In a span of a year since the COVID-19 pandemic started, about 4.2 million Filipinos1 lost their jobs. If the experience has taught us one thing, it’s that we cannot counter the economic threat brought by events beyond our control.
However, we can prepare for that uncertain day by knowing employee rights and the statutory benefits we’re entitled to, such as separation pay. Read on to know who is entitled to this benefit, what are the conditions applicable, and how to compute it.
Table of Contents
- At a Glance: Compute Separation Pay Using Our Excel Calculator [FREE Download]
- What Is Separation Pay?
- Who Qualifies for Separation Pay?
- Who Doesn’t Qualify for Separation Pay?
- How To Compute Separation Pay in the Philippines: 2 Ways
Tips and Warnings
- 1. Do your due diligence in determining the cause of your dismissal
- 2. Do not allow the management or human resource department to deceive you into accepting less than what is due to you
- 3. Do not immediately report your employer to DOLE
- 4. At the same time, report if there is a clear violation of the Labor Code
- 5. The rules on separation pay may change based on the employment contract, company policy, or collective bargaining agreement
- 6. Your employer cannot demand your resignation
- 7. File a labor case if you were constructively or illegally dismissed, regardless if you have already received your separation pay
Frequently Asked Questions
- 1. Who is entitled to separation pay?
- 2. Is separation pay mandatory?
- 3. Is it required for the business to incur losses before management decides to close down?
- 4. Can a terminated employee get separation pay?
- 5. Is 13th-month pay included in separation pay?
- 6. Can I get separation pay if I resign?
- 7. Is back pay the same as separation pay?
- 8. When will I receive separation pay?
- 9. Is a probationary employee eligible for separation pay?
- 10. My previous employer sold the company. However, the new owners did not want to continue our employment contract because according to them, there was no such agreement. Instead, they urged us to apply as new probationary employees. Is this legal?
- 11. My job contract says that separation pay will not be granted. Is this legal?
- 12. I am being transferred to a different department but I don’t want to. If I refuse the offer, will it be a cause for termination and am I eligible for separation pay?
- 13. Will I receive separation pay if my contract ended as a Contractual Employee?
- 14. Will I receive separation pay if my contract ended as a Project-Based Employee?
- 15. Will I receive separation pay if my contract ended as a Freelancer?
- 16. Will I receive separation pay if I am in “Floating Status?”
- 17. Will I receive separation pay if my dismissal was due to the business being forced to close down by the government?
- 18. Is a retrenched employee’s separation pay subject to a tax?
At a Glance: Compute Separation Pay Using Our Excel Calculator [FREE Download]
Looking for a quick way to calculate your separation pay? Here’s our free Separation Pay Calculator we created through an Excel spreadsheet to help you estimate how much you will receive after your dismissal. Simply click the link to download the file.
Please note that this tool does not account for employees who had less than six months of service in their company. If the period of your employment is less than six months, your separation pay is equivalent to at least one month of your monthly salary.
What Is Separation Pay?
Separation pay is the additional compensation given to employees at the time of their dismissal from the company. The purpose of the separation pay is to assist the employees financially during their adjustment period from termination until they find new employment.
However, there are underlying conditions that have to be met in order for an employee to receive such payments. These conditions are called authorized causes, which means the termination of employment must be for valid business reasons under the labor laws and not due to violations by the employee.
Who Qualifies for Separation Pay?
1. According to the Labor Code
The Labor Code lists the following authorized causes2 to justify an employee’s termination:
- Installation of labor-saving devices: There is the introduction of a new machine, equipment, or automation devices for economic reasons such as efficiency and cutting business costs, and termination of employees is the only option available.
- Redundancy: There are extra positions or services that are unnecessary to operate the business.
- Retrenchment: There is a perceived or actual loss and termination of employment is necessary to prevent future or further losses.
- Closing or cessation of business operations: There is a decision by the management to close or cease operations.
