Introduction

The termination of employment in the Philippines carries significant legal obligations for employers, particularly concerning the final pay and statutory benefits owed to the departing employee. Whether the separation is due to resignation, redundancy, retirement, or dismissal, compliance with the Labor Code of the Philippines, Department of Labor and Employment (DOLE) regulations, and pertinent jurisprudence is mandatory. Employers must ensure that all dues are settled within the prescribed period to avoid administrative penalties, labor disputes, and potential claims for damages.

Legal Basis

Labor Code of the Philippines
- Articles 297–301 (formerly Articles 282–286) govern termination of employment, including just and authorized causes.
- Article 306 (formerly 283) outlines separation pay entitlements for authorized causes such as redundancy, retrenchment, or closure.
- Article 297 specifies due process for termination due to just causes.
DOLE Department Advisory No. 6, Series of 2020
- This circular defines “final pay” and mandates the release of all monetary benefits within 30 calendar days from the date of separation, unless a more favorable company policy, contract, or CBA (collective bargaining agreement) provides otherwise.
Republic Act No. 7641 (Retirement Pay Law)
- Requires employers to pay retirement benefits equivalent to one-half month salary for every year of service for employees not covered by a retirement plan.

Definition of Final Pay

Final pay, also referred to as last pay or back pay, is the total amount due to an employee upon separation from service. It includes all earned wages, benefits, and other monetary entitlements up to the date of termination.

Components of Final Pay

The computation varies depending on the cause of separation, but typically includes:

Unpaid Salary
- Salary earned up to the last working day, including overtime, night differential, and holiday pay if applicable.
Pro-rated 13th Month Pay
- Computed based on the number of months worked during the year of separation.
Unused Leave Credits
- Conversion of accrued and unused Service Incentive Leave (SIL) and other company-granted leaves into cash, as required by Article 95 of the Labor Code.
Separation Pay (if applicable)
- Due only for authorized causes (e.g., redundancy, retrenchment, or closure).
- Redundancy/Closure: One month pay per year of service or as provided by company policy.
- Retrenchment/Illness: At least one-half month pay per year of service.
Retirement Pay
- Applicable if the employee qualifies under the company’s retirement plan or R.A. 7641.
Tax Refunds and Deductions
- Adjustment for withheld taxes, loans, or company advances. Any remaining liabilities must be deducted only with the employee’s written consent.
Other Company Benefits
- Bonuses, incentives, profit sharing, commissions, or allowances due under company policy or collective agreements.

Timeline and Manner of Release

Prescribed Period

Under DOLE Department Advisory No. 6, Series of 2020, employers must release the final pay within 30 calendar days from the employee’s date of separation, unless a shorter period is provided by company policy or contract.

Payment Method

Payment may be made via check, bank transfer, or cash.
A Release, Waiver, and Quitclaim document should be executed upon payment, provided it meets validity requirements set by the Supreme Court (voluntary execution, full understanding, and reasonable consideration).

Clearances and Documentation

Before the release of the final pay, employers typically require completion of a clearance process to ensure return of company property and settlement of accountabilities. However, the clearance process must not unduly delay the release of payment beyond the 30-day statutory period.

Required Documentation

Notice of Termination or Resignation
Certificate of Employment (COE) – Must be issued within three (3) days upon employee’s request (Article 279 of the Labor Code).
BIR Form 2316 – Annual income tax certificate.
Release, Waiver, and Quitclaim – Acknowledges full payment and settlement.
Final Pay Computation Sheet – Itemized breakdown of all payments.

Penalties for Non-Compliance

Failure to release final pay within the prescribed period may result in:

Administrative penalties under DOLE regulations.
Monetary claims filed through the DOLE Single Entry Approach (SEnA) or Labor Arbiter under the National Labor Relations Commission (NLRC).
Legal damages, including moral and exemplary damages, for bad faith or undue delay (as upheld in various Supreme Court rulings).

Best Practices for Employers

Establish a Standard Clearance and Final Pay Procedure
- Clearly outline the timeline and responsible departments (HR, Payroll, Accounting).
Document All Payments
- Maintain detailed computation sheets and acknowledgment receipts.
Communicate Transparently
- Inform employees of the process and schedule of release immediately upon separation.
Ensure Tax Compliance
- Properly withhold and remit taxes on compensation and benefits.

Summary Table: Final Pay Components and Applicability

Type of Benefit	Applicability	Legal Basis
Unpaid Salary	All separations	Labor Code
Pro-rated 13th Month Pay	All separations	P.D. 851
Unused SIL Conversion	All separations	Article 95, Labor Code
Separation Pay	Authorized causes only	Article 298, Labor Code
Retirement Pay	If qualified	R.A. 7641
Tax Refunds	All separations	NIRC
Other Benefits (bonus, allowances)	As per company policy	Company CBA / Policy

Conclusion

Employers in the Philippines are legally mandated to settle all monetary obligations to a separated employee within 30 days from termination, in accordance with DOLE Department Advisory No. 6, Series of 2020 and the Labor Code. Compliance not only ensures lawful discharge of employer obligations but also fosters goodwill, transparency, and protection against potential labor disputes. A clear, well-documented Final Pay and Benefits Checklist is essential for both employers and employees to ensure a fair and orderly separation process.