A complete practitioner’s guide for HR, payroll, accountants, and counsel

I. What “final pay” covers

Final pay (a.k.a. last pay/last salary) is the sum of all amounts due to a worker upon separation from employment—whether by resignation, termination for just/authorized cause, retirement, or end of contract. It typically includes:

Unpaid basic wages up to last day worked (including regular holiday pay, if applicable).
Premiums and differentials earned but unpaid: overtime, night shift differential, rest day/special day/holiday premiums.
Pro-rated 13th month pay (statutory).
Unused leave pay (e.g., commutable Service Incentive Leave or company-granted leaves per policy/CBAs).
Separation benefits (if the cause is an authorized cause or as awarded/contracted).
Other contractual/CBAs benefits due at separation (e.g., allowances, rice/meal conversions, retirement/gratuity).
Refunds/return of deposits (cash bonds, subject to lawful deductions).
Tax adjustments and statutory clearances (e.g., pro-rated withholding).

Golden rule: If an amount was earned, vested, or legally mandated, and has not been paid yet, it belongs in final pay—subject only to lawful deductions.

II. Release timeline and deliverables

Release deadline: Within 30 calendar days from employee’s separation (resignation, termination, end of contract, retirement), unless a more favorable company policy/CBA provides an earlier date. Clearance processes must be managed to meet this 30-day cap.
Certificate of Employment (COE): Issue within 3 days from an employee’s request—regardless of clearance status.
Payslip/Breakdown: Provide a transparent computation (earnings and deductions by line item).
BIR Form 2316: Issue upon separation or within the statutory deadline for substituted filing.
Government loans/benefits: Coordinate updates (SSS, PhilHealth, HDMF) and loan reconciliations.

Interest for delay: Late payment may earn legal interest (commonly 6% p.a.) from default until full payment, and expose the employer to money claims and administrative complaints.

III. What changes with the cause of separation?

A. Resignation or termination for just cause (e.g., serious misconduct)

Pay: Wages through last day + earned premiums + pro-rated 13th month + commutable leaves + other accrued benefits.
No separation pay (unless granted by policy/contract).
Lawful deductions only (see § V).

B. Authorized causes (reduction, closure not due to serious losses, labor-saving devices)

Separation pay (statutory minimum):
- Redundancy / installation of labor-saving devices: 1 month pay or 1 month per year of service (whichever is higher).
- Retrenchment / closure not due to serious losses: 1 month pay or 1/2 month per year of service (whichever is higher).
- Disease (employee found unfit after due process): at least 1/2 month per year of service.
- Rounding rule: ≥ 6 months counts as 1 whole year.
Plus all items in § I (wages, 13th month, leaves, etc.).

C. End of fixed-term/project/seasonal engagement

Pay all earned items; separation pay only if contract/CBA provides or if the end is treated as an authorized cause by law/policy.

D. Retirement

Statutory retirement pay (if applicable) or superior CBA/plan benefits, plus § I items.

E. Illegal dismissal (by final judgment or settlement)

Backwages + reinstatement or separation pay in lieu, plus 13th month/benefits during the backwage period; attorney’s fees/interest may be awarded.

IV. Computation building blocks

A. Daily and hourly rates

Monthly-paid: Daily equivalent often computed using 26 days (company practice/CBAs may vary); ensure consistency with how you paid during employment.
Daily-paid: Use actual days worked + paid regular holidays as applicable.
For premiums (OT/NSD), use the company’s established basic hourly rate consistent with payroll policy.

B. Pro-rated 13th month pay

Formula (statutory): [ \text{13th month} = \frac{\text{Basic salary actually received within the calendar year}}{12} ] Include only basic pay components that are part of the salary; exclude those legally excludable (e.g., COLA if treated as exclusion by policy). Count months actually served; for separated employees, compute up to the separation date.

C. Service Incentive Leave (SIL) and company leaves

SIL: Minimum 5 days/year for eligible employees; commutable if unused at year-end or proportionate upon separation.
Company leaves: Follow the vesting/commutation rules in policy/CBA (some are “use-it-or-lose-it,” others are fully commutable).

D. Premiums and differentials (quick reference)

Overtime: OT hours × basic hourly × OT premium rate.
Night Shift Differential: Hours between 10:00 PM and 6:00 AM × NSD rate (statutory minimum 10% of basic hourly).
Rest day / special day / holiday premiums: Apply statutory/company multipliers; include regular holiday pay if the last pay period covers a regular holiday.

E. Separation pay (authorized causes)

Compute using the latest salary rate (basic + the inclusions recognized by law/CBAs, if any).
Apply the whichever-is-higher rule for the category involved; round up a fraction of ≥ 6 months.

F. Taxes

13th month & de minimis: Exempt up to the current statutory ceiling; excess is taxable.
Separation benefits due to authorized causes, death, sickness, or disability: Generally tax-exempt under the Tax Code; resignation-based gratuities are typically taxable.
Backwages: Generally taxable.
Always apply withholding consistent with the employee’s tax status and issue Form 2316.

V. Deductions: what is and isn’t allowed

Allowed deductions (must be lawful, reasonable, and properly documented):

Withholding taxes and statutory contributions;
SSS/HDMF/PhilHealth/Company loans per written authorizations;
Value of company property lost/damaged only when: (a) the employee is clearly at fault/has negligence, (b) due process was observed, (c) liability and amount are clearly established, and (d) there is written authorization or a final decision;
Cash bond offsets under the exact conditions of the bond policy;
Overpayments/advances documented in writing.

