Misconceptions about Separation Pay and Final Pay: Understanding Your Rights as an Employee
There has been a lot of misconception about separation pay that has caused confusion among employees who believe they are entitled to such compensation upon leaving their jobs. However, there is a difference where a certain type of exit pay is granted, depending on the situation.
Let’s elaborate on the key factors that determine eligibility for separation pay and differentiate it from other forms of compensation, such as termination pay and final pay. This article will help you better understand your rights as an employee in order for you to navigate the complexities of employment termination with confidence if you are in this position.
Understanding Separation Pay and Final Pay
Separation Pay is a form of compensation provided to employees who are terminated for authorized causes, signaling that the termination was not the employee’s fault. It acknowledges the employee’s involuntary separation from the company and aims to provide financial support during the transition period.
An employee is entitled to separation pay in two ways:
- If an employee’s separation from the service is caused by any of the authorized reasons, they have the right to receive a separation payment equal to half (1/2) a month’s salary for each year of service. A fraction of at least six (6) months is considered one (1) whole year in calculating the payment.
- Retrenchment to prevent losses;
- Closure or cessation of operation of an establishment not due to serious losses or financial reverses; and
- When the employee is suffering from a disease not curable within a period of six (6) months, and his/her continued employment is prejudicial to his/her health or to the health of his/her co-employees.
- Lack of service assignment of security guard for a continuous period of six (6) months
- If an employee’s separation from service is caused by any of the specified reasons, they have the right to receive separation pay equal to their one-month salary for each year of service. A fraction of at least six (6) months will be treated as a complete year in calculating the separation pay.
- Installation by the employer of labor-saving devices;
- Redundancy as when the position of the employee has been found to be excessive or unnecessary in the operation of the enterprise; and
- Impossible reinstatement of the employee to his or her former position or to a substantially equivalent position for reasons not attributable to the fault of the employer, as when the reinstatement ordered by a competent authority cannot be implemented due to closure or cessation of operations of the establishment/employer, or the position to which he or she is to be reinstated no longer exists and there is no substantially equivalent position in the establishment to which he or she can be assigned.
- Lack of service assignment of a security guard by reason of age.
Separation Pay Sample Computation and Scenario
Employee A, with a fixed monthly salary of Php 20,000.00, has unfortunately been retrenched due to the company’s recent business losses. Employee A dedicated six years and eight months of service to Company A. To calculate the tenure accurately, we consider the period from the date of Employee A’s hiring until the effective date of their separation. The separation pay computation is as follows:
Note on the separation pay granted to employees who have been retrenched, as a result of their separation from the company, is not subject to income tax or withholding tax. Therefore, it is exempt from both types of taxes.
Employee B, who receives a fixed monthly salary of Php 50,000.00, has unfortunately been made redundant as a result of Company ABC’s recent reorganization. Upon careful evaluation, it was determined that Employee B’s position was deemed excessive and no longer essential to meet the company’s current requirements. Employee B has been with the company for five years and three months. The separation pay computation is as follows:
It is noteworthy that other fixed and or regular allowances provided by the company given to an employee must be included on the computation of the separation pay.
On the other hand, Final pay refers to the pro-rated wages and other entitlements that an employer is obligated to pay an employee when their employment ends. This calculation usually includes the number of days worked before the effective date of resignation or termination.
Final Pay Sample Computation and Scenario:
An employee submitted his/her resignation dated August 1, 2023, with 30 days’ notice before the effective date of August 30, 2023. Assuming an employee is receiving a monthly salary of Php 30,000.00, here’s how we will compute his/her pay.
Final pay serves as a settlement for the outstanding compensation owed to the employee, taking into account any accrued but unused benefits.
In certain cases, employees who are separated due to authorized causes such as the installation of labor-saving devices, redundancy, retrenchment, closure or cessation of business, or due to an incurable disease may be entitled to receive both separation pay and last pay.
Remember, separation pay is not an automatic entitlement but rather a specific form of compensation for employees terminated under authorized causes.
Know Your Rights as an Employee
It is essential for both employers and employees to have a clear understanding of the distinctions between separation pay and final pay. By dispelling misconceptions and clarifying the criteria for each type of compensation, we can foster transparency and ensure that employees are aware of their rights.
To ensure fair workplace treatment, employers must be equipped with accurate knowledge when it comes to organizational development as a whole. If you seek assistance with workplace concerns you may contact business consulting firms to guide you with your HR consulting services inquiries.
Understanding Employee Compensation Rights
With full human resource services, our team of consultants can help you navigate the complexities of HR-related concerns with ease.