How to Compute Separation Pay (Philippines Labor Code)

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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 President of Optixor, Inc.. a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

Comments

bernadette says

Started JUly 2012 and resigned on June 2012?

“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:

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.

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

Marix says

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

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.

angelyn bael says

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

elvie popoy says

mary joy says

Kristine Orte says

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