This article explains what typically goes into an employee’s “final pay,” when it’s due, what employers may (and may not) deduct, and how the pro-rated 13th-month pay works upon separation—whether due to end of contract, resignation, or termination.

1) What “back pay” (final pay) usually includes

Final pay (often called back pay or last pay) is the sum of all amounts an employer still owes when the employment relationship ends. In the Philippines, it commonly covers:

Unpaid basic wages up to the last day worked
Pro-rated 13th-month pay (see Section 5)
Cash conversion of unused Service Incentive Leave (SIL)—at least 5 SIL days per year for eligible employees, convertible to cash if unused at year-end or at separation
Holiday pay, rest-day premiums, and night shift differential still unpaid
Overtime pay still unpaid
Separation pay, if legally due (e.g., authorized causes like redundancy, retrenchment, closure not due to serious losses, installation of labor-saving devices; or as provided by company policy/CBA)
Other earned, vested benefits under company policy/CBA (e.g., rice allowance differentials already earned, commissions actually earned, incentive pay that has vested under clear rules)

Timeline: As a general benchmark from DOLE guidance, final pay should be released within 30 calendar days from the date of separation unless a more favorable company policy or CBA provides an earlier release.

2) The legal baseline for deductions from wages

As a rule, wages are protected. Deductions are prohibited unless they fall under legally recognized exceptions. In practice, valid deductions tend to fit into one of these buckets:

(A) Deductions required or authorized by law
- Withholding taxes
- SSS, PhilHealth, and Pag-IBIG contributions (and loan amortizations to these agencies only if the employee has authorized payroll deduction per the agency’s rules)
(B) Deductions ordered by a court, quasi-judicial agency, or government office
- E.g., garnishments, writs, lawful levies
(C) Deductions with the employee’s freely given, written authorization for the employee’s own benefit
- E.g., company loan repayments, salary advances, cooperative dues, HMO top-ups, government-agency loan amortizations
(D) Deductions for loss or damage to the employer’s property only if all of the following are satisfied:
1. The employee is clearly shown to be responsible (after due process)
2. The employee is given a chance to explain
3. The deduction is fair and reasonable, and
4. The employee agrees in writing to the deduction (or a CBA expressly allows it)

Key point: “Set-off” or compensation under the Civil Code cannot be used to bypass wage-protection rules. Employers cannot simply net what they believe the employee owes against wages unless the deduction is one of the recognized exceptions above and all formalities are observed.

3) What employers cannot deduct from final pay

Arbitrary penalties or fines not authorized by law, a valid CBA, or a written consent that complies with rules
Unproven losses/damages (no evidence and no due process)
Training bonds/liquidated damages that are unreasonable, punitive, or unsupported by a valid, clear, and fairly applied training agreement; even with a valid agreement, payroll deduction still needs the employee’s written consent and reasonableness
Uniform/tool deposits and similar amounts unless explicitly allowed by law and handled per DOLE rules
Costs of normal business risk (e.g., ordinary shrinkage or spoilage) unless a valid policy and due process establish the employee’s fault and the deduction requirements above are met
Deductions that reduce pay below minimum wage (unless allowed by law, e.g., statutory deductions like taxes/SSS)

4) Company property, accountabilities, and clearance

Employers may require return of IDs, tools, equipment, laptops, documents, uniforms, corporate cards, SIMs, etc.
If something is missing or damaged, the employer must (i) document the loss/damage, (ii) observe due process, and (iii) obtain written employee consent for any reasonable deduction (unless a CBA already provides a clear, lawful basis).
Clearance procedures must not be used to unduly delay final pay beyond the 30-day benchmark (or an earlier contractual/CBA commitment).

5) 13th-month pay upon separation

5.1 Who is entitled

All rank-and-file employees are entitled to 13th-month pay, regardless of employment status (regular, project-based, fixed-term, casual), provided they have worked at least one (1) month during the calendar year.
Some categories (e.g., government-owned/controlled corporations under special rules, managerial employees, etc.) are treated differently by law; confirm your classification.

5.2 When paid if employment ends before December

If an employee separates before December, the 13th-month pay is pro-rated based on the actual basic wages earned during the year up to the date of separation and is due with final pay.

5.3 Formula (default rule)

13th-Month Pay = (Total Basic Wage Earned in the Calendar Year) ÷ 12

“Basic wage” generally excludes: overtime pay, holiday pay, premium pay, night differential, and allowances not integrated into basic.
Commissions and incentives: treatment depends on jurisprudence and the nature of the payment. Productivity-linked commissions that are part of wage may be counted; purely discretionary bonuses usually are not. Company policy/CBA or settled practice can also affect inclusion.

Example (end of contract on April 15):

Monthly basic: ₱20,000
Wages earned Jan 1–Apr 15: ₱20,000 (Jan) + ₱20,000 (Feb) + ₱20,000 (Mar) + ₱10,000 (Apr half-month) = ₱70,000
Pro-rated 13th-month = ₱70,000 ÷ 12 = ₱5,833.33

Tip: If the company released a mid-year 13th-month advance, that amount can be offset against the final 13th-month computation (not below zero), with proper payslip disclosure.

5.4 Tax treatment

13th-month and other benefits are income-tax-exempt up to the statutory ceiling (currently ₱90,000 under TRAIN). Any excess is taxable.
Separation benefits due to involuntary separation (e.g., redundancy, retrenchment, closure not due to serious losses, disease) are generally tax-exempt; voluntary resignations are typically taxable per regular rules.

