Are You Entitled To Receive Separation Pay? Here's How to Compute It

Job security is a reason new moms go back to work after giving birth even earlier than they had planned or before their maternity leave is done. But people may lose their jobs due to unforeseen circumstances. If this happens, an employee is entitled to a separation pay. 

Final pay vs separation pay

Final pay is the total amount of wages that companies have to give all their outgoing employees. An employee’s final compensation include:

• His last salary due (i.e., payment for the hours the employees clocked in since their last pay)
• Cash conversions of unused vacation and sick leave credits, if applicable
• Pro-rated 13th month pay
• Income tax claim for the excess taxes withheld
• Other types of compensation stipulated in the employees’ contracts

A separation pay is given to an outgoing employee on top of his final compensation when an employee was terminated due to “authorized causes.” The Labor Code of the Philippines lists the following as “authorize causes”: 

• Installation of labor-saving devices
• Redundancy
• Retrenchment to prevent losses
• Closing or cessation of operation of the establishment
• Health risks

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How much separation pay are you entitled

If the reason for the employee’s termination is due to the installation of labor-saving devices or redundancy, the employee is entitled to receive a separation pay equivalent to their monthly basic pay, or their monthly basic pay multiplied by the number of years they’ve served the company, whichever is higher.

If termination of employment is due to retrenchment or closure of business operations not due to severe business losses or financial reverses, the employee should receive a separation pay equivalent to one-month basic pay or at least half of his basic salary for every year of service, whichever is higher.

An employee who is terminated because he suffers from a disease or illness that puts himself or his co-workers’ health at risk if he continued working should also receive a separation pay amounting to one-month basic salary or at least half of his basic pay for every year of service, whichever is higher.

A fraction of a year, or more than six months but less than a year of employment, is considered as one whole year when computing for an employee’s separation pay.

How to compute for separation pay

Let’s talk in numbers. Here are a few scenarios and ample computations to help illustrate how separation pay is computed in the Philippines:

If employee X got terminated due to redundancy, rendered 10 years of service and is receiving a monthly salary of Php15,000.00 at the time of termination, the computation of his separation pay is:

One month salary = Php15,000
One month pay for every year of service = Php15,000 x 10 years
Employee X should be given a separation pay of Php 150,000

If employee Y’s cause for termination is still due to redundancy, but he was only employed by the company for three months and is receiving a salary of Php 15,000.00 at the time of termination, his separation will look like this:

One month salary = Php15,000
One month pay for every year of service = Php15,000 x 0 years
Employee Y should be given a separation pay of Php15,000

If employee A lost his job due to retrenchment, was with the company for three years and gets Php10,00.00 a month at the time of his termination, his separation pay will be calculated as:

One month salary = Php10,000, or
One-half month salary for every year of service = (1/2) x Php10,000 x 3 years = Php15,000
The higher amount is Php15,000, so Employee A should receive this amount.

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Who are NOT qualified to receive separation pay

If you voluntarily resigned, you are not entitled to receive separation pay unless it is stated in your contract, collective bargaining agreement, or company policy. Employees who voluntarily resigned still get final pay.

Likewise entitled to their final pay but not a separation pay are employees who were terminated due to “just causes.” According to the Labor Code of The Philippines, “just causes” include:

• 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 duties
• Fraud or willful breach by the employee of the trust reposed in him by his employer or a duly authorized representative
• 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
• Other causes analogous to the forgoing

Every working individual needs to have a keen understanding of how separation pay is computed and, more importantly, if they are entitled to it. It saves time for both the employee and the employer if this is understood by both parties.

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