In the Philippine labor landscape, the "Final Pay" or "Last Pay" is a critical entitlement for any departing employee, regardless of the cause of termination. However, disputes frequently arise regarding how much an employer can legally deduct from these amounts. The general rule is one of protection for the worker, but it is tempered by the employer's right to recover legitimate debts and accountabilities.

1. The General Rule: Prohibition of Wages Withholding

Under Article 113 of the Labor Code of the Philippines, employers are generally prohibited from making deductions from the wages of employees. Since separation pay and final pay are considered forms of compensation or benefits earned by reason of employment, they are protected by the same principle.

Article 116 further reinforces this by making it unlawful for any person to withhold any amount from the wages of a worker or induce said worker to give up any part of their wages by force, stealth, intimidation, or any other means without the worker’s consent.

2. Authorized Deductions

Despite the general prohibition, the law allows for specific exceptions where deductions are considered valid:

Statutory Deductions: These include mandatory contributions for SSS, PhilHealth, Pag-IBIG, and withholding taxes (unless the employee is a minimum wage earner or falls under the tax-exempt threshold).
Worker’s Consent: Deductions for value received (e.g., company loans, stocks, or grocery bonds) are allowed provided the employee gives written authorization.
Court-Ordered Deductions: When there is a valid attachment or execution on wages for debts incurred for food, shelter, clothing, and medical attendance.
Loss or Damage: In specific industries, deductions for loss or damage to tools or equipment are allowed, provided the employer proves the employee is clearly responsible and the deduction does not exceed 20% of the employee’s wages in a week.

3. The Employer’s Right to "Clearance"

A common practice in the Philippines is withholding the final pay until the employee completes the "clearance process."

The Supreme Court, in cases like Milan vs. NLRC, has affirmed that the employer has the right to withhold the final pay as a form of management prerogative, provided it is for the purpose of ensuring the employee returns company property (e.g., laptops, uniforms, ID cards) or settles liquidated debts (e.g., unliquidated cash advances).

Limits on the Right to Withhold:

Reasonableness: The withholding must be for a legitimate accountability. An employer cannot indefinitely withhold pay for vague or unsubstantiated claims of "potential" damages.
Proportionality: If an employee owes 5,000 PHP for a lost tablet, the employer cannot legally justify withholding a 100,000 PHP final pay indefinitely. The employer should deduct the value of the lost item and release the balance.

4. Specific Issues in Separation Pay

Separation pay is distinct from final pay. It is usually paid in cases of Authorized Causes (Redundancy, Retrenchment, Disease, or Closure of Business).

Taxes: Generally, separation pay received due to the involuntary death, sickness, or physical disability of the employee, or for any cause beyond the control of the employee (like redundancy or retrenchment), is exempt from income tax.
Offsets: Employers often try to offset "training bonds" or "non-compete violations" against separation pay. For a training bond deduction to be valid, there must be a clear, written contract specifying the pro-rated cost of training if the employee leaves before a certain period.

5. Timeline for Release

According to DOLE Labor Advisory No. 06, Series of 2020, the final pay of an employee must be released within thirty (30) days from the date of separation or termination of employment, unless a more favorable company policy or Individual/Collective Bargaining Agreement exists.

6. Prohibited Deductions (Common Violations)

The following are generally considered illegal if deducted without the specific conditions mentioned above:

"Inventory Shortages": Unless it is proven that the employee had sole possession and the loss was due to their negligence/fault.
Cash Bonds: Employers cannot require employees to post "cash bonds" or "deposits" for loss/damage unless the nature of the business requires it (and even then, it is strictly regulated by DOLE).
Attorney's Fees: Deducting the cost of the company's legal counsel from an employee’s pay is prohibited.

7. Remedies for Illegal Deductions

If an employer makes unauthorized deductions or refuses to release the final pay beyond the 30-day period, the employee may:

SENA (Single Entry Approach): File a request for assistance before the Department of Labor and Employment (DOLE) for mediation.
Labor Arbiter: If mediation fails, a formal complaint for "Non-payment/Underpayment of Final Pay" can be filed with the National Labor Relations Commission (NLRC).

Failure to release the pay or making illegal deductions can subject the employer to 12% legal interest per annum on the unpaid amount and potential moral and exemplary damages if bad faith is proven.