Here’s a practical, everything-you-need-to-know legal guide to final pay (a.k.a. last pay) in the Philippine private sector—what it covers, when it’s due, how to compute it, what can and cannot be deducted, tax treatment, and what to do if it’s delayed.

What “final pay” means

“Final pay” (or “last pay”) is the sum of all monetary entitlements due to an employee upon separation from employment—whether by resignation, end of contract, termination for authorized causes (redundancy, retrenchment, closure, disease), termination for just cause, or death.

It’s distinct from separation pay (an additional benefit owed only in certain authorized-cause terminations).

Legal bases (at a glance)

Labor Code (as renumbered):
- Authorized causes & separation pay: Arts. 298–299 (formerly 283–284).
- Just causes: Art. 297 (formerly 282).
- Resignation/30-day notice: Art. 300 (formerly 285).
- Service Incentive Leave (SIL): Art. 95.
- Money-claims prescriptive period: Art. 306 (formerly 291).
PD 851 & rules: 13th month pay and pro-ration upon separation.
DOLE Labor Advisory (LA) No. 06-20: Payment of Final Pay and Issuance of COE—sets the 30-day release guideline and 3-day COE rule.
NIRC (Tax Code): Sec. 32(B)(6)(b) and related BIR issuances—tax exemption of separation benefits when separation is beyond the employee’s control (e.g., redundancy, retrenchment, closure, disease, death).
Jurisprudence (for context):
- Money claims earn 6% legal interest per annum once adjudged (e.g., Nacar v. Gallery Frames).
- Illegal dismissal actions generally prescribe in 4 years (civil action for injury to rights), while purely money claims prescribe in 3 years.

DOLE labor advisories guide compliance and are widely followed in inspections and settlements. CBAs or company policies that are more favorable to employees prevail.

What must be included in final pay

Depending on the case, final pay typically includes:

Unpaid basic salary/wages up to the last actual day worked.
Pro-rated 13th month pay under PD 851:
- Formula (daily-rated or monthly—use equivalent): 13th month = (Total basic salary earned from Jan 1 to last day) ÷ 12
- Include salary actually earned; exclude allowances not integrated into basic pay (unless company policy says otherwise).
Conversion to cash of unused Service Incentive Leave (SIL) (5 days/year minimum after at least one year of service), and other monetized leaves if provided by policy/CBA.
Overtime, night shift diff, holiday pay, premium pay, and commissions/incentives that are earned and determinable at the time of separation (per company scheme).
Separation pay (only if applicable—see below).
Pro-rated allowances and benefits due under contract/CBA (e.g., rice/meal allowances if contractually due on a pro-rata basis).
Tax adjustments and required government-mandated deductions.
Refunds due to the employee (e.g., excess withholdings, deposits required by company policy that are refundable).

Separation pay (only for certain terminations)

Separation pay is an additional entitlement only when the employee is separated for the authorized causes below:

Installation of labor-saving devices or redundancy Minimum: 1 month pay per year of service or 1 month pay, whichever is higher.
Retrenchment to prevent losses, closure/cessation not due to serious losses, or disease (not curable within 6 months as certified) Minimum: ½ month pay per year of service or 1 month pay, whichever is higher.

Rounding rule: A fraction of at least six (6) months counts as one (1) whole year of service.

Not due when termination is for just cause (e.g., serious misconduct) or when the employer’s closure is due to serious business losses (documented).

Deadline to release final pay

Within 30 calendar days from the date of separation (per DOLE LA 06-20), unless a shorter timeline is set by company policy/CBA.
Employers often require clearance (return of company property, settlement of accountabilities). Clearance processing must not be used to unreasonably delay beyond the 30-day benchmark absent a valid, documented reason.

Certificate of Employment (COE)

Upon an employee’s request, the COE must be issued within 3 days (LA 06-20). A COE only states facts: employment period, position, and, if requested, wage or pay class.

Deductions: what’s allowed vs. not allowed

Allowed (if lawful, properly documented, and not excessive):

Statutory withholding tax.
Employee share of SSS, PhilHealth, Pag-IBIG for the last payroll period.
Company loans/cash advances with written authorization.
Accountabilities for unreturned or damaged company property if (a) liability is established, (b) value is reasonable and documented, and (c) there is legal/contractual basis (e.g., signed undertaking or CBA).

Not allowed / risky:

Penalties or forfeitures not grounded in law/contract/CBA.
Withholding entire final pay purely to compel clearance if no real, liquidated accountability exists.
Set-offs against alleged losses without due process or proof.

Best practice: issue an itemized final pay computation showing each inclusion/deduction and attach supporting documents (timekeeping, leave balances, loan ledgers, asset turn-over forms).

Tax treatment highlights

Separation benefits due to causes beyond the employee’s control (redundancy, retrenchment, closure not due to serious losses on the employee’s part, disease, death) are income tax–exempt under the NIRC and BIR rules.
Separation pay due to just cause or gratuitous/retirement pay outside tax-exempt retirement schemes is taxable.
13th month pay remains part of the annual “13th-month and other benefits” exclusion up to the statutory cap (any excess is taxable).
Employers must issue the appropriate BIR forms (e.g., BIR 2316) marking “terminated” and reflecting year-to-date figures; employees may request substituted filing where applicable.

Prescriptive periods and remedies

Money claims (e.g., unpaid wages, 13th month, SIL conversion, separation pay): 3 years from when the claim accrues (usually the separation or the release-deadline date).
Illegal dismissal (for reinstatement/backwages): generally 4 years from dismissal.
Legal interest of 6% per annum may be imposed on adjudged amounts from finality of decision until full satisfaction.

