns, they are not entitled to receive separation pay.

However, there may be instances when this happens but it fully depends on the company’s policies, and the employee’s contract or unless it is stated in the Collective Bargaining Agreement.

How Long Does It Take Before You Get Separation Pay?

The exact timeline for receiving separation pay may vary depending on company policies.

However, it should be given to the employee within 30 days from the date of termination.

Separation pay is a legal right, and failure to receive it within the given timeline can lead to legal action.

How do I claim separation pay in the Philippines?

Simply contact the HR department by writing a written request providing your eligibility for separation pay and the reason for your termination.

Provide any necessary documents such as proof of employment and termination.

Is Separation Pay exempted from taxation? 

If you receive separation pay due to situations like the employee’s death, physical disability, illness, or reasons beyond their control, it is tax-exempt.

However, this only applies if the separation pay is equal to or less than the total value of 10 unused vacation leaves. If the separation pay goes beyond this value, it might be subject to tax.

How to address disputes related to separation pay?

Before knowing how to address disputes related to separation pay, here are some common issues faced by employees and employers:

Disagreement on eligibility

Employees may dispute their eligibility for separation pay, and employers may contest whether an employee qualifies for it based on the reason for separation.

Calculation disputes

Disagreements may also arise over the computation of separation pay, particularly if there are complex benefit structures.

Calculation disputes may also happen due to varying interpretations of the tax exemption rules for separation pay.

Timely Payment

Delays in the payment of separation pay are a very common source of conflict. Many employers cite administrative issues that cause delays.

In cases of disputes related to separation pay, employees and employers can seek assistance from DOLE for mediation and conciliation.

A labor officer may mediate the discussions between the parties involved until they reach a fair resolution. If this isn’t successful, DOLE can facilitate conciliation proceedings to help the parties agree on a settlement.

Furthermore, DOLE has the authority to issue compliance orders directing employers to pay separation pay when it is found fair.

If issues persist, the parties can elevate the matter to the NLRC for a more formal resolution.

This commission is in charge of appeals which is done by conducting hearings and reviewing evidence to make a final decision. the decisions made by NLRC are enforceable like court orders.

This ensures that employers comply with separation pay obligations.