Separation Pay

1. Concept

Separation pay – refers to an additional pay given to employees who are separated from their employment due to authorized causes (e.g. installation of labor-saving devices, redundancy, retrenchment, etc.) as these employees are not at fault since their employment was ended due to legitimate business reasons.

a. Legal basis

The following is the legal bases:

Legal BasisProvisions
1) P.D. 442, Labor CodeArts. 298 and 299
2) DOLE RegulationsDOLE D.O. No. 150, Series of 2016 (Private Security; “DO-150”)
DOLE D.O. No. 174, Series of 2017 (Contracting; “DO-174”)

b. Daily- or monthly-paid, irrelevant

Whether employees are daily- or monthly-paid is not relevant.

Both daily-paid and monthly-paid are entitled to separation pay.

Otherwise stated, the rules on separation pay apply to both daily-paid and monthly-paid employees. There should be no distinction between the two.

Related: Daily-paid v. Monthly-paid

c. Employee status, irrelevant

The employee’s status is not relevant.

Simply, so long as they are employees, they are entitled to separation pay. Thus, it does not matter whether they are regular, probationary, casual, project, seasonal, or fixed-term.

2. The benefit

The benefit consists of either ½ month or 1 month pay per year of service, depending on the authorized cause.

a. Computation

See: Computation of Separation Pay

3. Conditions for entitlement

The following are the conditions for entitlement:

1) That there is an authorized cause; and

2) That the authorize cause applies to the employee.

a. Authorized cause

Authorized cause – refers to a ground for separating an employee due to a business/economic reason and illness of an employee.

Related: Authorized Causes

b. Covered employees

The employee should be covered by the authorized cause. Otherwise stated, if the employee is not covered by the authorized cause, then the employee cannot be separated from employment and thus will not be entitled to separation pay.

4. Kinds of separation pay

The following are the different kinds of separation pay:

1) Separation pay under the Labor Code;

2) Separation pay under jurisprudence or Supreme Court Decisions; and

3) Separation pay under DOLE Regulations.

a. Separation pay under the Labor Code

Separation pay under the Labor Code is based on authorized causes under Articles 298 and 299, to wit:

1) Installation of labor-saving devices;

2) Redundancy;

3) Retrenchment;

4) Closing or cessation of business operations; and

5) Disease.

Related: Authorized Causes

b. Separation pay under jurisprudence or Supreme Court Decisions

The Supreme Cour has expanded separation pay to these situations:

1) Impossible reinstatement;

2) Social justice or equitable grounds.

1) Impossible Reinstatement

‘In case the reinstatement is no longer possible, however, an award of separation pay, in lieu of reinstatement, will be justified.’ (Manila Jockey Club, Inc. v. Trajano, G.R. No. 160982, June 26, 2013, Per Bersamin, J.)

1) 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 the reinstatement ordered by a competent authority cannot be implemented due to closure or cessation of operations of the establishment/employer, or 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; and,

Related: Impossible Reinstatement

a) Strained Relations

‘As a general rule, an employee who has been illegally dismissed is entitled to reinstatement. An exception to this rule is the doctrine of strained relations.’ (Guinto v. Sto. Niño Long-Zeny Cosignee, G.R. No. 250987, March 29, 2022, Per Inting, J.)

‘Under the doctrine of strained relations, such payment of separation pay is considered an acceptable alternative to reinstatement when the latter option is no longer desirable or viable.’ (Rodriguez v. Sintron Systems, Inc., G.R. No. 240254, July 24, 2019, Per Caguioa, J.)

Related: Strained Relations Doctrine

2) Social Justice or equitable grounds

As a general rule, an employee who has been dismissed for any of the just causes enumerated under Article 28222 of the Labor Code is not entitled to a separation pay. x x x In exceptional cases, however, the Court has granted separation pay to a legally dismissed employee as an act of “social justice” or on “equitable grounds.” In both instances, it is required that the dismissal (1) was not for serious misconduct; and (2) did not reflect on the moral character of the employee. (Manila Water Company v. Del Rosario, G.R. No. 188747, January 29, 2014, Per Perez, J.)

c. Separation pay under DOLE Regulations.

The Department of Labor and Employment has likewise expanded separation pay to these situations:

1) DO-174: Lack of service assignment of deployed personnel in a DO-174 contracting and subcontracting arrangement for a period of three (3) months;

2)  DO-150: Lack of service assignment of security guard for a continuous period of six (6) months; and,

3) DO-150: Lack of service assignment of security guard by reason of age.

