Misconceptions about Separation Pay and Final Pay: Understanding Your Rights as an Employee
Updated: May 29, 2024
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 Sample Computation and Scenario
- Final Pay Sample Computation and Scenario
- [In.Sights Unplugged] EP 3: Ask InCorpPH – Exit Pay Questions
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.
RELATED READ: Final Pay, Separation Pay and Back Wages: Are They All the Same?
[In.Sights Unplugged] EP 3: Ask InCorpPH – Exit Pay Questions
To clarify the distinctions between Final Pay, Separation Pay, and Back Pay, and to address questions from the comments, we’ve created a dedicated podcast episode that provides clear and concise answers to your queries. You can watch/listen to it on YouTube and Spotify.
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.
Hi Sir Sherwin,
Hope my message/inquiry finds you well.
I just want to ask if I am entitled to a separation pay or anything since I have already tendered my resignation from a private company to which I have been working for 23 years and 4 months. I am already 50 years old at the time of my resignation.
Thank you.
Hello Paul,
If your resignation is voluntary, you are only entitled to your final pay, which includes your remaining salary, prorated 13th month pay, and any unused leave credits, if applicable. However, please note that separation pay is not provided for voluntary resignations as it is typically reserved for cases of authorized causes like retrenchment or redundancy.
Hello!
I just turned 3 years sa current company ko. I was issued an end of employment due to redundancy (they can’t revert me back to my position since it does not need an additional manpower). When I had a discussion with the HR, they did not include a separation pay to it. They only included prorated 13th month, tax refund. If I am not mistaken, I am entitled for a separation pay, right? What will be the next steps since I am still waiting for the final pay this coming 30th. Can I still contest it?
Dear Rose,
If your separation from the company is due to redundancy, your employer is obligated to provide you with the appropriate separation pay.
Hi, question. Our employer gave a memo that they’ll be needing to layoff some employees to cut cost. That was this morning (April 12) they called me around in the afternoon (April 12) that they need to end my contract.
I am currently pregnant. It feels like they took advantage of my situation. Do I get a separation fee due to redundancy? And can you give me what part of the labor code you got this computation so i can tell our HR/Accounting dept.
Btw, I’m a 2year employee of this company.
Dear Jahlia,
Based on the information you provided. It’s important to clarify that what you’re experiencing is not redundancy but rather a retrenchment. The calculation of Separation Pay due to retrenchment has been outlined in the samples we’ve provided in this article.
It’s also worth noting that your employer is required to submit an advance written notice to the Department of Labor and Employment at least 30 days prior to the effective date of your separation from the company.
Hi po,
Na remove po ako sa work due to redundancy and I received naman po a separation pay. I signed the quitclaim form na rin po but i noticed dun po sa separation pay computaton incomplete sya.
Hindi po nasama yung night differential and OTs rendered ko from the previous cut-off. Sinabihan ako na ma provide after ng separation date ko sa company. May habol pa ba ako?
Hello Theo,
It’s crucial to ensure that the night shift differential and any rendered overtime are accounted for in your final pay. We suggest collaborating with your HR department to address this issue promptly. Additionally, please remember that Final Pay and Separation Pay are distinct types of exit payments.
Good morning,,25 years po ako sa company,,then it is about to close a week after my employer informed us,,it is said that the reason is company looses of sales,,but we have known the fact that the looses amount was due to a facilities reconstruction,,our employer intended us to be paid our separation pay only for her consideration,,is it right for me as employee of 25 years to demand a lawful computation of my separation pay,,thank you,,
Hello Cresilo,
Absolutely, if the separation is indeed due to retrenchment, you are entitled to demand separation pay as mandated by our labor laws. It’s important to note that the amount of separation pay is typically determined based on factors such as the length of your service and your salary. Additionally, the Philippine Labor Code requires the employer to provide advance written notice to the Department of Labor and Employment at least 30 days prior to the date of retrenchment.
Nagwork po ako sa company for 15years and gusto ko na magresign. Ang sabi po ang makukuha ko lang ay yung 30days rendered ko after ng resignation ko at plus 13th month and annualization ng taxes. Wala po ba talaga ako other benefits na pwede makuha s company?
Hello Diana,
As your exit is voluntary, please note that you are entitled only to the final pay, and no separation pay will be provided by your employer.
And wala pong kahit anong benefits likes sss pag ibig phil healt hndi po hinuhulugan
And hindi po nagbabayad ng overtimes namen at ang service charge po na 10% sana hndi po namen natutupad .
Sana po mapansin nyo eto salamat po
Hello Leandro,
When encountering employer practices of this nature, it’s advisable to seek direct guidance from the Department of Labor and Employment (DOLE). They are equipped to provide comprehensive assistance and guidance tailored to your specific concerns.
I have been with the company for 1 year, 10 months and 24 days. Will this be considered as 2 years? I just want to understand as my previous employer only gave me my separation pay equivalent to only 1 month of my salary.
Dear Jenna,
In the event of separation due to authorized causes such as retrenchment, redundancy, or other similar circumstances, it is important to note that, according to our labor laws, the separation pay multiplier is set at 2 years.
Hello po. Pano po ba ang computation kung sa 5 years po na nagtrabaho ako, magkakaiba po ang naging salary rate ko. Ano po bang rate amg pinaka pagbasesan ? Salamat po
Hello Mary,
The basis of the computation is you most recent salary.
If I have 15k monthly salary and working for almost 8 yrs this May 2024 how much will I get?
Hello Leo,
In light of the nature of your separation, it’s important to consider whether it stems from a voluntary resignation. If your employment contract outlines your 15th-month as a guaranteed benefit, it should unequivocally be factored into your final pay. Conversely, if the separation is a result of authorized causes, your separation pay will be calculated by multiplying your monthly salary by your tenure.
Pano po pag hindi nakapag clearance nang ilang taon may makukuha pa din po ba
Hello Joselito,
It is recommended that you coordinate with your company to facilitate a seamless process for completing your clearance. Once you fulfill all clearance requirements, you can proceed to request the computation of your final pay.
sir Sherwin ,
I worked 1 year and 6 months in the company clinic as nurse and was stopped July 1, 2024 due to closure of the said clinic.
am I entitled for separation pay and final pay at the same time?
my employer never given me a 30 days notice before the termination . My supervisor just verbalized to me of not going to work anymore started July 1, 2024 due to that closure. what consequences my employer might receive if I will file complain to DOLE?
thank you so much sir.
Hello Nena,
If a business closes due to serious financial losses, the Labor Code does not hold the employer responsible for making separation payments (Manila Polo Club Employees’ Union [MPCEU] FUR-TUCP v. Manila Polo Club, Inc., supra.).
But you can still consult with the DOLE as there has been no due process from your employer’s side.
Thank you for sharing. Very detailed and informative.