Whether you’re looking to register a business in the Philippines, currently operate a business in the Philippines, or are an employee in the Philippines – separation pay is a very important topic to understand thoroughly. We’ll explore the fundamentals here.

Severance pay, often called separation pay in the Philippines, is an additional compensation provided to employees who find themselves separated from their employment through no fault of their own. Such separation usually occurs due to authorized reasons related to legitimate business requirements. Here, we delve into the concept of separation pay in the Philippines and its various aspects.

Theory

Separation pay is an extra monetary benefit awarded to employees when they are separated from their employment due to authorized causes, including situations such as the installation of labor-saving devices, redundancy, reduction, and more. In such cases, the employees are not at fault for the termination of their employment, as it results from valid business motives. It is important to note that employees who resign voluntarily are not entitled to separation pay since they chose to leave.

As a general rule, employees terminated for just causes, such as serious misconduct, willful disobedience, gross and habitual neglect of duty, and the like, are not eligible for separation pay, as their actions are deemed to be at fault. However, there are exceptions, which will be discussed below.

Benefit

The separation pay benefit is calculated based on the length of an employee’s service, typically expressed as either half a month or a full month’s pay for each year of service. This calculation depends on the specific authorized cause for separation.

Computation

Regardless of the specific calculation method, any fraction of at least six months is considered equivalent to a full year of service.

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

Employees separated from their service due to the following authorized causes are entitled to receive either one month’s pay or one-half (1/2) month’s pay for each year of service, whichever amount is higher:

1. Retrenchment (due to serious financial losses or anticipation of such losses)
2. Closure or cessation of operation of an establishment not related to serious financial losses
3. When an employee is suffering from a disease not curable within six (6) months, and their continued employment jeopardizes their health or the health of their co-employees
4. Lack of service assignment for security guards for a continuous period of six (6) months
5. Lack of service assignment for deployed personnel in a DO-174 contracting and subcontracting arrangement for a period of three (3) months

One month’s pay for every year of service

Employees separated due to the following authorized causes are entitled to one month’s pay for each year of service:

1. Installation of labor-saving devices by the employer
2. Redundancy is when an employee’s position is found to be excessive or unnecessary for the enterprise’s operation
3. Impossible reinstatement to the same or a substantially equivalent position for reasons not attributable to the employer’s fault, such as closure or cessation of operations or the non-existence of a substantially equivalent position
4. Lack of service assignment for security guards due to age

Latest salary rate

The separation pay is calculated based on the employee’s most recent salary rate, including mandatory and integrated allowances.

Entitlement conditions

To be eligible for separation pay, the following conditions must be met:

1. The employee is separated from employment for one of the authorized causes and has complied with any relevant requirements.
2. If necessary, the employer has fulfilled the requirements for separation due to an authorized cause, including notifying the Department of Labor and Employment (DOLE) and affected employees.

Notice of separation

Employers must notify the DOLE’s Regional Office, which has jurisdiction over the establishment, regarding any employment separation resulting from authorized causes.

Exempt from income tax

Severance pay is exempt from income taxation when the separation results from reasons such as death, sickness, physical disability, or other causes beyond the employee’s control, including retrenchment, redundancy, or cessation of business operations.

Employment contract, company policies, CBA

Any favorable stipulations for employees present in employment contracts, company policies, collective bargaining agreements, or similar arrangements can supersede the information provided here.

Dismissed employees

In summary, separation pay is only granted to a dismissed employee in specific instances, including:

1. Closure of the establishment under Article 298 of the Labor Code
2. Termination due to disease or sickness under Article 299 of the Labor Code
3. As a measure of social justice, when an employee is validly dismissed for reasons other than serious misconduct or issues reflecting on their moral character
4. When the employee’s position is no longer available
5. When the continued relationship between the employer and the employee is no longer viable due to strained relations
6. When the dismissed employee opts not to be reinstated or when the payment of separation benefits is in the best interest of all parties involved.

Assistance for Companies

If you are an HR professional or business executive needing assistance navigating through the technicalities of separation pay for your employees, we can help. Please contact us through one of the following channels:

• Contact us here
• Complete the form below
• Call us at +63 (02) 8540-9623
• Or send an email to info@tripleiconsulting.com.