omputation of Separation Pay

Employee Discipline and Termination 2011-09-03

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. 2. 3. The employees last salary; The employees length of service; The reason for employees separation from service.

Employees last salary

The employees 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 employees 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 employees 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.

Employees length of service

Employees 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 employees last continuous years of service should be considered in the computation (SeeCarandang vs. Dulay; Also Sta. Catalina College vs. NLRC; Phil. Tobacco Flue-Curing vs. NLRC.)

The reason for the employees separation from service

The reason for the employees 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 employees: 1. 2. one month salary; or 1/2 month salary for every year of service. Example: If the retrenched employees 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. 2. one month salary = P8,000; or 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. 2. one month salary = P8,000; or 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? Lets see. 1. 2. one month salary = P8,000; or 1/2 month salary for every year of service = (1/2) x P8,000 x 0 year = 0. So, its 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 employees one month salary. Last Edited: Sunday, September 4, 2011

Separation Pay Meaning Separation pay, as generally understood, refers to the amount due to the employee who has been terminated from service for causes authorized by law (not due to employees fault or wrong-doing) such asinstallation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking. Separation pay is intended to provide the employee with the wherewithal during the period he is looking for another employment. (See Gabuay v. Oversea Paper Supply, G.R. No. 148837, August 13, 2004.) Five Instances when Separation Pay is due to Employee There are at least five instances in which an employee is entitled to payment of separation pay upon severance of employment: 1. When the termination of employment is due to causes authorized by law, such as installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking. This is provided under Art. 283, Labor Code of the Philippines. The provision states, viz.: Article 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to

prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. 2. When the severance of employment is cause by a disease, particularly when the employee is found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as the health of his co-employees. This is found in Art. 284, ibid., the full text states, viz.: Article 284. Disease as ground for termination. An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one month salary or to one-half month salary for every year of service, whichever is greater, a fraction of at least six months being considered as one whole year. 3. When the termination from service of the employee has been declared illegal, but his reinstatement to his former position is no longer feasible for some valid reason, e.g., when reinstatement is rendered impossible due to subsequent closure of business, or when the relationship between employer and employee has become strained (doctrine of strained relations). (See Gabuay v. Oversea Paper Supply, G.R. No. 148837, August 13, 2004.) 4. 5. In case of pre-termination of employment contract in job-contracting arrangement. (SeeDepartment Order 18-02, Rules Implementing Article 106 to 109 of the Labor Code.) In exceptional cases, where separation pay is awarded as a measure of social or compassionate justice. Here, payment of separation pay may be ordered by the court even if the dismissal from service is found to have been for valid or just cause, i.e., even if the employee is found to have been at fault. (See PLDT vs. NLRC, No. L-80609, August 23, 1988.) Distinguished from Retirement Pay Separation pay should not be confused with retirement pay. Separation pay is the amount due to the employee where the cessation of employment is due to causes authorized by law (or for any of the other causes stated above). Retirement pay, on the other hand, is the amount to be paid to the employee who has reached the compulsory retirement age or who availed of voluntary retirement.

Voluntary Resignation Resignation is defined as the voluntary act of an employee who finds himself in a situation where he believes that personal reasons cannot be sacrificed in favor of the exigency of the service and he has no other choice but to disassociate himself from his employment. (Virgen Shipping Corp. vs. Barraquio, G.R. No. 178127, April 16, 2009 citing Valdez vs. NLRC.) The key is that resignation must be a voluntary act, and that the employee must have knowingly and voluntarily dissociate himself from his employment for his own personal reasons. It does not cover cases where the employee is forced to resign with the use of threats, intimidation, coercion or manipulation, or where resignation is imposed as a penalty for an offense. The common practice of allowing an employee to resign, instead of terminating him for just cause so as not to smear his employment record, also fall under the category of voluntary resignation. (See J Marketing Corp. vs. Taran, G.R. No. 163924, June 28, 2009).

