What You Need To Know About Separation Pay

When an employee is terminated, they may be eligible for separation pay. This is a form of payment given to employees who have been closed due to authorized causes. In the Philippines, specific laws govern the computation and payment of it. This article will discuss the basics of separation pay in the Philippines. Stay tuned for more information!

What is Separation Pay in the Philippines?

It is a form of payment that is given to employees who have been terminated due to authorized causes, such as the installation of labor-saving devices, redundancy, closure of the establishment, or reduction in personnel. In general, separation pay in the Philippines is equivalent to one-half (1/2) month or one (1) month’s salary for every year of service, depending on the authorized cause. Additionally, it is calculated based on the employee’s most recent salary, including regular allowances.

Related: A Guide on Writing an Effective Request Letter for a Certificate of Employment

An employee who is separated from their job due to retrenchment, closure of the business, or a disease that cannot be cured within six months is entitled to one month’s pay or at least half a month’s pay for every year of service, whichever is higher. This also applies to security guards who have not been given an assignment for six months.

For the following reasons, an employee separated from the service should be paid one month’s pay for every year of service.

1. Installation of labor-saving devices: In this case, the employer must provide advance notice and consult with their employees before making any changes to the organization or business.

2. Redundancy: This is an excess of workers about the company’s requirements that cannot be eliminated by transfer, re-deployment, retraining, or salary reduction. To qualify for it due to redundancy, one must have been employed at least one year before the business’s closure or laying off workers.

3. Impossible reinstatement of the employee to their former position or to an equivalent position for which the position is no longer available where they can be assigned.

Also entitled are security guards who were not given service assignments because of age, as stated in DO 150-16.

How Is It Computed?

The Philippines is typically calculated based on the employee’s latest basic salary. It is equivalent to one-half (1/2) month or one (1) month’s pay for each year of service, depending on the authorized cause. For example, if an employee has been separated from their job due to redundancy, their pay may be calculated as follows:

  1. Identify the Basis for Separation:
    • The Labor Code, specifically Article 283, sets out the conditions under which separation pay is granted. These include redundancy, installation of labor-saving devices, closing or cessation of operation of the establishment, and reduction to prevent losses​.
  2. Calculate Monthly Salary:
    • Establish the monthly salary that will be used in the calculation. This typically refers to the basic monthly salary.
  3. Compute Years of Service:
    • Determine the total number of years served in the company. If service is more than six months but less than a year, it’s rounded off to a whole year​.
  4. Apply the Relevant Formula:
    • The formula used to compute separation pay depends on the reason for termination:
      • For termination due to redundancy or the installation of labor-saving devices: Separation pay=One-month salary×Number of years servedSeparation pay=One-month salary×Number of years served​.
      • For termination due to retrenchment, business closure, or health risk: Separation pay=(One-month salary÷2)×Number of years servedSeparation pay=(One-month salary÷2)×Number of years served​.
  5. Adjustments and Additional Calculations:
    • There might be additional calculations or adjustments depending on company policy or other factors. For instance, some employers might include a prorated 13th-month pay in the separation pay calculation.

Example 1: Redundancy

John has worked at a company for 10 years and currently earns a basic monthly salary of 20,500. He was laid off due to redundancy and qualified for one month’s separation pay for every year of service. His separation pay would be calculated as follows:

Separation Pay = (20,500) * (10 years) = 205,000

Example 2: Closure of the business

Sally has been working for a company for 20 years and earns a basic monthly salary of 40,000. The company decides to close down, and she qualifies for one month’s separation pay for every year of service. Her separation pay would be calculated as follows:

Separation Pay – (40,000) / 2 * 20 years = 840,000

As you can see, it varies depending on the authorized cause of termination and the employee’s length of service. Suppose you are facing a reduction, business closure, or any other situation that could result in your separation from your job. In that case, it is essential to understand your rights and entitlement to it and to seek appropriate compensation.

Separation Pay Calculator – Philippines

Separation Pay Calculator

Enter basic monthly salary:

Enter years of service:

Select termination reason:



Who is Eligible?

It is typically available to employees who are laid off or separated from their jobs due to retrenchment, redundancy, business closure, reduction of personnel, or an incurable illness.

To be eligible for it, an employee must have been employed by the company for at least one year before being laid off or terminated.

How to Claim?

If you are eligible, you can typically apply by contacting your employer or HR department to initiate the process. You must submit a written request and provide evidence of your employment history and eligibility. Depending on the circumstances, there may also be other requirements that must be fulfilled to qualify for this type of compensation.

FAQs about separation pay in the Philippines

1. What is separation pay in the Philippines?

It refers to compensation provided to employees who are laid off or separated from their jobs due to authorized causes such as redundancy, closure of the business, reduction of personnel, or an incurable illness.

2. Who is eligible for separation pay in the Philippines?

To be eligible in the Philippines, an employee must have been employed by their company for at least one year before being laid off or terminated. Additionally, specific eligibility requirements may depend on the authorized cause of termination and other factors.

3. How is separation pay calculated in the Philippines?

The calculation typically depends on several factors, including the authorized cause of termination, the length of employment, and the employee’s basic monthly salary. Generally, it is calculated as one-half or one month’s salary for each year worked, though other factors may determine specific calculations.

4. How do I claim separation pay in the Philippines?

To claim separation pay in the Philippines, you must typically contact your employer or HR department to initiate the process. Typically, this involves submitting a written request and providing evidence of your eligibility for separation pay based on your employment history and other relevant factors. Depending on your situation, there may also be additional requirements or steps involved in claiming this compensation.

5. Is Separation Pay subject to tax?

It is exempted from taxation if the cause is due to death, sickness, or other physical disability or for other reasons beyond the control of said employee, such as reduction, redundancy, or cessation of business operations.

Conclusion

Whether you are facing reduction, closure of the business, or any other situation that could result in your separation from your job, it is essential to understand your rights and entitlement to separation pay. If you are eligible for this type of compensation, make sure you know how to claim it and what factors may affect the calculation of your separation pay. Whether you are a new or long-term employee, understanding your rights can help ensure you receive the compensation you deserve if faced with termination or layoff.

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One comment

  1. Where does it say that the compensation includes regular allowances? our HR insists that the computation does not include our regular monthly allowances.

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