A Separation Pay is an amount of money paid by the employer to the employee upon the termination of employment. This is on top of the other monetary compensation and benefits such as your last salary, pro-rated 13th month pay, tax refund, vacation and sick leave conversions if applicable.
Well, there are specific criteria or grounds of termination written in the Labor Code of the Philippines that serves as a basis if the employee should receive a separation pay or not. Pertinently, it also includes the computation of the separation pay if the employee should receive it.
So, how do you know if you are entitled to receive a separation pay from your company? The answer is found in the Labor Code of the Philippines.
Employees Eligible to Receive Separation Pay
Under the Article 283 in the Labor Code of the Philippines, employees who are terminated from work due to the “authorized causes” should receive a Separation Pay from the company. If you are terminated from work due to the following, you are entitle to receive a separation pay:
- Installation of Labor-Saving Devices
- Redundancy
- Retrenchment to Prevent Losses
- Closing or Cessation of Operation of the Establishment
Moreover, under the Article 284, if you are terminated from your work because you are suffering from a disease that continued employment is not allowed by the law or put your co-workers’ health at risk, you are also entitled to receive a separation pay.
Employees Not Eligible to Receive Separation Pay
If your employment was terminated by your employer because of certain reasons, commonly referred to “just causes“, stated under the Article 282 of the Labor Code, you are not entitled to receive a separation pay. This includes the following:
- Serious misconduct or willful disobedience by the employee of the lawful orders of his employer or representative in connection with his work.
- Gross and habitual neglect by the employee of his duty.
- Fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized representative.
- Commission of crime or offense by the employee against the person of his employer or any immediate member of his family or his duly authorized representatives.
- Other causes analogous to the forgoing.
On the other hand, if you voluntarily resigned from your work, you are not entitled to receive a separation pay. Unless it is stipulated on your contract or collective bargaining agreement, company policy or practices.
How to Compute Separation Pay
Step 1. Determine the Ground for Termination
So let us assume that you are eligible to receive a separation pay. There are different calculation of payment base on the grounds of termination.
A. Due to Labor-saving devices or redundancy
You are entitled to receive a separation pay equivalent to your one (1) month pay or at least one (1) month pay for every year of service, whichever is higher.
B. Due to Retrenchment to prevent losses, closure or cessation of operations of the establishment, or disease
You should receive a separation pay equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher.
Step 2. Latest Basic Pay and Number of Years of Employment
In the computation of your separation pay, your latest basic pay shall be used as a reference. This depends on the ground of termination stated in the first step, either the whole latest salary or just half of it. Then, you should check back on how many years you have already worked in the company from the date you are hired.
It is also stated under the Article 283 of the Labor Code that a fraction of at least (6) months shall be considered as one (1) whole year.
Step 3. Compute the Separation Pay
Knowing the ground of termination, your latest basic pay and number of years of employment, you should now be able to compute your separation pay.
To elaborate this, I’ll give you two (2) examples in each category of the ground of termination.
Example A. An employee terminated due to the installation of labor-saving devices.
The separation pay should be equivalent to 1 month pay or 1 month pay for every year of service. The higher amount should be paid to the employee.
Employee Number 1:
Salary: ₱20,000
Years of Employment: 5 Years
One month pay is worth: ₱20,000
One month pay for every year of service is worth: ₱100,000 (calculated as ₱20,000 salary x 5 years)
In this case, Employee Number 1 shall receive the higher amount which is worth ₱100,000. This is the meaning of the term “whichever is higher” in the Step 1.
Employee Number 2:
Salary: ₱20,000
Years of Employment: 5 months
One month pay is worth: ₱20,000
One month pay for every year of service is worth: ₱0 (calculated as 20,000 salary x 0 years)
If you may recall, it is stated above that you should have worked at least 6 months for it to be considered and calculated as 1 whole year. This time, it is multiplied by zero since you didn’t reach the minimum month duration.
In this case, Employee Number 2 shall receive the one month pay with the amount of ₱20,000.
Example B. An employee terminated due to cessation of operations of the establishment.
In this ground for termination, the separation pay should be equivalent to 1 month pay or 1/2 month pay for every year of service. The higher amount should be paid to the terminated employee.
Employee A
Salary: ₱15,000
Years of Employment: 10 Years
One month pay is worth: ₱15,000
One-half month pay for every year of service: ₱150,000 [this is calculated as (₱15,000 salary / 2) x 10 years]
This time, the higher amount is ₱150,000. That is the amount of separation pay Employee A should receive from his/her employer.
Employee B
Salary: ₱15,000
Years of Employment: 8 months
One month pay: ₱15,000
One-half month pay for every year of service: ₱7,500 [calculated as (₱15,000 salary / 2) x 1 year]
In this case, Employee B shall receive the one month pay worth ₱15,000 since it is higher than the other calculation.
That was the general guide on how to compute your separation pay. If you need to know more regarding this, you may read on the Book VI of the Labor Code of the Philippines or you may drop your thoughts in the comment section.
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