In the Philippine employment landscape, the cessation of the employer-employee relationship—whether through resignation or termination—triggers the mandatory release of "Final Pay." However, the computation of this amount is rarely a simple addition of days worked. Conflicts often arise regarding what an employer can legally deduct from these terminal benefits.
Under the Labor Code and prevailing jurisprudence, the rules on deductions are strict, intended to protect the worker’s wages from arbitrary withholding.
I. Defining the Components: Final Pay vs. Separation Pay
Before discussing deductions, it is vital to distinguish between the two types of payments often bundled together:
- Final Pay (Last Pay): Refers to the sum of all wages and monetary benefits earned by the employee, regardless of the cause of termination. It typically includes unpaid salary, pro-rated 13th-month pay, and the cash conversion of unused Service Incentive Leaves (SIL).
- Separation Pay: A specific statutory payment due only in cases of Authorized Causes (e.g., redundancy, retrenchment, or closure of business) or as a matter of financial assistance in specific legal settlements. It is not usually required in cases of Just Causes (e.g., serious misconduct or gross neglect) or voluntary resignation.
II. The General Rule on Deductions
The general rule under Article 113 of the Labor Code is that no employer shall make any deduction from the wages of their employees. There are only three primary exceptions:
- When the deductions are authorized by law (e.g., SSS, PhilHealth, Pag-IBIG contributions, and withholding taxes).
- For premiums for insurance starting with the employee's consent.
- When the deduction is authorized by the employee in writing (e.g., company loans or union dues).
III. Common Legitimate Deductions in Termination Cases
When an employee is terminated or leaves, the employer may legally deduct the following from the final settlement:
1. Statutory Contributions and Taxes
The employer must deduct the employee's share of mandatory contributions (SSS, PhilHealth, Pag-IBIG) and any applicable withholding tax on the final salary. Note, however, that Separation Pay received due to involuntary causes (death, sickness, or causes beyond the control of the employee) is generally exempt from income tax.
2. Debts and Liquidated Obligations
If the employee has outstanding company loans or salary advances ("vale"), these can be deducted from the final pay. This is supported by the principle of Legal Compensation under the Civil Code, where two persons are creditors and debtors of each other.
3. Property Accountability (The "Clearance" Process)
This is the most common area of dispute. An employer can withhold the final pay until the employee completes the clearance process. Deductions can be made for:
- Unreturned company property (laptops, uniforms, ID cards).
- Accountabilities for lost or damaged equipment, provided due process was followed to determine the employee's liability.
4. Cost of Training (With a Bond)
If the employee signed a Training Bond and was terminated or resigned before the bond expired, the employer may deduct the stipulated penalty or the pro-rated cost of training from the final pay, provided the contract is not unconscionable.
IV. Prohibited Deductions
Employers cannot arbitrarily deduct amounts for the following:
- "Damage to Goodwill": General claims that the employee's termination hurt the company's reputation.
- Standard Business Risks: Losses inherent to the business (e.g., spoilage or breakage) cannot be deducted unless it is proven that the employee was clearly at fault and such deductions are a recognized industry practice.
- Unproven Claims: Deductions for alleged theft or embezzlement that have not been substantiated through an internal investigation or a court ruling.
V. The Requirement of "Clearance" and Timing
The Department of Labor and Employment (DOLE) issued Labor Advisory No. 06, Series of 2020, which mandates that the Final Pay must be released within thirty (30) days from the date of separation.
While the employer has the right to require a "clearance" before releasing the funds, they cannot use the clearance process to indefinitely delay payment. If the employee has no pending accountabilities, the employer is legally obligated to release the full amount.
Legal Note: In Milan vs. NLRC, the Supreme Court affirmed that an employer may withhold terminal pay pending the return of company property. This is a "suspensive condition"—once the property is returned, the pay must be released.
VI. Summary of Recoverable Amounts
| Type of Pay | Taxable? | Subject to Loans/Debts? | Subject to SSS/PhilHealth? |
|---|---|---|---|
| Unpaid Salary | Yes | Yes | Yes |
| 13th Month Pay | No (up to ₱90k) | Yes | No |
| Separation Pay | No (if due to Authorized Cause) | Yes | No |
| SIL (Leave) Cash Out | Yes | Yes | No |
Conclusion
Deductions from final pay and separation pay in the Philippines are heavily regulated to ensure employees receive their hard-earned benefits. While employers have the right to offset debts and recover company property, they must do so within the bounds of written consent and statutory allowances. Any deduction not supported by law or a valid contract can lead to a complaint for underpayment of wages before the Labor Arbiter.
Would you like me to draft a sample Demand Letter for the release of withheld final pay?