How Separation Pay Is Computed In The Philippines

Many are still confused with separation pay. Is it mandatory in the Philippines? Is it the same with the pro-rated 13th-month pay? Can a probationary employee receive it?

Find the answers in this article and learn how separation pay is computed in the Philippines.

Separation Pay Computation

What is separation pay?

Separation pay, also known as severance pay, is a payment given to employees who are involuntarily removed from work, regardless of how long they have rendered their service. As of April 2020, the amount can either be equivalent to one-half (1/2) month or one (1) month pay per year of service, depending on the grounds of termination indicated in the Labor Code of the Philippines. It is different from the 13th month pay.

Who are qualified to receive separation pay?

Employees eligible to receive a separation pay are those terminated on the following grounds:

  • Installation of devices or machines that reduce the number of labors
  • Redundancy, or when there is excessive manpower
  • Retrenchment to prevent company losses
  • Cessation of operations of the establishment
  • Business closure due to bankruptcy and other bad instances
  • The employee is suffering from a disease incurable within 6 months or harmful for co-workers

(Read: How To Apply For The COVID-19 Adjustment Measure Program (CAMP) From DOLE)

Who are not qualified to receive severance pay?

Employees are not entitled to separation pay if they are terminated because of these causes:

  • Neglect of duty
  • Insubordination
  • Grave misconduct
  • Commission fraud or breach of the trust
  • Engaging in a crime against the employer or authorized personnel
  • Other similar grounds

Separation pay also does not apply to employees who:

  • Committed AWOL (Absence Without Leave)
  • Voluntarily resigned*

NOTE: Voluntarily resigned employees can receive a separation pay if it’s a part of the contract signed or company practice.

How to calculate your separation pay

Here are the formulas on how to compute your severance or separation pay:

1/2 Month Pay x Year/s of Service = Separation Pay

This formula applies to employees terminated due to

  • Retrenchment
  • Closure or termination of the operations
  • Grave illness

One-Month Pay x Year/s of Service = Separation Pay

This formula applies to employees terminated due to

  • Installation of labor-saving devices
  • Redundancy
  • Retrenchment, or impossible reinstatement to the former position because of significant reasons

NOTE: The product of the separation pay computation will likely be different from the rate of an employee’s salary. By law, the employee will receive the amount whichever is higher.

Sample computations of severance pay

Here are two examples to help you understand the computations better:

Example No. 1

Computation applicable to employees terminated due to labor-saving devices, redundancy, and similar grounds

Michelle was a customer sales representative and has been earning a monthly salary of P13,000. She had finished the probationary period, being in the company for six months, but was terminated due to redundancy. How much will her separation pay be?

One-month of salary x Year of service

P13,000 x 1 = P13,000

Michelle’s separation pay will still amount to P8,000 because she has not spent a year in the company.

However, if Michelle had been working at the company for four years with the same salary rate, how much will her separation pay be?

One month of salary x Years of service

P13,000 x 4 = P52,000

Since her salary for one month is multiplied by four years (the length of her service), Michelle’s separation pay will be P52,000.

(Read: How To Find A Job During A Crisis Like COVID-19)

Example No. 2

Computation applicable to employees terminated due to retrenchment, disease, closure, and similar grounds

Let’s say James has rendered four years of service to the company and his salary is P9,000. He was one of those laid off because of business closure. How much will his separation pay be?

1/2 month of salary x Years of service

P4,500 x 4 = P18,000

James’s monthly salary is P9,000, but computing half of his monthly salary multiplied by four years of service gives P18,000. By law, he will get his separation pay of the higher amount, which is P25,000.

What if he merely worked for seven months? If that’s the case, how much will his separation pay be with same amount of monthly salary?

Now, let’s calculate how much he will receive if we multiply half of his monthly salary multiplied by a different length of service, expressed in years.

1/2 month of salary x Year of service

P4,500 x 1 = P4,500

Since the higher amount is what the law says John will receive, his separation pay is P4,500.

We all dread losing our jobs especially in times of crisis. But the Department of Labor and Employment (DOLE) makes sure employees whose employment are terminder under unfortunate circumstances are given compensation for their living expenses as they find a new job. It’s best to know what you must legally receive at the end of your contract.