1) DO-174 lack of service assignment

Section 13. Effect of Termination of Employment. x x x
x x x
Where the termination results from the expiration of the Service Agreement, or from the completion of the phase of the job or work for which the employee is engaged, the latter may opt to wait for re-employment within three (3) months to resign and transfer to another contractor-employer. Failure of the contractor to provide new employment for the employee shall entitle the latter to payment of separation benefits as may be provided by law or the Service Agreement, whichever is higher, without prejudice to his/her entitlement to completion bonuses or other emoluments, including retirement benefits whenever applicable. x x x (DO-174)

NB: DO1-74 uses the term “separation benefits” and not separation pay as the above separation benefits is not contemplated under Labor Code no under prevailing jurisprudence or Supreme Court Decisions.

2) Lack of service assignment of security guard for a continuous period of 6 months

7.5. Statutory Benefits. – x x x
x x x
m. Separation Pay if the termination of employment is for authorized cause as provided by law and as enumerated below”
1. One-half (1/2)-month pay per year of service, but guaranteed to one (1) month pay if separation is due to:
x x x
iv. Lack of service assignment for a continuous period of six (6) months. (DO-150)

3) Lack of service assignment of security guard by reason of age

7.5. Statutory Benefits. – x x x
x x x
m. Separation Pay if the termination of employment is for authorized cause as provided by law and as enumerated below”
x x x
2. One (1) month pay per year of service if separation is due to:
iv. Lack of service assignment by reason of age. (DO-150)

5. Exempt from income tax

The separation pay is exempted from taxation resulting from his/her separation from the service of the employer due to death, sickness or other physical disability or for other cause beyond the control of said employee such as retrenchment, redundancy or cessation of business operations. (See: BIR Ruling No. 057-2014)

‘Pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as amended, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the same Code.’ (DOLE-BWC, p. 47)

6. Certain types of employees

a. Dismissed employees

Employees who are terminated from their employment due to just causes (e.g. serious misconduct, willful disobedience, gross and habitual neglect of duty, etc.), are not entitled to separation pay, as these employees are at fault. However, there are exceptions as discussed below.

In sum, separation pay is only awarded to a dismissed employee in the following instances:

1) In case of closure of establishment under Article 298 [formerly Article 283] of the Labor Code;

2) In case of termination due to disease or sickness under Article 299 [formerly Article 284] of the Labor Code;

3) As a measure of social justice in those instances where the employee is validly dismissed for causes other than serious misconduct or those reflecting on his moral character;

4) Where the dismissed employee’s position is no longer available;

5) When the continued relationship between the employer and the employee is no longer viable due to the strained relations between them; or

6) When the dismissed employee opted not to be reinstated, or the payment of separation benefits would be for the best interest of the parties involved. (Claudia’s Kitchen, Inc. v. Tanguin, G.R. No. 221096, June 28, 2017, Per Mendoza, J.)

In all of these cases, the grant of separation pay presupposes that the employee to whom it was given was dismissed from employment, whether legally or illegally. In fine, as a general rule, separation pay in lieu of reinstatement could not be awarded to an employee whose employment was not terminated by his employer. (Claudia’s Kitchen, Inc. v. Tanguin [2017], supra.)

b. Resigned employees

Employees who resigned are not entitled to separation pay as they themselves decided to leave their employment.

7. Favorable employee stipulations

The above discussion may be superseded by any stipulation favorable to the employee via an employment contract, company policies, collective bargaining agreement, or analogous thereto.

8. When in doubt, interpretation favors labor

Art. 1702. In case of doubt, all labor legislation and all labor contracts shall be construed in favor of the safety and decent living for the laborer. (R.A. 386, Civil Code)
ART. 4. Construction in Favor of Labor. – All doubts in the implementation and interpretation of the provisions of this Code, including its implementing rules and regulations, shall be resolved in favor of labor. (P.D. 442, Labor Code)

Article 4 of the Labor Code provides that all doubts in the implementation and interpretation of its provisions, including its implementing rules and regulations, shall be resolved in favor of labor. For the working man’s welfare should be the primordial and paramount consideration. (Asian Transmission Corporation v. CA, G.R. No. 144664, March 15, 2004, Per Carpio-Morales, J.)

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