How to Compute Separation Pay (Philippines Labor Code)

Feb 15, 2011 by at Labor Laws, Law & Government, Philippine Laws

How to Compute Separation Pay (Philippines Labor Code)

How to compute separation pay in the Philippines according to the Labor Code? Separation, especially when employer-employee relationships are already well-established within the workplace, is one happening that can be heartbreaking. But as the old saying says, “the only permanent thing in this world is change”. People change; people reach the point that they need to take new steps and directions. For this kind of situation, what we can only do is to hope for the best and do the things that are necessary. Thus, employers should take responsibilities and obligations, and give what is lawfully due to their terminated employees. On the other hand, employees, who are terminated or have decided to resign, should know their rights and understand how to exercise them. The following are guidelines on the computation of separation pay.


Who are entitled to separation pay?

Separation pay is given to employees whose services are terminated by their employers for the following reasons as stated by Articles 283 and 284 of the Labor Code as follows:

Art. 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.

Art. 284. Disease as ground for termination. An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to one-half (1/2) month salary for every year of service, whichever is greater, a fraction of at least six (6) months being considered as one (1) whole year.


Who are not entitled to separation pay?

An employee may also be terminated for just causes as enumerated below under Article 282 of the Labor Code. Generally, employees falling under this article are not entitled to separation pay.

Art. 282. Termination by employer. An employer may terminate an employment for any of the following causes:

a. Serious misconduct or willful disobedience by the employee of the lawful orders of his employer or representative in connection with his work;
b. Gross and habitual neglect by the employee of his duties;
c. Fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized representative;
d. Commission of a crime or offense by the employee against the person of his employer or any immediate member of his family or his duly authorized representatives; and
e. Other causes analogous to the foregoing.


Are employees who voluntarily resign entitled to separation pay?

Generally, an employee who resigns is not entitled to separation pay except when it is stipulated in his employment contract or collective bargaining agreement, or such is an established practice or policy of the company. An employee resignation is presumed to be voluntary.


Is separation pay taxable?

Under Section 32(B)(6)(b) of the 1997 Tax Code, 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 is exempt from taxes regardless of age or length of service. The phrase “for any cause beyond the control of the said official or employee” in effect connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be of his own making.  (Sec 4(f). Revenue Regulations No 1-68; Sec 2(b)(2), Rev. Regs. No 6-82, as amended). Therefore, separation pay under the foregoing ruling shall not be subject to income tax and consequently to withholding tax.


Other notes in computing Separation Pay

The amount of the separation pay shall be multiplied with the number of years of actual service. In computing the length of service, a fraction of at least six (6) months is considered as one (1) whole year. The computation of separation pay shall be based on the latest salary rate, unless the same was reduced by the employer to defeat the intention of the Labor Code, in which case, the separation pay shall be based on the rate before the deduction.

Disclaimer: New and subsequent issuances, rulings, or laws may cause the whole or part of the article inaccurate or obsolete. It is advised to make inquiries with the Department of Labor and Employment for more information.

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the CEO of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

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21 Comments

  1. gerald

    dear sir just want to ask a favor if you could please compute my backpay i started last july 2012, and the effectivity of my resignation will be on June 310 2012, i resign voluntarily. my basic gross pay is 25000 a month. i am married with 1 dependent, suppose to be 2 but i have not yet updated my latest dependent on BIR.
    could you please atleast give me an estimate. am i entitled for a tax refund since i did not finish the year here in my company? thanks and more power

  2. Mich

    dear sir i just may i request if you could please compute my backpay i started last September 10,2010, and the effectivity of my resignation will be on Nov. 16,2012.
    i resign voluntarily. my basic gross pay is 9800 a month. could you please give me an estimated Backpay? thanks and best regards

    • E.R

      “At least one month or 1/2 month for every year of service?”
      The phrase “at least one month salary or 1/2 month salary for every year of service, whichever is higher”, can be quite confusing. It simply means that the employee is entitled whichever is higher of the employee’s:

      1.one month salary; or
      2.1/2 month salary for every year of service.
      Example: If the retrenched employee’s salary is P8,000, and he has been working for 3 years, he is entitled to separation pay equivalent to whichever is higher of his:

      1.one month salary = P8,000; or
      2.1/2 month salary for every year of service = (1/2) x P8,000 x 3 years = P12,000.
      In the above example, the employee is entitled to P12,000, the higher amount.

      Following the same rule, if the length of service is only one year, his separation would be whichever is higher of the following:

      1.one month salary = P8,000; or
      2.1/2 month salary for every year of service = (1/2) x P8,000 x 1 year = P4,000.
      Here, separation pay is P8,000 or one month salary, the higher amount. Actually, we will arrive at the same result even if the length of service is only 10 months or 7 1/2 months, etc., as long as it is 6 months or more. This is because a fraction of at least 6-months is considered as 1 whole year.

      Now, what if the employee has served for less than 6 months, how much separation pay will he get? Let’s see.

      1.one month salary = P8,000; or
      2.1/2 month salary for every year of service = (1/2) x P8,000 x 0 year = 0.
      So, it’s still P8,000 or one month salary.

      • Carina

        Hi sir,

        panu po pag may butal example panu icocompute kung ang length of service nya lang ay 1 year and 3 months

      • Marix

        If an employee has actual service years of 3.75,do you round up to 4 years as per Art 283?