- Disease: The employee is suffering from an incurable disease and continued employment is detrimental to his/her health and to the health of other employees.
2. According to the Supreme Court
The Supreme Court Decisions provide for the following authorized causes:
- Reinstatement is no longer possible: It is already impossible for a dismissed employee to retain his/her previous position because of the cessation of business, or the position no longer exists and there is no other role to which he/she can be assigned.
- Strained relations: This is when separation pay is more favorable for the employee than being reinstated or restored to his/her previous position because the working environment is no longer desirable.
3. According to DOLE Regulations
The following are additional authorized causes provided by the DOLE Regulations3:
- Lack of service assignment of security guard for a continuous period of six months;
- Lack of service assignment of a security guard by reason of age; and
- Lack of reassignment of deployed personnel after three months.
Who Doesn’t Qualify for Separation Pay?
Just causes4, as opposed to authorized causes, are justified reasons for termination of employment due to an employee’s behavior or actions. If termination is due to these causes, separation pay is not necessary, unless it is agreed in the employment contract, company policy, or collective bargaining agreement, that separation pay will be given.
The Labor Code provides the following just causes to terminate an employee:
- Serious misconduct
- Willful disobedience of a lawful order
- Gross and habitual neglect of duty
- Willful breach of trust
- Commission of a crime against the employer, his family, or authorized representatives
- Similar causes as the above
Voluntarily resigned employees are also not entitled to separation pay unless it’s clearly stated in their contract or company policy that they can receive such payments after leaving the company.
In addition, employers whose businesses ceased operations due to serious financial losses are not obligated to pay their employees’ separation pay, provided they can comply with the strict requirements proving they have closed their businesses due to this reason.
How To Compute Separation Pay in the Philippines: 2 Ways
There are two ways to compute separation pay. Note that a fraction of six months is considered one year:
1. If Dismissal is Due to Installation of Labor-Saving Devices and Redundancy
One-month salary, or one-month pay for every year of service, whichever is higher.
Formula: (One Month Pay) x (Years of Service) = Separation Pay
If for instance your monthly salary is PHP 20,000 and the years of service are 5, your separation pay will be PHP 100,000.
20,000 x 5 = 100,000
Let’s say you’ve been with your employer for 4 years and 6 months. This will be considered 5 years since a fraction of six months is regarded as one year.
2. If Dismissal is Due to Retrenchment, Closing of Business, or Disease
One-month salary, or half-month salary for every year of service, whichever is higher.
Formula: (One Month Pay / 2) x (Years of Service) = Separation Pay
With a monthly salary of PHP 20,000 and 5 years of tenure, the separation pay will be PHP 50,000.
(20,000 / 2) x 5 = 10,000 x 5 = 50,000
Tips and Warnings
1. Do your due diligence in determining the cause of your dismissal
Review the Labor Code of the Philippines and examine if the cause of your dismissal falls under the authorized causes to be eligible for separation pay. Also, examine if your employer followed the legal requirements for terminating you.
2. Do not allow the management or human resource department to deceive you into accepting less than what is due to you
If you have not received your final payment in full, you should not sign any affidavit of quitclaim, release, or waiver that may free your employer of their legal responsibilities. However, if you are really in dire need of money, you may sign the document and write the words “UNDER PROTEST” to express your unwillingness to sign.
3. Do not immediately report your employer to DOLE
It is important to settle things properly with your employer first before taking any action that would strain your relationship with them. Know your rights as an employee and file disputes as necessary.
4. At the same time, report if there is a clear violation of the Labor Code
Provided that your accusations are valid and no action was taken after you have raised your concern to the management, it’s time for you to escalate your case to the labor arbiter5.
5. The rules on separation pay may change based on the employment contract, company policy, or collective bargaining agreement
For termination due to reasons outside of the authorized causes, separation pay may not be necessary, unless the employment contract or collective bargaining agreement says otherwise, or it has been a common practice of the company to grant separation pay in similar cases.
