Computation of Redundancy Pay (Philippines) – A Practical Legal Guide

This is a practitioner-style overview for Philippine employers and employees. It covers the legal basis, eligibility, computation rules (with formulas and worked examples), documentation, timing of payment, taxation, and common edge cases. It’s written for general guidance and is not a substitute for legal advice on specific facts.

1) Legal basis & what “redundancy” means

Authorized cause. Redundancy is an authorized cause for termination under the Labor Code (renumbered Article 298, formerly Art. 283).
Concept. A position becomes redundant when it is in excess of what is reasonably needed by the business (e.g., re-organization, overlapping roles, adoption of technology, efficiency measures).
Good-faith + fair criteria. The decision must be made in good faith and supported by objective criteria (e.g., LIFO/seniority with exceptions, efficiency ratings, qualifications, disciplinary record), and by business records (new staffing pattern, feasibility studies, financials, or similar documents).

Procedural requirements (authorized causes):

30-day written notice to the affected employee(s); and
30-day written notice to the Department of Labor and Employment (DOLE);
Separation pay released on or before the effectivity date (best practice) or within the legally/administratively required period for final pay.

2) Who is entitled (and who is not)

Entitled: Rank-and-file and managerial employees, whether monthly- or daily-paid, including probationary employees, if the separation is due to redundancy (i.e., not for just cause). Tenure length only affects the amount, not entitlement.

Not entitled under redundancy rules:

Project/seasonal employees separated due to project completion/season end (they follow different rules).
Fixed-term employees whose contracts end by expiration (unless ended early for redundancy).
Employees validly dismissed for just cause (e.g., serious misconduct), which is a different regime and has no separation pay (unless provided by company policy/CBA).

3) Core formula for redundancy pay

Under Article 298, the separation pay for redundancy is:

Separation Pay = the higher of: (a) One (1) month pay or (b) One (1) month pay for every year of service (Fractions of at least six (6) months count as one whole year.)

3.1 What counts as “one (1) month pay”?

Use the employee’s latest monthly salary rate at the time redundancy takes effect. As a rule of thumb:

Start with basic monthly salary.
Include monetary items that the law or consistent, established practice treats as part of “wage” (e.g., mandated COLA or truly regular fixed allowances that are wage-integrated).
Exclude discretionary/contingent items that are not wage (e.g., performance bonuses, profit-sharing, honoraria, non-regular allowances), unless a CBA/policy or clear practice has integrated them.

Tip: If there’s doubt whether an allowance is wage-integrated (hence part of “month pay”), examine: (i) regularity/fixity, (ii) linkage to actual work or time, (iii) explicit policy/CBA language, and (iv) how payroll and government contributions treat it.

3.2 Converting rates for non-monthly pay

If the employee is daily-paid or hourly-paid, first determine a Monthly Equivalent:

Daily-paid: Monthly Equivalent = Average actual monthly earnings over the last 3 full months or use the company’s established conversion factor (e.g., 26, 27, 30), applied consistently.
Hourly-paid: Monthly Equivalent = Hourly Rate × Average paid hours per month (use a documented, consistent method).

Consistency and documentation are key—apply the same method used for payroll, leaves, and government remittances.

3.3 Rounding of service

≥ 6 months in the last, incomplete year rounds up to 1 whole year.
< 6 months does not add another year.

4) Worked examples

All examples assume “one month pay” uses basic monthly salary only. If certain fixed allowances are wage-integrated, add them to the monthly rate before computing.

Example A — Mid-tenure employee

Latest monthly salary: ₱30,000
Service: 4 years and 7 months → 5 years (rounded)
Formula: 1 month × 5 = ₱150,000
Compare with the floor (₱30,000). Pay ₱150,000 (higher amount).

Example B — Short-tenure employee

Latest monthly salary: ₱22,000
Service: 1 year and 2 months → 1 year
Formula: 1 month × 1 = ₱22,000
Compare with the floor (₱22,000). Pay ₱22,000 (same).

Example C — Very new hire (still entitled)

Latest monthly salary: ₱18,000
Service: 4 months → 0 year (no rounding)
Year-of-service computation = ₱0 but the 1-month floor applies → Pay ₱18,000.

Example D — Daily-paid with fixed factor

Daily rate: ₱900; company uses 26-day factor
Monthly Equivalent: ₱900 × 26 = ₱23,400
Service: 2 years and 8 months → 3 years
Separation Pay: ₱23,400 × 3 = ₱70,200 (higher than the ₱23,400 floor).

Example E — With wage-integrated allowance

Basic monthly: ₱40,000; fixed transportation allowance ₱2,000 (regular & wage-integrated)
One month pay: ₱42,000
Service: 9 years and 5 months → 9 years
Separation Pay: ₱42,000 × 9 = ₱378,000 (higher than the ₱42,000 floor).

