An employee who is terminated for an authorized cause is entitled to separation pay of at least 1 month pay. It is a form of compensation provided for the transitional period during which the employee is looking for another employment after the employee is separated from the company.

This article will provide you with information on:

  • Who is entitled to Separation Pay?
  • Components of Separation Pay
  • The Basis and Examples of computation of Separation Pay

Who is entitled to separation pay?

According to the Labor Code of the Philippines, an employee who is terminated due to an installation of labor-saving devices; redundancy; retrenchment to prevent losses; closing or cessation of operation of the establishment or undertaking; or disease is entitled to separation pay.

It can also be provided to an employee when the termination of the employee was ruled illegal but reinstatement rendered impossible; as a measure of social justice; or when the grant of it was established through a contract or agreement.

Is a resigned employee entitled to separation pay?

An employee who voluntarily resigned from employment is not entitled to it unless provided for under an existing company policy, practice or agreement.

What is included in the separation pay?

Separation pay is computed based on the employee’s salary at the time of separation from the company. All regular allowances and benefits such as transportation allowance and cost of living allowance, whichever applicable, should be included in the computation.

On the other hand, items such as 13th-month pay, monetized unused leave credits are not included in the computation.

Basis of Separation Pay

The employee shall be entitled to 1-month pay or 1-month pay for every year of service whichever is higher if the cause of termination is due to:

  • Installation of labor-saving devices;
  • Redundancy; or
  • Illegal dismissal (depending on court order).

The employee shall be entitled 1-month pay or 1/2 month pay for every year of service whichever is higher if the cause of termination is due to:

  • Retrenchment to prevent losses; or
  • Closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses; or
  • Disease.

Examples: How to compute separation pay?

The amount depends on the following 3 factors:

  • The cause of termination;
  • The employee’s last salary; and
  • The employee’s length of service;
    (noting that a fraction of at least 6 months shall be considered 1 whole year)
Example 1 Example 2 Example 3 Example 4
Last Salary P 20,000 P 20,000 P 20,000 P 20,000
Length of Service 2 months 2 yrs 7 mths 2 months 2 yrs 7 mths
Cause of Termination Redundancy Redundancy Retrenchment Retrenchment
Separation Pay P20,000 P20,000 × 3
= P60,000
P20,000 P20,000 × 1.5
= P30,000

For more information on labor regulations, please refer to the Presidential Decree No. 442, s. 1974.