In the Philippine labor landscape, the termination of employment—whether voluntary or involuntary—triggers specific financial obligations for the employer. Understanding the distinction between Final Pay and Separation Pay is crucial, as they are often confused but governed by different legal triggers and computations under the Labor Code and Department of Labor and Employment (DOLE) regulations.
I. Final Pay (Last Pay)
Final Pay refers to all revenues and benefits earned by an employee during the course of their employment that remain unpaid at the time of resignation or termination. Regardless of the reason for leaving—be it resignation, retirement, or termination for cause—every employee is entitled to their final pay.
According to DOLE Labor Advisory No. 06, Series of 2020, final pay must be released within thirty (30) days from the date of separation, unless a more favorable company policy or Individual Employment Contract exists.
Components of Final Pay:
- Unpaid Salary: Wages earned for actual days worked prior to the effective date of separation.
- Pro-rated 13th Month Pay: Calculated as .
- Service Incentive Leave (SIL): The cash equivalent of unused SIL (5 days per year of service for those who have worked at least one year), if not yet commuted or used.
- Cash Conversions: Vacation and sick leaves, if provided for by company policy or a Collective Bargaining Agreement (CBA).
- Tax Refunds: Any excess withholding tax collected from the employee.
- Other Benefits: Such as performance bonuses, commissions, or enrollment in retirement plans, if applicable.
II. Separation Pay
Unlike Final Pay, Separation Pay is not an automatic right for every departing employee. It is specifically mandated by law only when the termination is due to Authorized Causes or in cases where "reinstatement" is no longer possible in an illegal dismissal case.
1. When is Separation Pay Mandatory?
Separation pay is required when an employee is terminated for reasons not attributable to their fault (Authorized Causes):
One-half (1/2) Month Pay per Year of Service:
Retrenchment to prevent losses.
Closure or cessation of operations (not due to serious business losses).
Suffering from a disease not curable within six months and whose continued employment is prejudicial to their health or that of their co-workers.
One (1) Month Pay per Year of Service:
Installation of labor-saving devices (Automation).
Redundancy (When a position is superfluous).
Impossible Reinstatement (By order of the court/Labor Arbiter).
2. When is Separation Pay NOT Required?
- Just Causes: If an employee is terminated for serious misconduct, willful disobedience, gross and habitual neglect of duty, fraud, or commission of a crime against the employer (Article 297 of the Labor Code).
- Voluntary Resignation: Generally, an employee who resigns voluntarily is not entitled to separation pay unless it is stipulated in the employment contract or is a long-standing company practice.
III. Statutory Computations
For the purpose of calculating separation pay, a "fraction of at least six (6) months" is considered as one (1) whole year.
| Cause of Termination | Minimum Amount |
|---|---|
| Redundancy / Automation | 1 Month Pay per Year of Service |
| Retrenchment / Disease / Closure | 1/2 Month Pay per Year of Service (or 1 Month, whichever is higher) |
Note: The "One Month Pay" used for computation includes the basic salary and all regular fixed allowances the employee was receiving.
IV. The "Certificate of Employment"
Hand-in-hand with the final pay, DOLE requires employers to issue a Certificate of Employment within three (3) days from the time of the request by the separated employee. This certificate must state the dates of engagement, the termination of employment, and the type of work performed.
V. Quitclaims and Releases
Employers typically require employees to sign a Waiver, Release, and Quitclaim upon receipt of their final pay. For this document to be legally binding and prevent future labor suits, it must meet these criteria:
- The employee was not coerced or intimidated.
- The consideration (amount paid) is reasonable and fair.
- The terms are clear and written in a language understood by the employee.
If an employer refuses to release the final pay within the 30-day window, the employee may file a Request for Assistance (RFA) through the Single Entry Approach (SEnA) of the DOLE.