1) The redundancy setting: what the law actually requires

Redundancy is one of the “authorized causes” for terminating employment under the Labor Code. It generally refers to a situation where a job, position, or function has become in excess of what the business reasonably needs—for example, due to reorganization, streamlining, automation, or overlapping roles.

In a lawful redundancy termination, Philippine labor law (and long-standing doctrine) centers on two distinct employer obligations:

Advance written notice The employer must serve written notice to (a) the affected employee(s) and (b) the Department of Labor and Employment (DOLE) at least 30 days before the intended date of termination.
Separation pay For redundancy, separation pay is at least one (1) month pay, or one (1) month pay for every year of service, whichever is higher (with a fraction of at least six months typically counted as one year).

These are separate duties. Notice is a procedural requirement; separation pay is a monetary consequence of a valid authorized cause.

2) What “pay in lieu of notice” means in Philippine practice

“Pay in lieu of notice” (often abbreviated as PILON) is not a Labor Code term, but it is used in HR and payroll practice to describe payments related to the 30-day notice rule. In the Philippine redundancy context, PILON commonly appears in one of these forms:

A. “Notice-period salary” while the employee is still employed (garden leave concept)

The employer gives proper notice but relieves the employee from reporting to work during the notice period and continues paying salary for those 30 days.

Legally, the employment relationship continues until the effective termination date stated in the notice.
The payments made during that period are salary, just paid while not requiring work.

B. “Salary in lieu of notice” when termination is made immediate

The employer terminates right away (or earlier than the 30-day notice window) and pays an amount equivalent to 30 days’ pay to the employee.

From a labor-law risk perspective, paying cash does not automatically “replace” the statutory notice requirement. If the mandated notices were not properly served within the required time, the employer may still be exposed to nominal damages for failure to observe procedural due process for authorized-cause terminations (even if the substantive ground is valid).
From a tax perspective, this is where classification becomes contentious: is it salary, damages, or additional separation benefit?

C. “Extra month” packaged into a redundancy program

Sometimes redundancy packages are drafted as: statutory separation pay plus an additional amount (often one month, or more) as an enhancement, and HR may casually refer to the extra amount as “in lieu of notice,” even when notice was properly served.

The label matters less than the true nature of the payment and how it is documented and computed.

3) The Philippine tax framework that governs termination payments

A. The general rule: compensation is taxable

Under the National Internal Revenue Code (NIRC), compensation for services (wages, salaries, allowances, and similar remuneration) forms part of gross income and is generally subject to income tax and withholding tax on compensation.

So, as a baseline:

Salary and salary-like payments are taxable unless a specific exemption applies.

B. The key exemption: involuntary separation pay for causes beyond the employee’s control

A major statutory exclusion applies to certain separation payments. The NIRC excludes from gross income amounts received by an employee from the employer as a consequence of separation due to:

death, sickness, or other physical disability, or
any cause beyond the control of the employee.

In practice, redundancy is widely treated as a cause beyond the employee’s control, so separation pay due to redundancy is generally tax-exempt, provided the separation is truly involuntary and properly grounded on redundancy (not merely papered as redundancy).

4) Redundancy separation pay: usually tax-exempt (and why)

In a properly implemented redundancy:

The statutory separation pay is typically treated as tax-exempt under the “cause beyond the employee’s control” exclusion.
Many redundancy programs also grant enhanced separation benefits (above statutory minimum). Where the separation is genuinely involuntary due to redundancy, enhanced benefits are commonly treated in practice as part of the same tax-exempt separation benefit—because the exemption is not framed as a “cap” tied to the minimum Labor Code amount.

But: the exemption does not automatically swallow every peso paid on exit. Final pay usually contains multiple components—some exempt, some taxable.

5) So: is pay in lieu of notice taxable?

The practical bottom line

Most “pay in lieu of notice” amounts are treated as taxable if they are, in substance, salary or wage replacement for a notice period. They are more defensibly treated as tax-exempt if they are, in substance, additional separation pay paid because of involuntary separation due to redundancy (and not as remuneration for a period of continued employment).

Because “PILON” is not a single legally defined bucket, the correct tax treatment depends on what the payment actually is.

6) How to classify PILON correctly: substance-over-label approach

Scenario 1: Pay covers a period when the employee remains employed (salary during notice period)

Typical indicators

The termination effective date is 30 days after notice.
The employee is put on “garden leave” or “off work with pay” until that date.
Payroll continues as regular salary during that month.

Tax treatment

This is compensation income (salary), therefore taxable, and subject to withholding tax.

Why

The employee is still employed during that period; payment is remuneration tied to the employment relationship, even if services are not required.

Scenario 2: Employer terminates immediately and pays “30 days salary in lieu of notice”

Typical indicators

Termination takes effect immediately or earlier than the notice window.
The payment is computed exactly like monthly salary and described as “salary in lieu of notice,” “notice pay,” or similar.
It is paid together with final pay.

Tax treatment (common and conservative payroll position)

This is generally treated as taxable compensation, subject to withholding.

Why

It is functionally wage replacement (a salary-equivalent amount) rather than a separation benefit computed on years of service.
It resembles payment for a period that would otherwise have been worked/paid during ongoing employment.

Important labor-law note

Paying this amount does not automatically cure noncompliance with the statutory notice requirement; exposure to nominal damages can remain if notices were not properly and timely served.

Scenario 3: The redundancy package includes an extra amount that HR calls “in lieu of notice,” but it is documented as separation benefit

Typical indicators

The employer still served the 30-day notice properly.
The “in lieu” amount is not paid as a continuation of payroll; it is packaged as part of a separation benefit.
Documentation frames it as an enhancement to separation pay due to redundancy, not as salary for a notice period.