Where to go:

SEnA (DOLE’s Single-Entry Approach): File a Request for Assistance with the DOLE Regional/Field Office for quick, non-litigious conciliation/mediation.
NLRC/Labor Arbiter: For formal complaints (money claims, illegal dismissal, damages).
DOLE Inspection/Compliance route:** For systemic violations; DOLE may issue compliance orders after inspection.

Special situations

Resignation: Employee must give 30-day written notice (unless waived by employer). Final pay still follows the 30-day release guideline from last day. No separation pay (except if contract/CBA grants it).
End of fixed-term/Project/Probationary: Final pay applies the same way; separation pay only if termination falls under an authorized cause requiring it or if the contract/CBA provides.
Death of employee: Final pay and any separation/death benefits are paid to legal heirs per law; benefits due to death are generally tax-exempt.
Company closure: If not due to serious losses, ½ month per year (or 1 month, whichever is higher) separation pay applies; final pay still due.
Disease termination: Requires competent medical certification that illness is incurable within 6 months and continued employment is prohibited by law or prejudicial; ½ month per year (or 1 month, whichever is higher) separation pay.

Computation guide (step-by-step)

Cut-off wages: Compute unpaid salary: Daily rate × actual days worked (since last payout).
Premiums/differentials: Add approved OT, NSD, holiday/premium pay not yet paid.
Leaves: Add SIL cash conversion (and other monetized leaves if applicable): Unused SIL days × equivalent daily rate (use company/CBA formula for daily rate conversion—common practice: Monthly rate × 12 ÷ 313 or ÷ 261/262 depending on workdays; be consistent with company’s lawful, written policy).
13th month (pro-rated): Total basic salary earned Jan 1 to last day ÷ 12.
Separation pay (if applicable):
- Redundancy/LSD: Max(1 month, 1 month × years of service)
- Retrenchment/closure (no serious losses)/disease: Max(1 month, 0.5 month × years of service)
- Rounding: ≥ 6 months = 1 year.
Other contractual items: e.g., pro-rated allowances/bonuses that are earned per policy/CBA.
Deductions: Apply lawful deductions only (tax, contributions, authorized loans/accountabilities).
Net final pay: Sum of (1)–(6) minus (7).

Mini-example (illustrative only)

Monthly basic: ₱30,000; last day: April 15; worked 10 days in April; unused SIL: 3 days; redundancy after 3 years, 7 months.
Wage earned: ₱30,000 / 26 ≈ ₱1,153.85 per day × 10 = ₱11,538.50
SIL conversion: ₱1,153.85 × 3 = ₱3,461.55
Pro-rated 13th month (Jan 1–Apr 15): basic earned (Jan–Mar = ₱90,000; Apr 10 days ≈ ₱11,538.50) total ≈ ₱101,538.50 ÷ 12 ≈ ₱8,461.54
Separation pay (redundancy): years of service = 4 (3y7m → counts as 4). 1 month × 4 = ₱120,000 (higher than 1 month).
Gross subtotal: ₱11,538.50 + ₱3,461.55 + ₱8,461.54 + ₱120,000 = ₱143,461.59
Less taxes: separation pay (authorized cause) tax-exempt; 13th month within cap may be exempt; apply regular withholding on taxable portions only; subtract authorized loans, if any.
Net final pay = gross minus lawful deductions.

Always align daily-rate conversion (e.g., 313 vs. 261/262 days) with your written pay policy and consistently apply it.

Employer best practices (to avoid disputes)

Publish a written clearance and final-pay SOP with timelines (≤30 days), approvers, and backup signatories.
Provide an itemized Final Pay Statement with all formulas and references (CBA clauses, policy sections).
Keep timekeeping/leave records updated and accessible.
For authorized-cause terminations, prepare board resolution, financials (if retrenchment/closure), redundancy matrix, medical certification (disease), and written notices to DOLE and affected employees as required.
Issue COE within 3 days of request; release BIR 2316 with “terminated” box ticked.

Employee checklist (if your pay is delayed or short)

Request the itemized computation and supporting documents in writing.
If unresolved, file a SEnA Request for Assistance at the DOLE Regional Office (fast, no fees).
If still unresolved, pursue a case at the NLRC (for money claims/illegal dismissal).
Mind the prescriptive periods (3 years for money claims; 4 years for illegal dismissal).
Keep copies of your contract, payslips, COE, clearance, notices, and emails.

Quick FAQs

Q: Can my employer hold my entire final pay until all assets are returned? They may withhold reasonable amounts for documented, liquidated accountabilities, but using clearance to indefinitely delay beyond the 30-day guideline is improper.

Q: Do I get separation pay if I resign? No, unless a CBA/company policy grants it.

Q: Is pro-rated 13th month mandatory if I leave mid-year? Yes—PD 851 requires it based on actual basic pay earned in the year up to separation.

Q: Are commissions included? If earned and determinable per your plan at the time of separation, they form part of final pay (subject to tax).

Q: Is separation pay taxable? If separation is beyond your control (e.g., redundancy, retrenchment, disease, death), separation benefits are tax-exempt. Otherwise, they’re taxable.

Final word

This guide summarizes the prevailing rules and common practice for final pay release in the Philippines. Specific CBAs, contracts, or policies may grant more favorable terms. For edge cases (e.g., complex bonus plans, stock awards, cross-border tax), consult counsel or DOLE for tailored advice.

If you want, I can draft a one-page policy for your HR manual (with computation templates and an itemized Final Pay Statement) or build a calculator you can reuse.