5) What else must be paid on separation (beyond redundancy pay)

On or shortly after the effectivity date, employees typically receive:

Final salary up to last day worked;
Pro-rated 13th-month pay (Jan–separation date);
Unused, convertible leaves (per policy/CBA or if convertible by practice/law);
Any other accrued benefits due under company policy or CBA;
Certificates (e.g., COE) and statutory clearances, as applicable.

Administrative guidance has required release of final pay within 30 days from separation (unless a shorter period is set by company policy/CBA), barring documented disputes or clearance issues.

6) Taxes & government contributions

Income tax: Separation pay due to redundancy (and similar authorized causes) is tax-exempt under the National Internal Revenue Code provision on amounts received by reason of separation for causes beyond the employee’s control, provided the payment is reasonable and not a disguised bonus.
SSS/PhilHealth/HDMF: Separation pay itself is not subject to regular payroll contributions. (Accrued wages and 13th-month remain subject to usual rules up to the last day worked.)

Practical tip: Employers often request a BIR ruling or internal memo from finance/tax confirming tax treatment when running mass redundancy programs, and apply withholding only to items that are taxable (e.g., taxable bonuses).

7) Paperwork & timing checklist (for employers)

Business records supporting redundancy (new org chart/staffing pattern, cost-savings study, board resolutions).
Selection criteria (documented and consistently applied).
Notices (30 days):
- To employee(s): date received, effectivity date, reason (“redundancy”), explanation of criteria.
- To DOLE: establishment report with headcount impact and reasons.
Computation sheet per employee (showing rate, years of service, rounding, inclusions/exclusions).
Release documents: quitclaim and release (voluntary; clear language; full & final amounts; employee given time to review).
Payment: preferably on or before effectivity (or in line with final-pay rules), via traceable means.
Post-separation deliverables: COE, government reports/clearances, and updates to payroll/HRIS.

8) Frequent pitfalls (and how to avoid them)

Missing DOLE notice or late notice. Always send both notices 30 days before effectivity.
Using redundancy to mask a just-cause dismissal. This can invalidate the action and lead to reinstatement/backwages.
Arbitrary selection. Apply clear, documented criteria; avoid discrimination.
Understating “one month pay.” Review which allowances are wage-integrated by law/practice/CBA.
Ignoring 6-month rounding. Fractions ≥ 6 months add one whole year.
Double benefits confusion. If both retirement and redundancy benefits appear to apply, the usual rule is no double recovery—pay whichever is higher, unless your CBA/policy explicitly grants both.

9) Quick reference: redundancy vs. other authorized causes

Authorized cause	Separation pay rule
Redundancy	1 month pay per year of service (or 1 month, whichever is higher)
Installation of labor-saving devices	1 month pay per year of service (or 1 month, whichever is higher)
Retrenchment to prevent losses	½ month pay per year of service (or 1 month, whichever is higher)
Closure/cessation not due to serious business losses	½ month pay per year of service (or 1 month, whichever is higher)
Disease (Art. 299; when requirements met)	½ month pay per year of service (or 1 month, whichever is higher)

“Per year of service” uses the ≥6-months = 1 year rounding rule.

10) Model computation clause (for HR memos)

“Separation pay shall be computed at one (1) month pay per year of service, with fractions of at least six (6) months counted as one whole year, or one (1) month pay, whichever is higher. One (1) month pay means the employee’s latest monthly basic salary immediately preceding the effectivity of separation, including wage-integrated regular allowances in accordance with law, applicable CBA, and established practice.”

11) Practical Q&A

Q: Are probationary employees covered? A: Yes, if separated due to redundancy (authorized cause), they get separation pay under the same formula.
Q: Must we conduct a hearing? A: No formal just-cause hearing is required, but written notice and good-faith documentation are.
Q: Can we stagger the separation pay? A: Best practice is lump-sum on or before effectivity. If staggered due to operational constraints, memorialize it in a written agreement and avoid extending beyond the final-pay timeline.
Q: Is quick re-hiring allowed? A: There’s no blanket ban, but swift re-hiring to equivalent roles can undermine the bona fides of redundancy and potentially affect tax-exempt treatment. Exercise caution and document business reasons.

Final reminders

Keep your paper trail: notices, criteria, computations, and business-need documents.
Apply the 6-month rounding consistently.
Treat tax and allowance inclusion issues carefully; align with your CBA/policies and established payroll practice.
When in doubt on a gray area (e.g., allowance integration or tricky tenure histories), get tailored legal/tax advice.

If you want, I can turn this into a fill-in-the-blanks redundancy computation template (with fields for rates, tenure, rounding, inclusions) you can reuse for your cases.