1) Why “one-month pay” matters

Philippine labor standards repeatedly use “one (1) month pay,” “one (1) month salary,” or “one-half (1/2) month salary” as a measuring unit for monetary entitlements—most prominently separation pay for authorized causes of termination, but also retirement pay, and in some cases separation pay in lieu of reinstatement or negotiated exit packages.

The practical problem: What exactly counts as “one-month pay”? Is it just basic salary? Does it include allowances? Commissions? 13th month? COLA? The answer depends on (a) the legal basis of the benefit and (b) whether a pay item is treated as part of “salary/wage” for that purpose.

This article sets out a working framework and computation guide used in Philippine practice.

2) Legal anchors: where “one-month pay” appears

A. Separation pay for authorized causes (Labor Code)

Separation pay is statutorily required for certain authorized causes (management prerogative grounds, not employee fault), commonly including:

Installation of labor-saving devices
Redundancy
Retrenchment to prevent losses
Closure or cessation of business (not due to serious losses)
Termination due to disease (when continued employment is prohibited or prejudicial)

These provisions are found in the Labor Code’s authorized-cause articles (renumbered over time). The familiar separation-pay formulas are discussed in Section 6.

B. Retirement pay (R.A. 7641; Labor Code retirement provision)

The statutory minimum retirement benefit is at least one-half (1/2) month salary per year of service, and the law itself defines what “one-half month salary” includes (important distinction from separation pay).

C. Contract/CBA/company policy

Many employers promise separation packages expressed as “x months pay,” “one month pay per year,” etc. In these cases, the contractual definition can expand or narrow what counts as “pay,” subject to minimum labor standards.

3) Core concept: “one-month pay” is usually “monthly salary at time of separation,” but “monthly salary” is not always obvious

Start with two questions:

Is the employee “monthly-paid” (fixed monthly salary) or “daily-paid/hourly/paid by results”?
What components are legally treated as part of “salary/wage” for the specific benefit?

As a baseline in many separation pay computations, “one-month pay” typically means the employee’s latest monthly salary rate (basic salary) at the time of termination, unless law/contract/CBA clearly includes additional components.

4) What pay components may be included (and excluded)

A. Almost always included: basic salary/basic wage

The agreed compensation for work, excluding most “extras.”
If the employee is paid a fixed monthly amount, that monthly amount is the starting “one-month pay.”

B. Sometimes included: regular, fixed allowances treated as part of wage

Allowances may be included if they are effectively integrated into wage, such as when they are:

Fixed and unconditional, paid regularly regardless of work conditions; or
Treated by the employer’s pay structure/CBA as a wage component; or
Not a true reimbursement of expenses.

Examples that may be treated as wage (context-dependent):

Regular COLA integrated into pay (especially if not treated as a separate statutory adjustment but as a built-in wage component)
Fixed monthly “allowance” that is paid even during absences/leave and not tied to actual expense

C. Commonly excluded from “one-month pay” for separation pay computations

These are frequently excluded because they are not “basic salary” or are contingent/premium payments:

Overtime pay
Night shift differential
Holiday pay / premium pay
Service charges (for covered establishments, typically distributed and variable)
Bonuses (unless it is demandable and effectively part of wage by agreement or established practice)
Profit share
Reimbursements (transport, meal, representation expenses actually treated as reimbursements)
13th month pay (it is a separate statutory benefit; not usually rolled into “one-month pay”)

D. Commissions: case-by-case

If the employee’s earnings are commission-based, the key issue is whether the commission is:

A productivity/extra incentive, or
The principal salary (e.g., purely commission-based roles).

Where commissions form the main compensation, Philippine practice often uses a representative average over a reasonable period (commonly several months) to get a “monthly rate,” but the correct approach is highly fact-specific and often litigated.

Practical rule of thumb:

If commissions are regular and integral to compensation, use an average monthly earnings method, unless the contract defines otherwise.

5) Converting daily/hourly pay into a “monthly” figure (to get “one-month pay”)

A. If the employee truly has a fixed monthly salary

One-month pay = stated monthly salary at the time of separation.

B. If the employee is daily-paid (common in rank-and-file)

You need a conversion. There are multiple conventions used in Philippine payroll practice, and what is “correct” can depend on the context (13th month pay vs. separation pay vs. retirement pay vs. CBA wording). For separation pay computations, employers commonly use the employee’s Monthly Equivalent Rate (MER) based on actual paid workdays per month.