Tax treatment (more defensible as exempt)

If it is genuinely an additional separation benefit arising from involuntary redundancy, it is commonly treated as tax-exempt together with the separation pay.

Why

The statutory exclusion focuses on amounts received as a consequence of involuntary separation due to causes beyond the employee’s control.

Risk management point

If the amount is described, computed, and processed like salary (e.g., run through payroll as “salary”), it becomes easier to reclassify as taxable compensation. Documentation and payroll treatment should align with the intended characterization.

7) Documentation and payroll treatment that usually determine the outcome

When taxability is questioned, the strongest determinants are not the label “PILON,” but:

A. Is the employee still employed for the period being paid?

If yes (notice period served; payroll continues): taxable salary.
If no (employment already ended; lump-sum separation benefit): may be exempt if truly a redundancy separation benefit.

B. What do the controlling documents say?

Look at:

redundancy program/board or management approval documents,
the termination letter (effective date; reason),
the DOLE notice and timing,
payroll register treatment (salary vs. separation benefit),
quitclaim/release language and final pay computation sheet.

C. How was it computed?

Salary-equivalent for 30 days that mirrors monthly payroll = more like taxable compensation.
Enhanced separation benefit (e.g., additional months based on tenure or a fixed enhancement paid as part of severance) = more like exempt separation pay in an involuntary redundancy.

D. Is the separation truly involuntary redundancy (not a voluntary exit dressed up)?

Tax exemption for separation benefits is commonly denied in practice where:

the employee resigned (even with a package),
the separation is by mutual agreement primarily initiated by the employee,
the redundancy is not bona fide or lacks the required labor-law hallmarks.

8) What about “nominal damages” for lack of notice—are those taxable?

If a labor dispute results in awards such as:

backwages (generally treated like compensation for the period covered),
separation pay (may be exempt if due to a cause beyond the employee’s control),
nominal damages for procedural defects,
moral/exemplary damages and attorney’s fees,

the tax characterization can become fact-specific and messy. As a practical matter:

Payments that substitute for salary/wages tend to be treated as taxable compensation.
Pure damages are not automatically tax-exempt under the Tax Code (tax exclusions for damages are narrower, commonly focused on personal injuries/sickness), so they may still be treated as taxable “income from whatever source” depending on nature and controlling guidance.

For PILON specifically: if it is paid as a salary-equivalent for failure to observe the notice period, the safer payroll approach is usually to treat it as taxable unless it is clearly structured and documented as part of an exempt redundancy separation benefit.

9) Common mistakes in redundancy exits (and the tax consequences)

Mistake 1: Treating “one month pay” as “notice pay”

For redundancy, the Labor Code minimum separation pay is “one month pay or one month per year of service, whichever is higher.” That “one month” is not the 30-day notice; it is separation pay and is typically exempt if the redundancy is involuntary and bona fide.

Mistake 2: Mixing salary components into “separation pay” without breakdown

Final pay often includes:

unpaid salary up to last day worked,
pro-rated 13th month and other benefits (subject to the statutory exclusion cap for 13th month/other benefits),
leave conversions (some may qualify as de minimis within limits; excess may be taxable),
separation pay (often exempt),
bonuses/incentives (often taxable unless within applicable exclusions).

A clear breakdown reduces miswithholding and reduces disputes.

Mistake 3: Paying “PILON” but still failing the labor notice rule

Even if “PILON” is paid, failure to serve proper notices can still trigger nominal damages exposure. Tax treatment does not fix labor compliance.

10) Illustrative example (classification-focused)

Facts

Monthly basic salary: ₱60,000
Years of service: 6 years
Termination cause: bona fide redundancy
Employer pays:
1. Statutory redundancy separation pay: 6 months x ₱60,000 = ₱360,000
2. “30 days pay in lieu of notice”: ₱60,000
3. Unpaid salary up to last day worked: ₱20,000
4. Pro-rated 13th month/other benefits: ₱40,000

Typical treatment

(1) ₱360,000 separation pay due to involuntary redundancy: generally tax-exempt
(2) ₱60,000 PILON:
- taxable if treated as salary/wage replacement for a notice period or processed as compensation
- potentially exempt if clearly documented and processed as an additional separation benefit due to redundancy (not salary), though classification risk is higher if it is literally “30 days salary”
(3) ₱20,000 unpaid salary: taxable compensation
(4) ₱40,000 pro-rated 13th month/other benefits:
- excluded from tax up to the statutory ceiling (commonly known as ₱90,000 under the TRAIN-era rule), with excess taxable

The crucial insight: redundancy does not automatically make every exit-related payment tax-exempt—only those that are truly separation benefits falling under the statutory exclusion.

11) Practical conclusion

In Philippine redundancy terminations:

Separation pay due to bona fide, involuntary redundancy is generally tax-exempt under the Tax Code exclusion for separation due to causes beyond the employee’s control.
Pay in lieu of notice is often taxable because it commonly functions as salary or wage replacement for a notice period (especially where the employee remains employed during the period covered, or where the payment is computed and processed as “salary”).
PILON can be closer to tax-exempt separation benefit only when it is genuinely structured, documented, and processed as part of the redundancy separation package, not as compensation for a period of continued employment or as a salary substitute—yet misclassification risk increases when the payment is framed as “30 days salary.”

A correct answer requires identifying what the “PILON” payment truly represents: continued-employment salary (taxable) versus separation benefit due to involuntary redundancy (generally exempt).