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Philippine Labor Laws

Computation of Separation Pay

Separation pay may be computed based on the terms provided in the employment contract,
company policy, or collective bargaining agreement. Company practice may likewise be used as
basis for computation, if such practice has been established for years and has already ripened into
a demandable right.

In the absence of contract or agreement, or when the existing agreement or policy provides for a
lower benefit, separation pay shall be computed based on the provision of the Labor Code.

The amount of separation pay under the Labor Code depends on the following factors:

1. The employee’s last salary;


2. The employee’s length of service;
3. The reason for employee’s separation from service.

Employee’s last salary

The employee’s last salary refers to the salary rate of the employee at the time of his termination
from service. It determines the based to be used in the computation of separation pay.

When there is a reduction of the employee’s salary prior to his termination, e.g., the employee
has been demoted resulting to a reduction of salary, such reduced salary rate, which is his ‘last
salary’ shall be the basis of the computation. But, if the reduction of salary was made to
circumvent the provision of the Labor Code, that is, to avoid payment of higher separation pay,
the salary rate before the reduction shall be used in the computation of separation pay.

For employee’s receiving salary below the minimum wage, the separation pay shall be computed
based on the minimum wage in effect at the time of separation from service. In addition, the
employee affected is also entitled to payment of salary differential equivalent to the difference
between the employees actual salary and applicable minimum wage.

Employee’s length of service

Employee’s length of service refers to the duration of time that the employee has been under the
employ of the same employer or company. It is computed beginning from the time of his
engagement up to the date of his termination. A fraction of at least 6 months shall be considered
as one whole year.

However, only the employee’s last continuous years of service should be considered in the
computation (See Carandang vs. Dulay; Also Sta. Catalina College vs. NLRC; Phil. Tobacco
Flue-Curing vs. NLRC.)

The reason for the employee’s separation from service


The reason for the employee’s separation from service is an important factor in the computation
of separation pay. The amount of separation pay may vary depending on the specific ground
relied upon for the termination.

An employee terminated based on installation of labor-saving devices or redundancy is entitled


to at least one-month salary or to at least one-month salary for every year of service, whichever
is higher. (See Article 283, Labor Code)

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. (Ibid.)

An employee terminated for health reasons (disease) under Article 284 should be paid separation
pay equivalent to at least one-month salary or to at least one-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.

“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. See these comments: Comment 1, Comment 2. The phrase
though is not really complicated. 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:

1. one month salary = P8,000; or


2. 1/2 month salary for every year of service = (1/2) x P8,000 x 1 year = P4,000.

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.

Minimum Separation Pay

Take a quick look at the examples given above. You will notice that the minimum separation pay
that may be given to an employee is one month salary. This is actually consistent with the phrase
“at least one month salary”, which simply means that the separation must not be less than the
employee’s one month salary.

Last Edited: Sunday, September 4, 2011