A practical approach:

6-day workweek: MER ≈ Daily Rate × 26
5-day workweek: MER ≈ Daily Rate × 22

These multipliers approximate the average paid days in a month (excluding rest days). Some employers use Daily Rate × 30.4167 (365/12) for certain conversions, but that approach may over-include rest days for daily-paid employees depending on the pay scheme. If a dispute arises, the decisive factor is the pay structure and the benefit’s legal basis.

C. Hourly-paid

Convert to daily: Hourly Rate × Hours per day
Then convert daily to monthly using the same logic as above.

D. Paid by results / piece-rate

Determine average daily earnings (or monthly earnings) using a representative period (often the last 3–12 months), then convert to monthly equivalent.

Best practice in documentation: state the averaging period and show the computation transparently.

6) Separation pay formulas and how “one-month pay” is used

A. Authorized causes with at least one (1) month pay per year of service

Commonly:

Redundancy
Installation of labor-saving devices

Statutory formula (typical): Separation Pay = One (1) Month Pay × Years of Service or One (1) Month Pay per year of service, whichever phrasing the law uses.

B. Authorized causes with at least one-half (1/2) month pay per year of service

Commonly:

Retrenchment to prevent losses
Closure/cessation of business not due to serious losses

Statutory formula (typical): Separation Pay = (1/2 × One-Month Pay) × Years of Service

C. Termination due to disease

Typically stated as: Separation Pay = the higher of:

One (1) Month Pay, or
(1/2 × One-Month Pay) × Years of Service

D. The “6-month rule” (rounding of service)

For statutory separation pay, a common rule is:

A fraction of at least six (6) months is treated as one (1) whole year.
Less than six months may be disregarded (unless a CBA/policy is more favorable).

E. No separation pay in some closure scenarios

If closure/cessation is due to serious business losses (properly established), statutory separation pay may not be required. The burden and evidence issues here can be significant in disputes.

7) Worked examples (separation pay)

Example 1: Redundancy (1 month pay per year)

Monthly basic salary at separation: ₱30,000
Years of service: 7 years and 8 months → counts as 8 years (because 8 months ≥ 6 months)

Separation pay = ₱30,000 × 8 = ₱240,000

Example 2: Retrenchment (1/2 month pay per year)

Monthly basic salary: ₱28,000
Years of service: 5 years and 4 months → counts as 5 years

Separation pay = (0.5 × ₱28,000) × 5 = ₱14,000 × 5 = ₱70,000

Example 3: Disease (higher of 1 month OR 1/2 month per year)

Monthly basic salary: ₱20,000
Years of service: 1 year and 2 months → counts as 1 year

Option A: ₱20,000 Option B: 0.5 × ₱20,000 × 1 = ₱10,000 Higher = ₱20,000

Example 4: Daily-paid conversion then redundancy

Daily rate: ₱700
6-day workweek
Monthly equivalent (common approach): ₱700 × 26 = ₱18,200
Years of service: 3 years and 6 months → counts as 4 years

Redundancy separation pay: ₱18,200 × 4 = ₱72,800

8) Retirement pay: “one-half month salary” has a special statutory definition (different from separation pay)

For statutory retirement (minimum standard), the law defines “one-half (1/2) month salary” as typically consisting of:

15 days salary, plus
1/12 of the 13th month pay, plus
Cash equivalent of up to 5 days Service Incentive Leave (SIL)

This is why many summaries equate minimum retirement pay per year of service to 22.5 days pay (15 + 2.5 + 5), assuming the employee is entitled to SIL and 13th month pay.

Retirement pay formula (minimum)

Retirement Pay = (1/2 month salary) × Years of Service Apply the 6-month rule similarly (≥ 6 months counts as 1 year), unless a plan provides more.

Important difference

For separation pay, “one-month pay” is often treated as basic monthly salary (plus only those wage-integrated items).
For retirement pay, the law explicitly adds components (13th month fraction and SIL equivalent) into the minimum “half-month salary.”

9) “One-month pay” across other termination-related money: what’s separate from separation pay

When employment ends, the employee may be entitled to amounts in addition to separation pay:

A. Final pay items (commonly due regardless of cause, if earned)

Unpaid wages/salary
Pro-rated 13th month pay (if not yet paid)
Cash conversion of unused SIL (if applicable and convertible)
Taxable benefits or reimbursements due under policy
Refunds (deposits, bond, etc.), subject to lawful set-offs

These are computed under their own rules and generally should not be “folded into” one-month pay unless the governing instrument says so.

