Separation Pay

Summary

▪ Employees may be separated from their employment due to authorized causes.

▪ Separated employees are not at fault, instead due to legitimate business reasons, their employment had to be severed.

▪ Separation pay varies depending on the authorized cause.

▪ Separation pay is exempt from income tax.

1. Concept

Separation pay is 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.

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.

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

2. The benefit

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

3. The Computation

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

a. Higher of one month pay or one-half (1/2) month pay for every year of service

Whichever is higher of one month pay or one-half (1/2) month pay for every year of service should be paid to an employee who is separated from the service due to any of the following authorized causes:

1) 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; and

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.

b. One month pay for every year of service

One month pay for every year of service should be paid to an employee who is separated from the service due to any of the following authorized causes:

1) 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 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,

4) Lack of service assignment of security guard by reason of age.

4. 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.

5. Conditions for entitlement

The following are the conditions for entitlement:

1) The employee is separated from employment for any of the authorized causes and has complied with any requirements related thereto; and,

2) Where necessary, the employer has complied with the requirements for the authorized cause separation, such as notices to the Department of Labor and Employment (DOLE), affected employees.

6. Notice of separation

The DOLE’s Regional Office which has jurisdiction over the establishment should be notified for any separation of employment resulting from these authorized causes.

7. 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.

8. Employment contract, company policies, CBA

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.

References

Presidential Decree No. 442, a.k.a. Labor Code of the Philippines

Book IIII, Omnibus Rules Implementing the Labor Code

2020 DOLE-BWC Handbook on Workers’ Statutory Monetary Benefits

DOLE Department Order No. 150, series of 2016, Revised Guidelines Governing the Employment and Working Conditions of Security Guards and Other Private Security Personnel in the Private Security Industry

DOLE Department Order No. 174, series of 2017, Rules Implementing Articles 106 to 109 of the Labor Code, As Amended

BIR Ruling No. 057-2014; Sec. 32 (B) (6) (b) of the National Internal Revenue Code, as amended.

Planters’ Products, Inc. vs. NLRC, G.R. No. 78524, January 20, 1989.

Gaco vs. NLRC, G.R. No. 104690, February 23, 1994.

▪ Jurisprudence or Supreme Court Decisions

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