A Legal Overview and Practical Guide

I. What Is “Redundancy” Under Philippine Labor Law?

“Redundancy” is an authorized cause for termination of employment under the Labor Code (Article on authorized causes, formerly Art. 283, now renumbered). It exists when:

The services of an employee are in excess of what is reasonably required by the enterprise, or
There is duplication of work, or
A position is no longer necessary due to reorganization, cost-cutting, streamlining, new technology, outsourcing, or changes in business strategy.

Key points:

The business may be legitimately reducing staff or restructuring, even if it is not losing money.
Redundancy is not based on fault of the employee.
Because it is an authorized cause, the law grants the employee separation pay, plus other final pay.

This article focuses on how that separation pay is computed, and the issues that commonly arise in practice.

II. Legal Basis for Redundancy Separation Pay

The Labor Code provision on authorized causes provides that if the termination is due to:

Installation of labor-saving devices or
Redundancy

the employee is entitled to separation pay equivalent to:

At least one (1) month pay or one (1) month pay for every year of service, whichever is higher.

This is a minimum standard. A CBA, company policy, or employment contract may grant more (but not less).

Contrast:

Redundancy and labor-saving devices → 1 month per year of service, or 1 month minimum
Retrenchment or closure not due to serious losses → ½ month per year of service, or 1 month minimum
Disease (authorized cause) → ½ month per year of service, or 1 month minimum

So redundancy is treated more favorably to the employee than retrenchment or closure.

III. When Is an Employee Entitled to Redundancy Separation Pay?

An employee is generally entitled if:

There is a genuine redundancy program, and
The employee is terminated specifically because his/her position became redundant, and
The employer complied with substantive and procedural requirements.

A. Substantive Requirements

For a valid redundancy:

There must be good faith in abolishing the position (not just a pretext to dismiss a specific worker).
The employer should have fair and reasonable criteria in choosing who to terminate, such as:
- Efficiency or performance ratings,
- Seniority,
- Status or specialization,
- Business needs.

Supporting documents often include:

Organigrams before and after restructuring,
Cost studies, feasibility studies,
New staffing patterns,
Management resolutions.

B. Procedural Requirements

Even if redundancy is justified, the employer must:

Give the employee written notice at least 30 days before the effective date of termination; and
Give DOLE written notice at least 30 days before the effective date.

Failure to comply with notice requirements may give rise to procedural defects (which can lead to nominal damages), but it does not remove the employee’s right to separation pay if redundancy is genuine.

IV. The Basic Rule on Computation

The Labor Code formula for redundancy:

Separation Pay = higher of (a) One (1) month pay, OR (b) One (1) month pay × Years of Service

In short:

Compute “1 month per year of service”
Compare it with “1 month pay”
The higher amount is the minimum separation pay.

This already assumes continuous service, but there are rules for fractional years and breaks in service.

V. Determining “Years of Service”

A. Full Years and Fractions

The general rule in labor practice and jurisprudence:

A fraction of at least six (6) months is considered one (1) whole year.

Examples:

1 year and 5 months of service → counted as 1 year
1 year and 7 months of service → counted as 2 years
9 years and 6 months → 10 years
9 years and 11 months → still 10 years (rounded up from 9.916… to 10)

This rule is applied when computing the “one month per year” component.

B. Broken Service and Gaps

Where an employee has multiple separated stints:

As a rule, only continuous service immediately preceding the redundancy is used unless:
- The law, contract, or company policy treats previous service as bridged; or
- There is clear evidence of continuous employment relationship, despite some gaps in actual work.

For project employees, seasonal workers, or fixed-term workers, entitlement can be more complex, and may hinge on whether they have become regular employees, or whether the termination is truly due to redundancy and not simply end of project/term.

VI. What Is Included in “One Month Pay”?

This is one of the most practical and litigated issues.

