here’s a plain-English, Philippines-focused explainer on

Final Pay (a.k.a. Back Pay) — Computation & Release Rules in the Philippines

Scope: Everything an employee or HR needs to know about final pay when employment ends (resignation, end of contract, termination, redundancy, etc.). Covers what’s included, what can be deducted, separation pay vs. final pay, timing of release, taxes, clearances, certificates, and practical formulas. General info only, not legal advice.

1) “Final pay” vs. “separation pay” (they’re different)

Final pay / back pay = the total amount due to the employee upon separation, regardless of cause. Think of it as the closing bill: unpaid salary + accrued benefits – lawful deductions.
Separation pay = a statutory benefit due only for certain causes of termination (authorized causes or disease). If applicable, it’s one line item inside the final pay.

2) What typically goes into final pay

Unpaid basic salary/wages up to last day worked (prorated).
Overtime, premium pay, night shift differential, regular/special holiday pay, rest-day premium, differentials from wage orders.
Pro-rated 13th-month pay (mandatory): earned from January 1 up to separation date.
Unused paid leave credits, if commutable under law/policy/CBA (e.g., Service Incentive Leave (SIL) 5 days/year is commutable if unused at year-end; many employers also cash out unused SIL and other leaves upon separation per policy/CBA).
Commissions, incentives, and productivity bonuses that are earned/determinable under the plan/policy at the time of separation.
Separation pay (if due; see §5).
Tax refunds/adjustments (e.g., over-withheld tax).
Conversion of company-mandated benefits if policy/CBA allows (e.g., rice/meal allowance prorations, clothing allowance rules).

Tip: If your handbook/CBA is more generous than the Labor Code, the more favorable rule applies.

3) What may be deducted (and what may not)

Lawful deductions (must be authorized by law, by the employee in writing, or by CBA):

Statutory: withholding tax; SSS, PhilHealth, Pag-IBIG arrears if permitted; government garnishments.
Employee-authorized: company loans, cooperative loans, benefit advances, salary overpayments, leave taken in advance, cash advances (with written consent).
Loss or damage to employer’s property only if: (a) employee is clearly at fault/has negligence, (b) the employee is given due process (notice and opportunity to explain), and (c) deductions do not exceed the proven loss.

Not allowed:

Deductions that erase or go below statutory minimums illegally.
Penalties not grounded in policy/law or imposed without due process.
“Clearance fees” or arbitrary holdbacks not supported by policy/law.

Best practice: Provide the employee an itemized final pay statement showing every inclusion and deduction.

4) When final pay must be released & required documents

Release period: As a general rule of practice, within 30 days from the employee’s separation date (earlier if policy/CBA/contract says so). Many HR teams target 15–30 days.
Certificate of Employment (COE): Must be issued within a few days upon request (standard practice is within 3 business days of request).
BIR Form 2316: Give the original signed copy to the separated employee upon or shortly after separation (or by the statutory annual deadline), reflecting year-to-date compensation and taxes.
Final payslip / breakdown: Provide on release of funds.
Proof of remittances (SSS/PH/HDMF) for last month(s): keep for audit; employees may request confirmation.

Clearance (return of ID/laptop/tools, settlement of accountabilities) is normal, but cannot be used to delay indefinitely. Build realistic clearance timelines into the 30-day window.

5) Separation pay — when it applies & how to compute

Separation pay is not for every exit. It is due only when the law says so:

A. Authorized causes (management prerogative/business causes)

Installation of labor-saving devices or Redundancy → At least 1 month pay for every year of service, or 1 month pay, whichever is higher.
Retrenchment to prevent losses, Closure/cessation not due to serious losses → At least ½ month pay for every year of service, or 1 month pay, whichever is higher.
Closure due to serious business losses → No separation pay required.

B. Health/Disease (when employee is terminated because a disease is incurable within six months and continued employment is prohibited by law and detrimental to health)

At least ½ month pay for every year of service, or 1 month pay, whichever is higher.

Rounding rule commonly applied: A fraction of at least 6 months is treated as one whole year in separation pay computations.

Separation pay ≠ quitclaim. It’s a legal entitlement for these causes. In resignation, expiration of fixed-term, or dismissal for just cause, separation pay generally does not apply (unless a policy/CBA grants it).

6) Taxes on final pay items

13th-month pay and other benefits are tax-exempt up to the statutory cap (TRAIN law: ₱90,000 aggregate cap for 13th-month + “other benefits”).
Separation pay due to authorized causes or health, and benefits due to death/physical disability, are generally tax-exempt.
Resignation gratuity/ex-gratia (purely voluntary company grant) is taxable unless it falls within an exemption.
Leave conversions, OT, premiums, commissions are taxable compensation.
Tax refund/deficiency should be reconciled in the final payroll run; provide updated BIR 2316.

Employers remain responsible for correct withholding and year-end reporting even after the employee leaves.

7) How to compute final pay (practical worksheet)

Step 1: Determine the daily/hourly equivalents

Choose the appropriate divisor based on pay classification (used consistently in your payroll):

Monthly-paid (paid for all calendar days): Daily = Monthly × 12 ÷ 365; Hourly = Daily ÷ 8.
Daily-paid (5/5.5/6-day workweek): common annual day factors 261 / 287 / 313 respectively. Daily = Monthly × 12 ÷ (261/287/313); Hourly = Daily ÷ 8.

