Final Pay Computation Under the Philippine Labor Code (A practitioner-oriented guide, updated to 13 June 2025)
1. What “final pay” means
“Final pay” (often called last pay or back pay) is the total monetary package an employee is entitled to receive when the employment relationship ends for any reason—resignation, termination, retrenchment, redundancy, completion of contract, retirement, death, or employer closure. It includes (1) wages already earned but still unpaid, and (2) statutory or contractual benefits that have accrued up to the date of separation.
While the Labor Code does not use the exact phrase final pay, payment of “wages and all money claims” upon separation is grounded in:
| Legal basis | Key text | Practical effect |
|---|---|---|
| Art. 103, Labor Code (Time of payment) | Wages must be paid “at least once every two weeks” or twice a month | Final wages cannot be delayed longer than the next regular payday unless a lawful deduction or clearance is pending. |
| Art. 116, Labor Code (Withholding prohibited) | It is unlawful to withhold wages except as authorized by law | Unauthorized “hold” policies on last pay are illegal. |
| Art. 301–306 (Separation pay grounds) | Prescribe when separation pay is due | Gives the formulas for closure, redundancy, retrenchment, disease, etc. |
| PD 851 & RA 10313 | 13th-Month Pay law & its amendments | 13th-month pay, or the proportion thereof, is part of final pay. |
| RA 7641 (Retirement Pay Law) | Mandates retirement benefits after 60 yrs or 5 yrs service | Adds retirement pay to final pay. |
| DOLE Labor Advisory No. 06-20 (4 Feb 2020) | “Payment of Final Pay and Issuance of Certificate of Employment” | Requires employers to release final pay within 30 calendar days from separation unless a shorter period exists in CBA/company policy. |
| NIRC, Sec. 32(B)(6) | Tax exemptions for separation, retirement, and 13th-month benefits | Governs tax treatment of each component. |
2. Items commonly included in final pay
| Component | Statutory / contractual source | How to compute | Tax treatment¹ |
|---|---|---|---|
| Unpaid basic salary & cost-of-living allowance (COLA) | Art. 94 & 99 | Daily rate × no. of actual days worked up to last day | Fully taxable |
| Overtime, night-shift, premium, and holiday pay differentials | Arts. 86-93, 100-101 | As recorded on payroll/time sheets | Fully taxable |
| Pro-rated 13th-Month Pay | PD 851 | (Total basic salary earned ÷ 12) | Exempt up to ₱ 90,000 per TRAIN Law; excess taxable |
| Cash conversion of unused Service Incentive Leave (SIL) | Art. 95 | Daily rate × unused SIL days (max 5 days/yr) | Taxable |
| Cash conversion of vacation / sick leave (if convertible) | Company policy / CBA | Daily rate × unused leave | Taxable unless part of de minimis fringe benefits ceiling |
| Separation pay | Arts. 298-300 | See § 4 | Generally tax-exempt if due to authorized cause |
| Retirement pay | RA 7641 or better CBA plan | See § 5 | Tax-exempt if 50 yrs & 10 yrs service (or 60 yrs/5 yrs) & plan registered with BIR |
| Pro-rated bonuses / commissions / profit-sharing | Contract / policy | As earned and quantifiable on last day | Taxable |
| Thrift/Savings plans, coop share returns, equity | Company/coop by-laws | Actual balance | Tax rules vary |
| Differentials awarded by final judgment | NLRC/Court order | As adjudged | Interest applies if delayed |
¹Tax rule quick look: Exemptions rely on Sec. 32(B)(6) of the NIRC (as amended by TRAIN). Mis-classification exposes the employer to withholding-tax deficiencies, so compute tax per item, not in bulk.
3. Time frame for payment
| Scenario | Mandatory release |
|---|---|
| Baseline rule (Labor Advisory 06-20) | Within 30 calendar days from separation |
| Earlier deadline in CBA, policy, or employment contract | Follow the shorter period |
| Overseas Filipino Workers (POEA SEC) | Within 30 days after arrival or earlier if crew change completed |
| Dismissed for just cause and with pending property accountability | Employer may deduct proven liabilities but must still release undisputed portion within 30 days |
Delay exposes employers to:
- Legal interest of 6% per annum (per Bangko Sentral circulars and jurisprudence)
- Nominal damages in some NLRC awards
- Possible criminal penalties for illegal withholding of wages (Art. 116)
4. Separation-pay matrix (authorized causes)
| Cause (Art. 298-300) | Formula | Quick notes |
|---|---|---|
| Installation of labor-saving devices | 1 month pay per year of service (MOS); ≥1 month minimum | |
| Redundancy | 1 MOS; ≥1 month minimum | |
| Retrenchment to prevent losses | ½ MOS; ≥1 month minimum | |
| Closure not due to serious losses | ½ MOS; ≥1 month minimum | |
| Closure due to serious losses | No separation pay but strict proof of losses required | |
| Termination due to disease | ½ MOS; ≥1 month minimum | |
| Just-cause dismissal (Art. 297) | No separation pay, unless granted by policy, CBA, or equity | |
| Resignation | No separation pay, except if company practice/contract or “financial assistance” on equity grounds | |
| Project completion | No separation pay (unless beyond project duration or by company practice/CBA) | |
| Fixed-term expiration | No separation pay |
Formula note:
Separation pay = Daily rate × 30 × years of service × rate Rate = 1.0, 0.5, or 0 depending on cause. Fraction of at least 6 months is counted as one year (Art. 297[L] jurisprudence).