A. Basic Principle: Latest Salary Rate

“Month pay” for separation pay is normally based on the employee’s latest monthly salary rate at the time of termination, including any regular wage increases already effective.

It is not based on average pay from previous years (unless a more favorable CBA/contract says otherwise).
If the employee had recent promotions or adjustments, those must be reflected.

B. Components of “Pay” for Separation Pay

As a general guide, separation pay “one month pay” is usually:

Basic monthly salary, plus
Regular fixed allowances which are considered part of wage (e.g., guaranteed monthly allowances regularly and uniformly received, like transportation allowance if fixed and not purely reimbursable, sometimes COLA depending on practice).

Not normally included (unless company practice/CBA says otherwise):

Overtime pay;
Premium pay for holidays/rest days;
Night shift differential;
Commissions that are individual-result-based and not fixed;
Profit-sharing, discretionary bonuses;
13th month pay (calculated separately);
Non-wage benefits (e.g., rice subsidy in kind, uniform, etc.), unless explicitly integrated.

In some companies or CBAs, there is a concept of “basic pay” versus “basic salary plus fixed allowances”. For redundancy, the more favorable definition often prevails, especially if company practice shows allowances are treated as part of “pay.”

C. Daily-Paid or Hourly-Paid Employees

For employees not paid on a fixed monthly basis:

Daily-paid:
- Compute “one month pay” by multiplying the daily rate by the number of days the employee is regularly paid for in a month (often 26 days for 6-day workweek, or as DOLE formulas provide).
Hourly-paid:
- Daily rate = hourly rate × number of hours per day;
- Monthly pay = daily rate × number of working days per month.

As long as the resulting amount reflects the employee’s normal monthly earnings, that can be used as the “one month pay” for separation pay purposes.

VII. Practical Computation Examples

Example 1 – Short Service Employee

Employee A is terminated due to redundancy.
Service: 1 year and 4 months
Latest monthly salary: ₱20,000

Years of service (rounded):

1 year and 4 months → less than 6 months fraction → 1 year

Compute:

1 month pay = ₱20,000
1 month per year of service = 1 year × ₱20,000 = ₱20,000

Compare:

Higher of the two is equal (₱20,000) → Separation pay = ₱20,000

Even if the employee served only 1 year and 4 months, law guarantees at least 1 month pay.

Example 2 – Long Service Employee

Employee B is terminated due to redundancy.
Service: 9 years and 7 months
Monthly salary: ₱35,000

Years of service (rounded):

9 years and 7 months → fraction ≥ 6 months → counted as 10 years

Compute:

1 month pay = ₱35,000
1 month per year of service = 10 years × ₱35,000 = ₱350,000

Compare:

Higher amount is ₱350,000 → Separation pay = ₱350,000

Example 3 – With Fixed Allowance Integrated

Employee C:
- Basic salary: ₱30,000
- Regular fixed transportation allowance: ₱3,000/month
- Service: 5 years and 11 months

If company practice treats the allowance as part of “pay,” then:

Monthly pay for separation purposes = ₱33,000
Years of service: 5 years + 11 months → fraction ≥ 6 months → 6 years

Compute:

1 month pay = ₱33,000
1 month per year of service = 6 × ₱33,000 = ₱198,000

Higher amount: ₱198,000 → Separation pay = ₱198,000

VIII. Redundancy Separation Pay vs. Other Final Pay Components

Separation pay is only one part of what an employee may receive upon redundancy.

An employee may also be entitled to:

Unpaid regular wages up to last day of work;
Pro-rated 13th month pay (for the year of separation);
Conversion to cash of unused vacation or service incentive leaves, if company policy or law (e.g., service incentive leave) requires payment;
Other vested benefits under CBA or company policy (e.g., loyalty awards, retirement benefits if applicable).

Separation pay does not replace these; they are separate and additional unless the law or a clear agreement provides otherwise.

