Computation of Separation Pay

When covered employees are separated from employment due to an authorized cause, they are entitled to separation pay which is computed based on the authorized cause.

1. Computation

These are the steps on how to compute for separation pay.

a. One month pay or one-half month (1/2) pay for every year of service, whichever is higher

The following is the assumption:

1)The employee’s monthly rate is Php30,000.00.

2) The following authorized causes are applicable.

Separation PayAuthorized Cause
Whichever is higher of: (a) one month pay; or (b) one-half (1/2) month pay for every year of service1) Retrenchment (i.e. due to serious financial losses or in anticipation of serious financial losses);
2) Closure or cessation of operation of an establishment not due to serious losses or financial reverses;
3) When the employee is suffering from a disease not curable within a period of six (6) months and his/her continued employment is prejudicial to his/her health or to the health of his/her co-employees;
4)  Lack of service assignment of security guard for a continuous period of six (6) months; and
5) Lack of service assignment of deployed personnel in a DO-174 contracting and subcontracting arrangement for a period of three (3) months.

1) One year of service

If the employee has one 1 year of service, computation is as follows:

STEP 1: Compute one month pay.
Php30,000.00 = one month pay
STEP 2: Compute one-half (1/2) month pay per year of service.
Formula:
one-half (1/2) month pay x year of service = separation pay
Sample computation:
Php15,000.00 x 1 = Php15,000.00
Php15,000.00 = one-half (1/2) month pay per year of service
STEP 3: Choose whichever is higher.
Php30,000.00 > Php15,000.00
Php30,000.00 is the separation pay since it is higher than Php15,000.00.

2) 2 years and 6 months of service

If the employee has one 2 years and 6 months of service, computation is as follows:

NB: A fraction of 6 months service is considered as one year of service for purposes of computing separation pay. Thus, the employee will be deemed to have 3 years of service.

STEP 1: Compute one month pay.
Php30,000.00 = one month pay
STEP 2: Compute one-half (1/2) month pay per year of service.
Formula:
one-half (1/2) month pay x year of service = separation pay
Sample computation:
Php15,000.00 x 3 = Php45,000.00
Php45,000.00 = one-half (1/2) month pay per year of service
STEP 3: Choose whichever is higher.
Php30,000.00 < Php45,000.00
Php45,000.00 is the separation pay since it is higher than Php30,000.00.

NB: As seen above, it is when the employee has rendered at least 2 years and 6 months (“2.5 years”) that one-half month pay per year of service becomes higher than one month pay. The key is thus the 2.5 years of service.

3) The employee has five 5 years of service.

If the employee has 5 years of service, computation is as follows:

STEP 1: Compute one month pay.
Php30,000.00 = one month pay
STEP 2: Compute one-half (1/2) month pay per year of service.
Formula:
one-half (1/2) month pay x year of service = separation pay
Sample computation:
Php15,000.00 x 5 = Php75,000.00
STEP 3: Choose whichever is higher.
Php30,000.00 < Php75,000.00
Php75,000.00 is the separation pay since it is higher than Php30,000.00.

b. One-month pay per year of service

The following are the assumptions:

1) The employee’s monthly rate is Php30,000.00; and

2) The following authorized causes are applicable.

Separation PayAuthorized Cause
One month pay for every year of service1) Installation by employer of labor-saving devices;
2) Redundancy, as when the position of the employee has been found to be excessive or unnecessary in the operation of the enterprise;
3) Impossible reinstatement of the employee to his or her former position or to a substantially equivalent position for reasons not attributable to the fault of the employer, as when: (a) the reinstatement ordered by a competent authority cannot be implemented due to closure or cessation of operations of the establishment/employer, or (b) the position to which he or she is to be reinstated no longer exists and there is no substantially equivalent position in the establishment to which he or she can be assigned, or (c) strained relations between the employer and employee;
4) Lack of service assignment of security guard by reason of age; and
5) Social justice or equitable grounds.
STEP 1: Compute one month pay per year of service.
Formula:
monthly pay x year of service = separation pay
Sample computation:
Php30,000.00 x 5 = Php150,000.00

Related: Authorized Causes, Authorized Cause Procedure

2. Things to note

a. 1-month pay as the minimum

Regardless of the authorized cause, the absolute bare minimum for separation pay is one month’s pay. Otherwise stated, separation pay must never be below 1-month pay.

b. Fraction of 6 months as 1 year

Regardless of the computation below, a fraction of at least six (6) months is considered as one (1) whole year.

c. Latest salary rate

The basis for the separation pay will be the latest salary rate of the concerned employee, including mandatory and/or integrated allowances. (DOLE-BWC Handbook, p. 46)

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