Steps on How to Compute Separation Pay in the Philippines

Steps on How to Compute Separation Pay in the Philippines

In pertaining to the Labor Code of the Philippines separation pay is a must. Employees must receive it for the service they rendered from the company. Though, there are certain conditions and requirements to meet this. Employees who were forced to resign from the company such as in retrenchment cases shall be given separation pay.

On the other hand, those who resign voluntarily will not be given any nor the employer is obliged to give them separation pay. It is not mandated under the Labor Code for such unless it has been a company practice to give separation pay to those voluntarily resigning or it was stipulated in the contracts that such is the case.

Furthermore, separation pay be computed based on contractual stipulation, policy or agreement or company practice that has been applied for many years in the company.

If not stipulated from the agreement or policy, those who are separated from the company shall receive at least one month equivalent salary or one half of one month salary compounded for each year of service whichever is higher. Thus, the amount of separation pay will be based on the value of the last salary of the employee, the length of service and the reason for the separation from service. This might be confusing but here’s how to compute it:

Article 283 of the Labor Code provides that an employee terminated based on installation of labor-saving devices or redundancy or for health reasons is entitled to at least one-month salary or to at least one-month salary for every year of service, whichever is higher.

This is different for termination based on retrenchment to prevent losses and closure of business, the employee affected is entitled to at least one month salary or 1/2 month salary for every year of service, whichever is higher.

In case of illegal termination, separation pay in lieu of reinstatement has been consistently computed at one month salary for every year of service.

As an example, if the retrenched employee’s salary is P8,000.00 and he has been working for 3 years, he is entitled to separation pay equivalent to whichever is higher of his:

one month salary = P8,000; or

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 P12,000.00, the higher amount.

If he has served for less than 6 months, say 5 months, he will either get:

one month salary = P8,000; or

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.

For below minimum wage earners, they will be given a separation pay of equivalent to the minimum wage of their place, not what they currently receive. Reduction of pay on the last salary is not allowed from companies just to give a lower separation pay for employees. The law is consistent that employees of the Philippines should receive at least one month of salary for the separation pay.

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