5. Retirement pay highlights
| Retirement scheme | Statutory floor |
|---|---|
| Labor Code / RA 7641 default | 22.5 days pay per year of service = (15 days basic + 5 days SIL + 1/12 of 13th-month) |
| CBA / private plan | Whichever is better than statutory |
| Voluntary (early) retirement | Governed entirely by the plan—no statutory floor |
Tax exemption (Sec. 32[B][6][a]): Entire retirement benefit is tax-free if (a) employee is at least 50 yrs old and 10 yrs in service or qualifies under RA 7641 default (60 yrs & 5 yrs), and (b) plan is BIR-registered. Otherwise, only the first ₱ 90,000 (if characterized as 13th-month) is exempt.
6. Allowed deductions from final pay
SSS, PhilHealth, Pag-IBIG, and BIR—unremitted statutory contributions/taxes still due.
Valid company loans or cash advances—if covered by a written authorization signed by the employee (Art. 113 b).
Court judgments or wage garnishments.
Damage or loss—only if:
- employee is clearly shown to be at fault or negligent;
- employee is given due process (notice & hearing); and
- deduction does not exceed 20 % of the employee’s wages in a week (Art. 115).
Illegal deductions (e.g., blanket “training bond” without actual liquidation of costs, unreturned uniforms without proof of value) are recoverable with interest.
7. Practical step-by-step computation workflow
Scenario example: Rank-and-file employee, ₱ 800 daily wage, resigned effective 15 May 2025 after 3 years & 7 months, with 2 unused SIL days, 12 earned but unused VL days (convertible per policy), outstanding company loan ₱ 3,000.
- Unpaid wages (1 – 15 May) ₱ 800 × 11 workdays = ₱ 8,800
- Pro-rated 13th-month Total 2025 basic salary earned (Jan 1-May 15) = ₱ 800 × 103 days = ₱ 82,400 13th-month = ₱ 82,400 ÷ 12 = ₱ 6,866.67
- SIL cash conversion ₱ 800 × 2 = ₱ 1,600
- Vacation leave conversion ₱ 800 × 12 = ₱ 9,600
- Separation pay – none (voluntary resignation, no company practice)
- Total gross = ₱ 8,800 + 6,866.67 + 1,600 + 9,600 = ₱ 26,866.67
- Less: company loan (authorized) = ₱ 3,000
- Subtotal = ₱ 23,866.67
- Less: Withholding tax (using BIR table for resigned employee) ≈ ₱ ? (depends on year-to-date taxable income)—compute per BIR RR 11-2018.
- Net final pay = ₱ 23,866.67 – tax = ₱ (figure)
Employer must release net amount on or before 14 June 2025 (30 days from 15 May).
8. Documentary prerequisites
Clearance procedures—Allowed for accountability, but cannot extend the 30-day period.
Quitclaim and Release—Not a legal prerequisite, but common. It is valid only if:
- executed voluntarily;
- employee fully understands terms;
- consideration is credible and reasonable; and
- no fraud or coercion. Otherwise, it can be set aside (e.g., Rural Bank of Cantilan v. Julve, G.R. 169750, 2013).
Certificate of Employment—Must be issued within 3 days from request (also under L.A. 06-20).
9. Jurisprudential principles
| Case | Gist |
|---|---|
| Cosmos Bottling Corp. v. Nagrama, G.R. 164403 (15 Jun 2011) | Quitclaim valid only if employee received “reasonable and credible” consideration. |
| Del Monte Land v. Velasco, G.R. 194480 (17 Jun 2015) | Separation pay still due despite closure if serious losses not proven. |
| Abbott Laboratories v. Alcaraz, G.R. 192571 (23 Jul 2013) | Separation pay as financial assistance may be awarded on equity even in just-cause dismissal. |
| Italkarat18 v. Uy, G.R. 221411 (17 Jun 2020) | Delay in paying final wages warrants moral and exemplary damages when coupled with bad faith. |
10. Penalties for non-compliance
- Wage-related fines (Art. 302): ₱ 40,000–₱ 400,000 plus possible imprisonment.
- NLRC money claims: Principal + 10% (now 6% legal interest) + attorney’s fees.
- Corporate officers’ personal liability where bad faith or malice is proven.
- Tax penalties: Surcharges & interest for failure to withhold/remit tax on lump-sum payments.
11. Best-practice checklist for employers
| Stage | Action |
|---|---|
| Pre-separation | Audit leave balances, commissions, loans; verify grounds for termination to pick correct formula. |
| Computation | Use a line-item worksheet; indicate tax-exempt vs taxable items. |
| Employee clearance | Parallel-track (do not wait to start computation); obtain signed quitclaim only after payment. |
| Payment | Cash, payroll credit, or check on or before 30 days; secure acknowledgment receipt. |
| Records | Retain computation sheets & proof of payment for 3 yrs (Art. 308). |
| Policy alignment | Issue written policy with timeline shorter than 30 days to build good employer brand. |
12. Key take-aways
- Comprehensive: Final pay is more than unpaid salary; it captures every lawful monetary entitlement up to the last day.
- Time-bound: The 30-calendar-day rule of DOLE Labor Advisory 06-20 is binding unless your policy is shorter.
- Itemized & documented: Use a detailed, transparent worksheet so both HR and the employee can audit each entry.
- Deductions are narrow: Withhold only what the law expressly allows; otherwise, pay first and litigate later.
- Tax rules matter: Mis-classifying a separation pay or retirement benefit can create BIR exposure larger than the benefit itself.
- Quitclaims are not ironclad: Fairness and voluntariness are always judicially reviewable.
13. Disclaimer
This article is for educational purposes only and does not constitute legal advice. For specific cases, consult a Philippine labor-law practitioner or the Department of Labor and Employment.
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