In Philippine labor law, when an employee is found to have been illegally dismissed, the primary objective is to restore the worker to the position they would have occupied had the illegal act not occurred. Under the Labor Code, specifically Article 294 (formerly Article 279), an employee who is unjustly dismissed is entitled to reinstatement without loss of seniority rights and other privileges, and to full backwages.
However, when reinstatement is no longer feasible—due to strained relations, the abolition of the position, or the employee's preference—separation pay is awarded as a substitute.
1. Backwages: Restoring Lost Income
Backwages represent the compensation that should have been earned by the employee from the time of the illegal dismissal until the actual reinstatement (or until the finality of the decision if separation pay is awarded instead).
Key Components of Backwages
Backwages are not limited to the basic salary. In the landmark case of Equitable PCI Bank vs. Sadac, the Supreme Court clarified that "full backwages" include:
- Basic Salary: The rate at the time of dismissal.
- 13th Month Pay: The mandatory 1/12 of the total basic salary earned within a calendar year.
- Allowances: Regular allowances (e.g., transportation, meal, or rice allowances) that the employee was receiving.
- Other Benefits: Including holiday pay, service incentive leave (SIL) pay, and bonuses that are integrated into the regular wage.
The Formula for Backwages
The calculation is generally:
Note: Backwages are calculated from the date of the illegal dismissal up to the date of actual reinstatement or the finality of the judgment.
2. Separation Pay in Lieu of Reinstatement
While reinstatement is the rule, separation pay is granted as an alternative under the "Doctrine of Strained Relations." This occurs when the bridge of trust between the employer and employee is so broken that working together is no longer viable.
The Computation Standard
In the context of illegal dismissal, separation pay is calculated at one (1) month’s pay for every year of service.
Key Rules for Calculation:
- Fraction of Six Months: A fraction of at least six (6) months is considered as one (1) whole year.
- Base Amount: The "one month pay" used for separation pay should include not just the basic salary but also regular allowances and the 1/12 of the 13th-month pay.
- Period Covered: The years of service are counted from the first day of employment until the finality of the decision (not just until the date of dismissal).
Example Calculation
If an employee worked for 5 years and 7 months with a total monthly compensation (salary + benefits) of ₱30,000:
- Years of Service: Round up 5 years and 7 months to 6 years.
- Separation Pay: .
3. Comparison of Separation Pay Scenarios
It is vital to distinguish separation pay as a remedy for illegal dismissal from separation pay as a statutory requirement for legal terminations (e.g., redundancy).
| Feature | Illegal Dismissal (Remedy) | Authorized Causes (e.g., Retrenchment) |
|---|---|---|
| Rate | 1 month pay per year of service | 1 month or 1/2 month per year (depending on cause) |
| Fraction Rule | 6 months = 1 year | 6 months = 1 year |
| Inclusion of Backwages | Yes, awarded alongside backwages | No backwages (dismissal is legal) |
| End Date of Computation | Finality of the court's decision | Date of actual termination |
4. Legal Interest and Finality
When a labor arbiter or court issues a final and executory judgment, the total monetary award (backwages + separation pay) is subject to legal interest.
According to the Nacar vs. Gallery Frames ruling, the following applies:
- 6% per annum: This interest rate is applied to the total monetary award from the time the judgment becomes final and executory until it is fully satisfied.
- Purpose: This serves as a penalty for the delay in payment and compensates the employee for the erosion of the value of money over time.
5. Additional Monetary Claims
In many illegal dismissal cases, the employee may also be entitled to:
- Moral Damages: Awarded if the dismissal was attended by bad faith, fraud, or was oppressive to labor.
- Exemplary Damages: Awarded if the dismissal was done in a wanton, fraudulent, reckless, or oppressive manner.
- Attorney’s Fees: Usually equivalent to 10% of the total monetary award, as the employee was forced to litigate to protect their rights.
Summary Checklist for Computation
To arrive at the total amount due to an illegally dismissed employee, use the following structure:
- Compute Full Backwages: (Basic + Benefits) from date of dismissal to finality of judgment.
- Compute Separation Pay: (Basic + Benefits) x years of service (including the time the case was pending).
- Aggregate Awards: Sum of backwages, separation pay, and other unpaid benefits (e.g., pro-rated 13th month).
- Add Attorney's Fees: 10% of the aggregate sum.
- Apply Interest: 6% per annum upon finality of the decision.