Not allowed: Open-ended “penalties,” liquidated damages with no basis, or set-offs that bypass due process. Never deduct so much that final pay becomes negative unless there is a final judgment or a freely executed settlement.

VI. Worked examples

Example 1 — Resignation mid-year (monthly-paid)

Monthly basic: ₱30,000
Separation date: April 15
Unused SIL (year-to-date): 2 days
Unpaid OT: 5 hours at 25% OT premium
No loans; standard tax

1) Wages up to Apr 15 Assume 26-day factor → Daily = 30,000 / 26 = ₱1,153.85 Apr worked days: 10 (Apr 1–5 & 8–12) + 3 (Apr 15 counted as worked) = 13 → ₱15,000.05

2) Pro-rated 13th month (Jan–Apr 15) Basic received Jan–Mar = 90,000; Apr half-month ≈ ₱15,000 → Total ₱105,000 / 12 = ₱8,750

3) Unused SIL (2 days) → 2 × 1,153.85 = ₱2,307.70

4) OT Hourly = 30,000 / (26 × 8) = ₱144.23 OT pay = 5 × 144.23 × 1.25 = ₱901.44

Gross final pay (pre-tax): ₱27, -ish (sum the above) → ₱26, - ₱27k range, then apply tax on taxable portions and issue 2316.

(Figures illustrate method; always recompute using your company’s accepted day/hour factors.)

Example 2 — Redundancy (5 years, 4 months of service)

Latest monthly basic: ₱25,000
Severance: Higher of (a) 1 month or (b) 1 month per year of service. Service = 5 years (4 months ≥ 6? No → count 5). Separation pay = ₱25,000 × 5 = ₱125,000 (tax-exempt). Plus unpaid wages, premiums, pro-rated 13th month, leaves, etc.

VII. Process roadmap for HR/Payroll

Trigger & cause: Confirm effective date and legal basis of separation; secure notices (resignation letter, termination memo, retirement approval).
Cutoff reconciliation: Pull attendance, OT/NSD, leave ledgers, incentives, and loan ledgers.
Compute entitlements: Wages to last day, premiums, 13th month, leaves, separation benefits; tag taxable vs. exempt.
Validate deductions: Taxes, loan balances with written authority, lawful offsets.
Clearance: Retrieve assets (ID, tools, devices), but keep the 30-day clock front-of-mind.
Review: Dual sign-off (HR + Payroll) with worksheet.
Release: Pay within 30 days via the agreed mode; hand over COE, payslip, 2316, and quitclaim/release (if any).
Records & reports: Update SSS/PhilHealth/HDMF, BIR; archive the computation sheet and employee’s acknowledgment.

VIII. Quitclaims and settlements

A Quitclaim/Release is valid only if voluntary, clear, and for a reasonable consideration. It cannot waive statutory minimums (e.g., 13th month, separation pay where mandated).
Best practice: Attach the line-by-line computation, allow time to review, and avoid undue pressure.

IX. Auditing checklist (defense-ready)

✅ Signed computation worksheet with formulas and rates
✅ Source docs: timecards, OT approvals, leave ledger, payroll register
✅ Basis for separation pay category and service computation (employment history)
✅ Tax basis and 2316 issued
✅ Proof of payment within 30 days (receipt/transfer advice)
✅ COE issued and acknowledged
✅ Clearance file (company property returned)
✅ Any deductions: written authorizations and due-process records

X. Frequently asked questions

1) Can we hold the final pay until the employee returns a laptop? You may coordinate clearance, but you must still release final pay within 30 days. If property is unreturned, use lawful deductions (documented valuation, due process) rather than open-ended withholding.

2) Do we pay 13th month if the employee worked only 2 months? Yes—pro-rated based on basic pay actually received.

3) Are unused leaves always payable? SIL is commutable at year-end or upon separation pro-rata. Company-granted leaves follow your policy/CBA—pay if commutable/vested.

4) Is separation pay taxable? Authorized-cause severance (redundancy, retrenchment, closure, disease) is generally tax-exempt. Gratuities on resignation are usually taxable.

5) What if we miss the 30-day release? Expect money claims, interest, and potential administrative issues. Pay immediately with interest if delayed.

6) Which day/hour factor should we use? Use the same factor used consistently in your payroll (e.g., 26 days for monthly-paid) and document it. Consistency prevents disputes.

XI. Model computation table (skeleton)

Unpaid basic wages (dates) ............................. ₱____
OT (hrs × rate) ........................................ ₱____
NSD (hrs × 10% rate) ................................... ₱____
Premiums (RD/SD/holiday) ............................... ₱____
Unused leave pay (days × daily rate) ................... ₱____
13th month (pro-rated) ................................. ₱____
Separation pay (category & formula) .................... ₱____ Gross final pay ...................................... ₱____ LESS
Withholding tax (breakdown) ............................ ₱____
Loans (SSS/HDMF/company) ............................... ₱____
Lawful deductions (itemize, attach basis) ............. ₱____ Net payable .......................................... ₱____

Employee Acknowledgment (name/sign/date)

XII. Takeaways

Compute everything that is earned/vested.
Apply the correct separation category and rounding rules.
Release within 30 days, with a clear breakdown and statutory documents.
Deduct only what the law allows, with paper trails.
Consistency and transparency are your best defenses.

When in doubt, document the basis, show the math, and pay promptly.