Step 2: Compute unpaid salary up to last day

If the month isn’t complete, prorate using your established divisor (e.g., monthly-paid often uses 30 for proration in policy, but compute consistently).

Step 3: Add premiums actually earned

OT @ +25% (ordinary days) / +30% (rest day/holiday OT);
Night shift differential @ +10% (10:00 p.m.–6:00 a.m.);
Holiday pay per rules; rest-day premium; wage differentials.

Step 4: Add 13th-month (pro-rated)

13th-month = (Basic salary actually earned from Jan 1 to separation date) ÷ 12. Include only amounts counted as basic salary under PD 851 and jurisprudence (most allowances aren’t).

Step 5: Add leave conversions

Convert unused commutable leaves per law/policy/CBA (document basis and rates).
For SIL, many employers cash out unused balance at separation (policy-based). Keep the computation transparent.

Step 6: Add separation pay (if applicable)

Use the correct cause and rate (see §5). Apply 6-month rounding rule.

Step 7: Less lawful deductions (see §3)

Taxes/withholding, loans with written consent, cash advances, proven loss with due process, government garnishments.
Never deduct arbitrary “penalties” without legal/policy basis.

Step 8: Produce itemized statement & release within timeline

Show all lines and net payable. Prepare BIR 2316 and COE.

8) Fixed-term and project employment

End of fixed term/project (validly agreed and completed) usually doesn’t entitle to separation pay, unless policy/CBA says otherwise.
All earned items (unpaid salary, OT/ND/holiday pay, 13th-month, commutable leave, commissions earned) still form part of final pay.

9) Dismissal for just cause vs. authorized causes

Just cause (serious misconduct, willful disobedience, gross neglect, fraud, etc.): no separation pay by default (unless equity/clemency via policy/CBA). Due process (notice-hearing-notice) must still be observed; unpaid earned benefits still must be paid.
Authorized causes (business/health): require 30-day written notice to both employee and DOLE, separation pay (except closure due to serious losses), and compliance with selection standards (for redundancy/retrenchment).

10) Clearances, quitclaims, and disputes

Clearance: Returning assets and settling accountabilities is standard, but use a reasonable, short checklist. Don’t use clearance to bypass the 30-day release expectation.
Quitclaims: Valid only if voluntary, informed, no fraud/duress, and the consideration is reasonable. Courts set aside quitclaims that waive statutory benefits or are unconscionable.
Money claims: Most labor money claims prescribe in 3 years from accrual; illegal dismissal and damages have different clocks—consult counsel early.

11) Employer compliance checklist

Identify separation cause (just vs. authorized vs. neutral like resignation/end-contract).
Observe procedural due process for terminations.
Compute final pay (items in §2) and separation pay if due (§5).
Reconcile tax and government contributions; prepare BIR 2316.
Process clearance quickly (return of assets, accountabilities).
Release final pay within ~30 days of separation (earlier if policy says).
Issue COE within a few days upon request (best practice: 3 business days).
Provide itemized final payslip/breakdown and proof of payment.
Keep records (computations, approvals, notices) for audit/DOLE inspection.

12) Common pitfalls (and how to avoid them)

Mixing up separation pay with final pay → compute both where applicable.
Using the wrong divisor → apply consistent and documented payroll rules.
Ignoring earned commissions/bonuses that are determinable → pay what’s accrued under the plan.
Over-deducting for losses without due process → risk of wage claims.
Delaying COE or final pay → potential complaints and damages.
Tax errors on separation/separation pay → fix at the final run; issue corrected 2316.

13) Mini-example (resignation, monthly-paid)

Facts: ₱30,000 monthly; last day March 10; unused VL 3 days (commutable per policy); OT 4 hrs on Mar 5; no loans; no separation pay.

Daily = 30,000×12÷365 ≈ ₱986.30; Hourly ≈ ₱123.29
Unpaid salary (Mar 1–10): 986.30 × 10 = ₱9,863.00
OT (ordinary day +25%): 4 × 123.29 × 1.25 = ₱616.45
13th-month (Jan 1–Mar 10): Basic earned Jan–Feb (₱60,000) + Mar 1–10 (₱9,863) = ₱69,863 ÷ 12 = ₱5,821.92
Leave conversion: 3 × 986.30 = ₱2,958.90
Gross final pay: ₱19,260.27 → less applicable withholding tax → Net.

(If the exit were redundancy with 4 years, 8 months tenure → separation pay = 1 month per year, 4 years + 8 months → treat as 5 years → 5 × ₱30,000 = ₱150,000 (add to final pay and apply tax rules).)

Bottom line

Final pay = everything earned (salary, premiums, 13th-month, commutable leave, commissions), plus separation pay when the law requires it, minus only lawful deductions.
Timing matters: plan clearance so you can release within ~30 days and issue the COE promptly.
Keep computations transparent, apply divisors consistently, withhold correctly, and document everything.

If you want, share the cause of separation, monthly rate, work schedule/divisor, tenure, leave balance, and any loans/advances, and I’ll run a precise final-pay worksheet (with tax notes) tailored to your case.