Understanding Separation Pay Computation in Philippines

In one’s career, there will come a time when you would have to move on to the next stage of your growth. This might be due to an active pursuit of development or due to unexpected circumstances, such as what happened last year when the pandemic exploded.

At any rate, employees have rights that they should assert, even as they decide to part ways with a company or have been affected by downsizing or retrenchment due to economic reasons. In this guide, we will share everything you need to know about separation pay in the Philippines, and how to settle this benefit amicably.

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A Complete Guide to Separation Pay Computation in 2021

As the threat of the pandemic continues to loom around us, there’s no telling if the trend in unemployment will improve any time soon. That said, there’s a great reason for everyone to prepare for the worst. And one way you can do so is by equipping yourself with the knowledge about your rights and benefits, including the separation pay, if indeed, the worst comes to pass.

What is separation pay?

According to the Department of Labor and Employment (DOLE), “separation pay is the amount given to an employee terminated due to installation of labor-saving devices, redundancy, retrenchment, closure or cessation of business, or incurable disease.”

Moreover, your separation pay should be:

Equivalent to “one month pay or one month for every year of service, whichever is higher.”

The law goes on to say that “in case of retrenchment, closure or cessation of business, or incurable disease, the employee is entitled to receive the equivalent of one month pay or on-half month pay for every year or service, whichever is higher.”

Do note, however, that this is the bare minimum a company can offer you. With that, it’s also worth noting that there are companies that offer more comprehensive packages, allowing for bonuses or even offering early retirement schemes.

Despite the differences of one company to another, you should know that there’s always room for negotiation when it comes to terms, especially if you’ve been in the business for many years, but do remember that anything beyond what’s mandated by the law should be treated as a nice extra.

But the most important thing here is that you get what is due you, and the only way to ensure that is first, to know how much you’re due.

How to Compute Separation Pay

The calculation of separation pay may be based on the company policy and terms and conditions provided in the employment contract or collective bargaining agreement. Company practices can also be used in the computation if they have been followed for years and have ripened into acceptable rights.

Pro Tip: As such, it is only important that you thoroughly review your employment contract, specifically noting the following:

Non-compete causes

If you’re working with a creative company, you most likely have signed a contract with non-compete clauses. This means you can’t apply in a competitor’s business for a certain number of years. If you’re getting laid off, it’s wise to talk to your HR and have them release you from that commitment. If they agree, put it into writing so that you won’t have any trouble with your future applications should a good opportunity is presented to you.

Other benefits you’ve initially agreed upon.

A contract isn’t there just for show. In some cases, there will be agreements put in place, especially at the beginning of your employment, which you should keep in mind when the time comes that you will need to move on to your next company. The government recognizes agreements and clauses written in employment contracts. If there are monetary benefits that should be granted to an employee, it should be strictly followed. This might come in the form of an early retirement benefit or a commission bonus. This will all depend upon what you and the management have agreed upon when you came on board. That said, always ensure that you’re not missing out on things that you’re already eligible for!

So, when you’ve ensured that all applicable grounds in the contract have been considered, here’s how you will proceed to compute for your separation pay:

Note: If you find that the above measures we’ve mentioned aren’t available to you, or when the policy which exists provides a lower package, then the computation is done based on the provision by Labor Code.

According to the Labor Code, the total money is determined by the following:

The employee’s period of service.

The reason for the employee’s termination from service.
The employee’s last salary.

By this standard, a worker who satisfies the terms mentioned above qualifies for separation pay.

And depending on the nature of the separation, Article 283 of the Labor Code requires that the calculation to be done as follows:

Case 1: Redundancy or due to health reasons or installation of labour-saving devices

In this case, the cash should be equal to one month’s pay for every year of service. Whichever amount is higher should be paid to the affected employee.

Examples:

If an employee earning Php 10,000.00/month and who has been working in the company for five years gets laid off because of the above reasons, the package is computed as follows:

One-month salary = Php 10,000.00, or

One-month pay for every year of service = P10,000.00 x 5 = P50000.00

The employee will be paid P50,000.00

If an employee on the above salary scale has been working for the company for only five months, the separation pay computation is as follows:

One-month salary = Php 10,000.00, or

One-month income for every year of service = Php 10,000.00 x 0 = 0.00

He will be paid Php 10,000.00

Case 2: Retrenchment to prevent losses and closure of business

This is the case that happened to many businesses worldwide since last year. In this situation, a worker in the Philippines is entitled to a separation pay of at least one month salary or 1/2-month salary for every year of service, whichever amount that is higher.

Examples:

If an employee earning Php 8,000.00 every month has been working for three years in their company, and he gets retrenched, his separation income will be calculated as follows:

One month salary = Php 8,000.00, or

Half month salary for every year of service = (1/2) x Php 8,000.00 x 3 years = Php12,000.00

If a worker earning Php 8,000.00 every month has been working for five months and gets retrenched, the computation of separation income is as follows.

One month salary = Php 8,000.00, or

Half month salary for every year of service = (1/2) x Php 8,000.00 x 0 years = 0.00

The highest amount, in this case, is Php 8,000.00, and it is the value the worker will receive.

Case 3: Illegal Termination

If an employee has been illegally terminated, separation pay instead of reinstatement is calculated at one month’s salary for every year of service. The Philippine law requires that affected workers should receive at least one month’s salary as the separation pay.

Do You Get Separation Pay When You Resign?

Not everyone can avail of separation pay as per the labor law. Such cases include employees who have committed misconduct, have shown incompetence or voluntarily resigned.

However, depending on company policies, collective bargaining agreement, or employment contract, some employees may be entitled to the package after voluntary departure.

Other Benefits You Can Get Once Your Company Decides to Let You Go

Salary Held

Do not feel attacked when your company withholds your salary on the last payment cycle before your last working day. This is done to ensure that they have funds in case an employee is subject to a salary deduction. What would remain after your clearance has been signed, however, should be given.

Pro-rated 13^th Month Pay

This a government-mandated benefit so even if you were not able to finish the entire year in the same organization, you are still entitled to receive an amount because it is pro-rated by nature, given that you were employed for one month at the minimum.

Income Tax Refund

This refers to your “tax adjustment.” So when you resign, before the 12^th month of the year, you’ll receive a tax refund because BIR assumes that you are employed in the same organization within a minimum period of one year.

So, when you weren’t able to finish the entire year, BIR refunds an amount to your account, which is then included in your back pay.

In line with this, take note that your next company may need to adjust your taxes yet again, so depending on the calculation, you’ll either have to pay more or less during your first few months of employment.

With these things in mind, every legal employee should know how to compute their separation pay as this will be helpful in the event that termination due to the above circumstances is inevitable. While situations may vary from one company to another, a minimum package has been set by the law to protect the employees when it comes to termination.

Disclaimer: This post is for information-sharing only. If you have specific concerns regarding salary and benefits provided by your company in the Philippines, then you may consult with the official website of the Department of Labor and Employment (DOLE).