Resignation Notice The Labor Code requires the employee to give an advance notice to the employer of his intention to resign. The notice of resignation must be in writing and must be served to the employer at least one month prior to the effective date of his resignation. Resignation notice usually takes the form of a letter (commonly called resignation letter) addressed to the employer, expressing the employees intention to terminate his employment. It must state the date when resignation is to take effect because of the 30-day notice requirement under the law. It may also contain the reason or justification of the employee for filing his resignation, although legally, this is not important. The employee may resign for whatever reason, or even for no reason at all. Thus, in legal parlance, voluntary resignation is also called termination by employee without just cause. Resignation letter normally contains explicit words expressing employees intention to terminate his employment. However, lack of explicit words stating the employees intention to resign is deemed not crucial, as long as the employees intention to resign can be deduced from letter itself. In one case, the Supreme Court held that a memorandum written by the employee containing his deep resentment towards his superior juridically constituted a letter of resignation. Even if the employee did not expressly indicate his intention to resign (neither of the words resign or resignation was mentioned), the resentful and sarcastic tone of the memorandum was held to be sufficiently indicative of such intention. Effect of Failure to Tender Resignation Notice If the employee fails to give the employer one month advance notice of his intention to resign, he may be held liable for damages. Instances when Notice of Resignation is Not Required The employee may resign even without serving any notice on the employer for any of the following reasons: 1. 2. 3. 4. Serious insult by the employer or his representative on the honor and person of the employee; Inhuman and unbearable treatment accorded the employee by the employer or his representative; Commission of a crime or offense by the employer or his representative against the person of the employee or any of the immediate members of his family; and Other causes analogous to any of the foregoing. Resignation under any of the instance enumerated above is also called termination by employee with justcause. Separation Pay An employee who voluntarily resigns from his work is not entitled to separation pay. There is no provision in the Labor Code which grants separation pay to voluntarily resigning employees. Separation pay as a rule is paid only in those instances where the severance of employment is due to factors beyond the control of the employee. Thus, in case of retrenchment to prevent losses where the employee is forced to depart from the company due to no fault on his part, separation pay is required by law to be paid to the dismissed employee. The case is totally different in case of voluntary resignation where severance of employment is due to employees own initiative. The law does not oblige the employer to give separation pay if the initiative to terminate employment comes from employee himself. However, by way of exceptions, there are at least two instances where an employee who voluntarily resign is entitled to receive separation pay, as follows: 1. 2. When payment of separation pay is stipulated in the employment contract or Collective Bargaining Agreement (CBA, for companies with existing bargaining agent or union); When it is sanctioned by established employer practice or policy.

In Hinatuan Mining Corporation, et al. vs. NLRC, et al., G.R. No. 117394, February 21, 1997, the court ruled viz.: It is well to note that there is no provision in the Labor Code which grants separation pay to voluntarily resigning employees. Separation pay may be awarded only in cases when the termination of employment is due to: (a) installation of labor saving devices, (b) redundancy, (c) retrenchment, (d) closing or cessation of business operations, (e) disease of an employee and his continued employment is prejudicial to himself or his coemployees, or (f) when an employee is illegally dismissed but reinstatement is no longer feasible. In fact, the rule is that an employee who voluntarily resigns from employment is not entitled to separation pay, except when it is stipulated in the employment contract or CBA, or it is sanctioned by established employer practice or policy. [Citations omitted.] In Lilia Pascua, et al. vs. NLRC, et al., G.R. No. 123518, March 13, 1998, the Supreme Court, reiterated that: The grant of separation pay, however, is inconsistent with existing employment or voluntary resignation, for it presupposes illegal dismissal. Special cases In addition to the exceptions cited above, there are other cases where the court may award separation pay to voluntarily resigning employee. For example, in Alfaro vs. CA, G.R. No. 140812, August 28, 2001, the Court ordered the payment of separation pay despite holding that the employee voluntarily resign from service, and although such payment was not mandated under the CBA or employment contract. Same conclusion was arrived at in J Marketing. In both of the above cases, the employer agreed to give separation pay to the employee as an incident of the latters resignation, but later on renege in the performance of such commitment. The Court held that such practice should not be countenanced. In Alfaro, the Court ruled as follows: Generally, separation pay need not be paid to an employee who voluntarily resigns. However, an employer who agrees to expend such benefit as an incident of the resignation should not be allowed to renege in the performance of such commitment. References 1. Article 285, Labor Code of the Philippines Last Edited: Friday, August 19, 2011 Caveat: Subsequent court and administrative rulings, or changes to, or repeal of, laws, rules and regulations may have rendered the whole or part of this article inaccurate or obsolete.

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