6. Your employer cannot demand your resignation
As an employee, you have the right to voluntary resignation. However, it becomes illegal if you resigned involuntarily or were pressured to do so as this becomes constructive dismissal6 or termination disguised as resignation.
7. File a labor case if you were constructively or illegally dismissed, regardless if you have already received your separation pay
If you were forced to resign in order for your employer to avoid paying separation pay, or if you were dismissed without due cause, you have the right to file a case against your employer. Your acceptance of separation pay will not invalidate your case because you just lost your source of income and you have no choice but to accept the money offered to you.
Frequently Asked Questions
1. Who is entitled to separation pay?
Only employees who were terminated due to authorized causes are entitled to separation pay.
2. Is separation pay mandatory?
Yes. The Labor Code requires employers to grant separation pay, except for cessation of business due to severe financial losses.
3. Is it required for the business to incur losses before management decides to close down?
No, it is management’s prerogative7 if they want to cease operations. Even if the business is not incurring losses, it can close business as long as it is done in good faith and in compliance with the Labor Code.
4. Can a terminated employee get separation pay?
If an employee was dismissed due to authorized causes in compliance with the Labor Code, he/she is entitled to separation pay. However if the termination was due to violations committed by the employee, then he/she has no right to separation pay.
5. Is 13th-month pay included in separation pay?
The 13th-month pay is not included in the separation pay. Instead, it is part of the final pay or the totality of monetary benefits given to a terminated employee. This final pay also includes the separation pay.
6. Can I get separation pay if I resign?
No. An employee who voluntarily resigned from employment is not entitled to separation pay because the benefit is only given to dismissed employees.
7. Is back pay the same as separation pay?
Separation pay is different from back pay, which is the total amount of benefits that a terminated or resigned employee will get. Back pay is also known as final or last pay.
8. When will I receive separation pay?
Separation pay must be released within thirty days from the dismissal of the employee.
9. Is a probationary employee eligible for separation pay?
Yes, a probationary employee is eligible for separation pay regardless of tenure as long as the reason for termination is one of the authorized causes.
10. My previous employer sold the company. However, the new owners did not want to continue our employment contract because according to them, there was no such agreement. Instead, they urged us to apply as new probationary employees. Is this legal?
Yes, it is legal on the part of the new owner. They had no obligation to continue your contract because they did not agree to absorb you. However, your previous employer must release your separation pay because you were dismissed due to the closure of the business after the company was sold.
11. My job contract says that separation pay will not be granted. Is this legal?
As long as the separation is due to authorized causes, employers are required by the Labor Code to grant separation pay to terminated employees. The only exception is when the closing of business is due to serious financial losses, in which case they must provide proof of the severe losses. Employers violating labor laws may be subject to fines and penalties or even imprisoned for up to three years8.
12. I am being transferred to a different department but I don’t want to. If I refuse the offer, will it be a cause for termination and am I eligible for separation pay?
It is management’s prerogative to transfer an employee within the company9, provided that the transfer is reasonable and not prejudicial to the employee. If you refuse the offer, you may be terminated but not for any authorized causes under the Labor Code. Your refusal will fall under willful disobedience or insubordination, in which case you will not receive separation pay. The same is true if you voluntarily resign.
13. Will I receive separation pay if my contract ended as a Contractual Employee?
If termination is due to the expiration of your contract, you will not receive separation pay. However, if you were dismissed prior to the end of the contract and for authorized reasons provided by law, you are entitled to separation pay10.
14. Will I receive separation pay if my contract ended as a Project-Based Employee?
If your contract has ended as a result of the completion of the project you’re engaged in, you will not receive separation pay. However, for people working in a construction company, if the total period of time they have worked on a project is at least one year and the contract did not specify a date for the project’s completion11, they are considered regular employees and are therefore entitled to separation pay.