  3. Mich

    Dear sir,may i request if you could please compute my backpay i started last September 10,2010, and the effectivity of my resignation will be on Nov. 16,2012.
    i resign voluntarily. my basic gross pay is 9800 a month. could you please give me an estimated Backpay? thanks and best regards

  4. arvin

    Dear Sir,
    Im an IT, I resigned to my current company. they gave me a tasks until my very last day and i have even extend 1day to just finish it. If ever they have found minor bugs in my work will they have the right to not sign my clearance and hold my last pay?

  5. Rolando

    Dear Sir,

    I am contractual employee.I received Tax refund this January 2013 amount of Php 8, 068.98..i this computation correct? I started March 1, 2012 and may total gross is Php 155, 491.87. total w/tax 9,997.75, total 13th month pay 9,550.00, total sss 3, 716.70, total pag-ibig 800.00 total Phic 1,687.50…and i have 4 children (M4)… please advise if i received correct tax refund. thank you very much.

  6. angelyn bael

    hi sir, can u compute my separation pay i hired last sept 2 2011 and i will voluntary resign last march 30 2013 thanks

  7. elvie popoy

    SIR/MAM,
    Good afternoon.
    My husband was employed 13 years as salesman.He was terminated because he did not remit to office
    collection of some accounts receivable by office.1. Is he entitled of separation pay? can he claim? 2. His salary was below minimum, can he file complain?

    Thanks.

  8. paz dagoy

    Sir Vic,

    here is the situation, the company (restaurant) was opened in 2010. since its opening, the resto did not earn any income and closed last jun 2, 2013. the company dismissed the 8 employees w/o paying the last 5-7 days of their salaries. w/out the president/owners knowledge I issued certificates of employments to all the employees. I am only acting as a supervisor, and signed the certificate as “ACTING RESTAURANT SUPERVISOR”. the dismissed employees decided to file a case against the owner using the certificate I issued. what is the liability of the owner aside from the 5-7 days unpaid salary? are the dismissed employees entitled to separation pay? the employees salaries are below minimum wage, no SSS and other benefits.

    Thank you.
    paz

  9. hi sir.. in case the employee has resigned.. is it right to still deduct the sss, pag ibig, philhealth and withholding taxes from their last pay?

  10. Kristine Orte

    Good day!

    Sir;
    I would just like to ask if am i entitled for separation pay? it is a voluntary resignation. I started working in our company last May 26, 2007 and the effectiveness of my resignation is on December 1, 2013 also I didn’t receive any tax refund from the company even they deducted tax from my salary monthly. It’s just ended this year as I gave birth on my 1st baby. hope for your response. It would be highly appreciated. Thank you..

    • mary grace bolivar

      itatanong ko lang po kung may makukuha ang asawa ko ng seperation pay sa kanilang company, nag voluntary resign po sya 6yrs po syang nagtrabaho doon. inaasahan ko po ang inying tugon sa aking katanungan ipadala nalang po ninyo ang inyong tugon sa aking email… maraming salamat po sa pag basa ninyo!!!!!

  11. mari paz

    Healthy Day!

    Sir may I request in your good consideration to please compute my separation pay I work from February 2010 to Dec 2012. And I have a total of 10 Unused Vacation leave and sick leave.

    Wishing for your kind consideration to help me.

    Thank you and God Bless!

  12. Donnabel Ferrer

    Dear Sir/Mam,

    Nais ko po sana magtanong kung pano ang computation ng seperation pay pag daily pay ang sahod Ilang araw po ba ang computation pag sinabing half month pay?
    Maaari po bang bigyan mo ako ng sample computation upang macheck ko yung natanggap kong seperation pay. Inaasahan ko po ang malugod nyong tugon sa aking katanungan.Pakipadala po sa email lo ang inyong tugon salamat po

  13. bets

    how to compute separation pay for retirement?

  14. Sammy Allemania

    Hi Sir/Mam,

    Good day.
    I just wanted to ask regarding my back pay. I was hired October 2,2013 and will voluntarily resign. May last day at work would be this May 25,2014. My net pay is 11623.96 per month (I already deducted the SSS, PAG-IBIG etc). However, the company declined the employment date that I was hired dated October 2,2013 due to the reason that they (Company) were not yet registered from that month. The company was just registered last January 2014. So therefore the company said that my actual hiring date started January, where in the company was just registered from that month. The company started deducting SSS, PAG-IBIG ect since January too. Can you please help me compute my back pay? Hoping to hear from you soon. Thanks in advance.

  15. Hi good day magsasara na po yung company na pinag tatrabahuhan ko, bale 1 year and 3 months na po ako doon, may aasahan po ba dapat ako na seperation pay? Dahil wala naman po silang nababanggit tungkol dito, ano po ba ang maari kong gawin? Thank you and more power !

  16. EmerSon

    Sir,

    My case is an illegal dismissal by my employer.
    I am certain that the termination is without basis and did not follow standard process of procedures as according to Philippine Labor Laws.

    I filed my case in NLRC and my employer is trying to settle in amicable settlement during the 1st preliminary meeting. I told them my “demand” for payment of unexpired portion of the contract. They re-set a 2nd conciliatory meeting to submit their counteroffer.

    Here are my questions:
    1. How much is the reasonable settlement that is considered “fair” for both parties?
    2. Can i demand for Moral and Exemplary Damages brought by this bad experience and unfair labor practice by suffering depression and humiliation ?
    3. If they made counter offer which is unacceptable, is is wise to pursue the case? and hire a Lawyer/COunsel?
    4. How much is normal fees for Legal Counsel to help me on this case?
    5. How long will it take us to resolve this kind of case?

    Thank you in advance and More power!

    Emerson

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