Note: There are cases where retirement benefits and separation pay overlap. Often, the rule is that the employee is paid the higher of the two if the law or company policy explicitly prevents double recovery. If not clear, disputes can arise.

IX. Tax Treatment and Deductions

A. Income Tax

As a general principle under tax regulations:

Separation pay due to causes beyond the employee’s control (such as redundancy, retrenchment, illness, etc., when properly documented) is typically excluded from gross income, and therefore not subject to income tax, provided:
- The separation was involuntary,
- The cause is one recognized by law (e.g., authorized cause),
- It is properly documented (e.g., redundancy program, notices, board resolutions).

If the alleged “redundancy” is in truth a voluntary resignation disguised as redundancy, or a purely ex gratia payment on resignation, the BIR may treat the amount as taxable.

B. Statutory and Contractual Deductions

From separation pay, employers may generally deduct:

SSS, PhilHealth, Pag-IBIG, tax (if taxable), where law requires;
Legitimate, documented debts of the employee to the company, if there is clear authority to deduct.

However, employers may not arbitrarily withhold or reduce separation pay beyond lawful deductions.

X. Release, Waiver, and Quitclaim

Often, employers ask redundated employees to sign quitclaims or releases in exchange for payment.

General points:

Quitclaims are not automatically void; they may be valid if:
- The consideration (amount paid) is reasonable and not unconscionable;
- The employee signed voluntarily and fully understood it;
- The agreement is not contrary to law (cannot waive minimum benefits).

But quitclaims cannot waive the minimum separation pay mandated by law. If the amount is unconscionably low, the employee may still question it.

XI. Common Issues and Pitfalls

“Redundancy” used to target specific employees
- If there is evidence that redundancy was merely a pretext (e.g., the same position is re-filled soon after with another person), the employee may challenge the termination as illegal dismissal, with claims for backwages and reinstatement or separation pay in lieu.
Improper computation ignoring fractions of a year
- Some employers compute only on full years and ignore the “6 months or more = 1 year” practice, leading to underpayment.
Exclusion of regular allowances from the base pay
- Regular, fixed allowances may have become part of “wage” through law, contract, or practice; excluding these can lead to short computation.
Lack of 30-day notice to employee and DOLE
- This may not eliminate the separation pay obligation but can lead to additional damages or findings of procedural infirmity.
Failure to pay other final pay items
- Some employers pay only the computed separation pay and forget about unpaid wages, leaves, 13th month, or other cashable benefits, which can still be claimed.

XII. Practical Guidance

For Employers

Plan redundancy programs with clear, documented business justification.
Use fair and objective criteria in selection.
Observe 30-day written notice to both the employee and DOLE.
Correctly compute:
- Years of service (with at least 6-month fraction = 1 year rule),
- One month pay based on latest pay and integrated allowances.
Pay at least the statutory minimum, or the higher amount provided by CBA/contract/practice.
Prepare a clear, written breakdown of final pay to avoid disputes.
Consider obtaining legal advice to ensure tax compliance and valid documentation.

For Employees

Keep copies of appointment letters, contracts, payslips, payroll records, and company memos.
Verify how long you have actually served, including fractions of a year.
Check your latest monthly pay, including any regular allowances.
Compute, even roughly, whether the separation pay offered meets the 1 month per year of service (or at least one month) standard.
Review any quitclaim carefully; do not sign if you do not understand it or if the amount is clearly unfair.
If in doubt, consult DOLE, a union representative, or a lawyer.

XIII. Closing Note

Redundancy is a lawful management prerogative, but it carries with it a legal duty to pay correct separation pay and comply with procedural safeguards. Understanding how redundancy separation pay is computed—from defining “one month pay,” counting years of service, including the right components in the base pay, to observing tax and final pay rules—helps both employers and employees protect their rights and minimize disputes.

This article provides general legal information. Actual cases can differ due to specific facts, CBAs, contracts, and evolving jurisprudence, so individual situations are best evaluated with tailored legal advice.