15. Will I receive separation pay if my contract ended as a Freelancer?
As a freelancer, you have no employee-employer relationship with your client, therefore you will not receive separation pay.
16. Will I receive separation pay if I am in “Floating Status?”
If you are in floating status due to the temporary closure of the business, you are still considered an employee so you will not be entitled to separation pay. However, if your floating status lasts for more than six months because your company closed down to prevent losses, your employer must follow the laws on retrenchment and you must then receive separation pay.
17. Will I receive separation pay if my dismissal was due to the business being forced to close down by the government?
Since your employer did not inherently close the business and was forced to close down due to government policy, your employer is not required to release separation pay.
18. Is a retrenched employee’s separation pay subject to a tax?
However, the retrenched employee must prove first that he is eligible for this exemption. To do so, he/she must present a Certificate of Tax Exemption (CTE) from Income and Withholding Tax. In addition to this, the employee must submit the following documents13 to the Revenue District Office where he is registered:
- A written notice to the DOLE Regional Office and to the employee released at least 30 days prior to termination. It must also indicate the ground/s for termination.
- A letter request from the employee or the employer for the tax exemption of the separation pay.
- In case of a juridical entity (e.g. corporation): a board resolution that states the following: (i) the retrenchment is made in good faith and not to deprive the employee of his security of tenure; (ii) the retrenchment is necessary to prevent further losses; (iii) expected/incurred loss is serious and real, together with evidence that supports this; (iv) the employees’ termination is based on fair and justifiable criteria.
- If the business is a sole proprietorship, an affidavit or a sworn statement from the owner is required instead of a board resolution.
- de Vera, B. (2021). Pandemic casualties: 4.2M lose jobs, 7.9M suffer pay cuts. Retrieved 20 September 2021, from https://business.inquirer.net/320462/pandemic-casualties-4-2m-lose-jobs-7-9m-suffer-pay-cuts
- Official Gazette of the Republic of the Philippines. Presidential Decree No. 442 (Labor Code) (1974).
- Department of Labor and Employment (DOLE). (2016). Department Order No. 150-16, Series of 2016 (Revised Guidelines Governing the Employment and Working Conditions of Security Guards and Other Private Security Personnel in the Private Security Industry). Intramuros, Manila.
- Del Puerto, J. Just Causes. Retrieved 20 September 2021, from https://www.laborlaw.ph/legal/just-causes-due-process-in-labor-law
- Frequently Asked Questions (FAQs). Retrieved 20 September 2021, from https://nlrc.dole.gov.ph/FAQS
- Termination of Employment. Retrieved 20 September 2021, from https://blr.dole.gov.ph/2014/12/11/termination-of-employment/
- Del Puerto, J. Management Prerogative. Retrieved 20 September 2021, from https://www.laborlaw.ph/legal/management-prerogative-employers-bundle-of-rights
- Palabrica, R. (2020). Issues on separation pay. Retrieved 20 September 2021, from https://business.inquirer.net/299993/issues-on-separation-pay
- Labor Laws of the Philippines (Part 3). (2006). [PDF] (p. 2). Retrieved from https://www.chanrobles.com/PART3.pdf
- Department of Labor and Employment (DOLE). (2002). Department Order No. 18-02, Series of 2002 (Rules Implementing Articles 106 to 109 of the Labor Code, As Amended). Manila.
- Department of Labor and Employment (DOLE). (1993). Department Order No. 19, Series of 1993 (Guidelines Governing the Employment of Workers in the Construction Industry).
- Sarmiento, R. (2021). Taxation of separation pay. Retrieved 12 February 2022, from https://www.bworldonline.com/taxation-of-separation-pay/
- Separation Pay of a Retrenched or Laid Off Employee Due to COVID-19, Not Subject to Tax. Retrieved 12 February 2022, from https://www.alburolaw.com/separation-pay-of-a-retrenched-or-laid-off-employee-due-to-covid-19-not-subject-to-tax