6) Lawful offsets an employer may apply to final pay (including 13th-month)

Subject always to the rules in Section 2:

Statutory deductions: withholding tax; SSS/PhilHealth/Pag-IBIG contributions; government-agency loan amortizations with proper authorization
Company loans/salary advances: if there is a signed authorization and the deduction is applied mathematically (no hidden charges)
Overpayments: e.g., payroll errors, over-credited leave converted to cash by mistake—documented and explained to the employee, with payslip visibility
Reasonable value of unreturned company property: only after due process, clear proof of accountability, and written consent for the deduction; use depreciated or fair value, not replacement-cost windfalls
Cash bonds: may be netted after proper liquidation/audit and in line with the policy/CBA and DOLE rules
CBA-authorized deductions: e.g., union dues, if the CBA and law allow

Never deduct items that are disputed, unliquidated, or speculative without due process and written consent. If there is a genuine dispute, release the undisputed portion of final pay and resolve the balance via internal process/mediation.

7) Practical payroll checklist for separations

Before payroll cut-off:

Confirm last day worked and basis of separation (end of fixed term, project completion, resignation, authorized cause, just cause)
Audit earnings (basic, OT, premiums, differentials, commissions that have vested)
Compute pro-rated 13th-month to the last day
Convert unused SIL (if eligible)
Determine separation pay (if due), rate (½-month or 1-month per year of service, depending on cause), and fraction-of-year rules
Review statutory deductions and tax
Verify loans/advances and obtain written consent for any offsets
Perform property/accountability clearance with documentation; if unresolved, avoid blanket holds—release undisputed amounts

Documentation to issue:

Payslip/final payroll register showing each component and each deduction
Certificate of Employment (issue within 3 calendar days from request)
BIR Form 2316 (at year-end or upon separation as applicable)
Quitclaim/waiver (optional): If used, it must be voluntary, for a reasonable consideration, and clearly explained; it cannot waive statutory entitlements like minimum wage or 13th-month.

8) Handling special scenarios

End of fixed-term/project contract: Pay all earned amounts up to the last day, plus pro-rated 13th-month and SIL cash conversion (if any). No separation pay is due unless an authorized cause or company/CBA benefit applies.
Resignation without full 30-day notice: Employer may recover demonstrable actual damages (not penalties) if the failure caused losses and if supported by policy/contract; deduction still needs written consent and must be reasonable.
Just-cause termination: No separation pay (generally), but all earned wages, SIL conversion, and pro-rated 13th-month must still be paid; lawful deductions may apply.
Authorized-cause termination: Pay separation pay per law/policy, plus all earned wages, SIL conversion, and pro-rated 13th-month.
Commission-heavy roles: Review if commissions are part of “basic wage” or separate incentives; apply jurisprudence, written policy, and consistent past practice. When in doubt, use a conservative inclusion and disclose your basis.
Remote assets not yet returned (e.g., laptop): If recovery will exceed the 30-day window, release the undisputed final pay and document the pending accountability; once resolved and with written consent, settle any netting or collect separately.

9) Computation templates

9.1 Pro-rated 13th-month

Total basic wages actually earned in the calendar year up to separation
÷ 12
= Pro-rated 13th-month pay

9.2 Illustrative final pay statement (skeletal)

Unpaid basic wages (to last day) …………………… ₱ __
Overtime/night/holiday premiums ………………… ₱ __
SIL cash conversion ………………………………………… ₱ __
Pro-rated 13th-month ……………………………………… ₱ __
Separation pay (if any) …………………………………… ₱ __ Gross Final Pay ………………………………………… ₱ __

Less lawful deductions:

Withholding tax …………………………………………… ₱ __
SSS/PhilHealth/Pag-IBIG ……………………………… ₱ __
Authorized loan/advance ……………………………… ₱ __ (attach consent)
Proven loss/unreturned property …………………… ₱ __ (attach findings + consent) Net Final Pay ………………………………………… ₱ __

Attach computation sheets and employee-signed authorizations where required.

10) Disputes, remedies, and best practices

Transparency: Provide a clear computation and supporting documents. Hidden or unexplained offsets invite disputes.
Due process: For any accountability deduction, conduct a fair inquiry and document findings; obtain written consent for the deduction.
Release the undisputed portion: Do not hold everything over a contested item.
Mediation: Many money-claim disputes settle quickly through DOLE’s SEnA (mediation) before escalating to formal cases.
Record-keeping: Maintain signed policies, authorization forms, proof of wage payments, and clearance records for at least the prescriptive period for money claims.

11) Quick reference: What employers can offset from back pay and 13th-month

Generally allowable (with proper basis):

Taxes; SSS/PhilHealth/Pag-IBIG; government-loan amortizations (with authorization)
Company loans/advances (with written consent)
Documented overpayments
Reasonably valued, proven losses/unreturned property after due process + written consent
CBA-authorized deductions

Generally not allowable:

Unproven losses/damages; arbitrary penalties/fines
Deductions without written consent where required
Deductions that pull wages below minimum (except statutory)
Using clearance or disputes to delay entire final pay beyond the benchmark period
Waiving statutory benefits (e.g., 13th-month) via quitclaim

Final word

For end-of-contract situations, the default is simple: pay everything earned (including the pro-rated 13th-month) and deduct only what the law or a valid, documented authorization allows—never guess, never penalize without proof, and always explain the math. If a line item is disputed, pay the undisputed portion on time and resolve the rest with documentation and, if needed, mediation.