B. Separation pay in lieu of reinstatement (labor cases)

In illegal dismissal cases where reinstatement is not viable, tribunals may award separation pay in lieu of reinstatement. Computation approaches can vary depending on the decision’s wording (often “one month pay per year of service” is used as a standard measure). The “what counts as pay” question becomes evidence-driven and may follow the same basic-salary logic unless the decision specifies otherwise.

C. Backwages (illegal dismissal)

Backwages are computed based on the wage the employee should have earned during the period, often including wage increases and regularly received benefits depending on the ruling and proofs.

10) Handling special pay structures

A. Employees with multiple rates (basic + fixed monthly allowance)

If the allowance is wage-integrated (fixed, unconditional), it may be included in “one-month pay” depending on the governing rule.
If it is an expense reimbursement or conditional (e.g., “transport allowance only when reporting onsite”), it is often excluded.

B. Project/seasonal employment

If separation pay is due (which depends on the nature of termination and applicable rules), determine the “one-month pay” based on the prevailing pay at separation, then apply service year computation consistent with the governing rule and facts.

C. Employees paid partly in kind

Benefits in kind can be part of wage if treated as such (e.g., board/lodging valued as wage under rules). Whether it is included in “one-month pay” depends on how the wage was structured and documented.

11) Tax treatment (high-level)

In practice, a key question is whether separation pay is tax-exempt. Philippine tax rules generally treat separation pay as tax-exempt when it is received due to causes beyond the employee’s control (commonly including authorized causes and involuntary separation), while voluntary resignations typically do not qualify. Actual tax outcomes depend on the specific ground, documentation, and application of current BIR rules.

Because tax positions can be sensitive, employers often:

Identify the statutory ground (redundancy, retrenchment, disease, etc.)
Keep board/management approvals and DOLE notices
Issue a clear computation sheet

12) Compliance and documentation checklist (practical)

To reduce disputes about “one-month pay,” keep a clear record of:

Latest salary rate (employment contract, salary adjustment notices)
Pay breakdown (basic vs allowances vs variable items)
Time and payroll records (for daily-paid and variable compensation)
Service record (start date, employment status changes)
Ground for termination and required notices (authorized causes have notice requirements)
Computation worksheet showing:
- Monthly base used as “one-month pay”
- Years of service and rounding
- Formula applied (1 month/year, 1/2 month/year, higher-of rule for disease)
- Final pay components listed separately

13) Common pitfalls and how to avoid them

Pitfall 1: Treating “one-month pay” as “total monthly take-home”

Take-home may include variable pay, reimbursements, premiums, and deductions. Separation pay computations generally start with basic salary, then include only those items that legally qualify as wage for that purpose.

Pitfall 2: Mixing separation pay with final pay

Separation pay is not a substitute for unpaid wages or pro-rated 13th month pay. Compute each separately.

Pitfall 3: Wrong year-of-service rounding

Apply the ≥ 6 months = 1 year rule (or the more favorable policy/CBA rule if it exists).

Pitfall 4: Using an arbitrary conversion for daily-paid workers

Use a conversion consistent with the pay scheme and document it. If rest days are unpaid for daily-paid employees, avoid conversions that effectively pay rest days unless that matches the compensation structure.

Pitfall 5: Ignoring contractual/CBA definitions

If a CBA defines “month pay” to include certain allowances or average earnings, that definition can control if it is at least as favorable as the law.

14) A practical framework you can apply

When you must compute “one-month pay,” do it in this order:

Identify the benefit: statutory separation pay? retirement? CBA package?
Identify the pay base required by that benefit:
- Separation pay: usually basic monthly salary (plus wage-integrated items if applicable)
- Retirement: use the statutory half-month salary definition (15 days + 1/12 13th month + SIL equivalent, at minimum)
Convert daily/hourly/piece-rate to a monthly figure using a method consistent with the pay scheme and the benefit
Compute years of service and apply rounding
Compute the benefit and list final pay items separately

15) Short disclaimer

This is a general legal-information discussion in the Philippine labor context. Specific outcomes depend on the exact statutory ground, pay structure, written agreements, and the evidence in a particular case.

If you want, share a sample pay structure (basic + allowances + variable items) and the termination ground (e.g., redundancy vs retrenchment vs disease), and I’ll show a clean computation template that matches that scenario.