Separation Pay and 13th-Month Pay Computation in the Philippines When a Company Closes

Philippine private-sector context. Plain-English guide with legal bases, coverage rules, formulas, edge cases, and worked examples.

1) Quick definitions

Separation pay: A one-time benefit owed when employment is terminated for specific “authorized causes” under the Labor Code. For closure/cessation of business, entitlement depends on whether the closure is due to serious losses.
13th-month pay: A statutory benefit for rank-and-file employees equal to 1/12 of basic salary actually earned within the calendar year. It is pro-rated if employment ends before year-end (including when the company closes).

2) Legal bases (plain summary)

Labor Code (authorized causes; notice and separation pay): Closure/cessation of business is an authorized cause. If the closure is not due to serious business losses or financial reverses, separation pay is due; if it is due to serious losses (properly proven), separation pay is not required. Employers must give 30-day written notice to both employees and DOLE before effectivity.
13th-Month Pay: Established by PD 851 and later rules; all rank-and-file private-sector employees who worked at least a month within the year are covered, regardless of how wages are paid.
Release of final pay: DOLE guidance expects final pay (including pro-rated 13th-month and any separation pay) to be released within 30 days from separation, unless a more favorable company policy or CBA applies.
Tax:
- Separation pay due to causes beyond the employee’s control (e.g., redundancy, retrenchment, closure) is income-tax-exempt.
- 13th-month and other benefits are tax-exempt up to the TRAIN-law ceiling of ₱90,000 in a year; amounts above the cap are taxable.

Government employees follow separate rules (Civil Service); this guide covers the private sector.

3) Who is covered when a company closes?

Separation pay (closure):
- Covered: Generally all employees (probationary, regular, rank-and-file, supervisory, managerial), if the closure is not due to serious losses.
- Not covered: If the employer proves serious business losses, no separation pay is due. (Notice is still required.)
13th-month pay:
- Covered: Rank-and-file private-sector employees who worked at least a month during the year—even if separated before Dec 24 due to closure.
- Managers/supervisors: 13th-month is not mandated by law for purely managerial employees, but they may still receive it by company policy, CBA, or long-standing practice.

4) Required notices and timing

30-day written notice to:
- Employees; and
- The DOLE (Regional Office with jurisdiction), stating the authorized cause (closure/cessation) and the effectivity date.
Final pay deadline: Release separation pay (if any), pro-rated 13th-month, and other terminal pay (unpaid wages, monetized unused SIL, etc.) within 30 days from separation unless a more favorable policy applies.

5) Separation pay on closure—rules and formulas

A) Is separation pay owed?

Closure due to serious losses? NO separation pay (employer must prove losses with competent evidence, e.g., audited financials; bare allegations are not enough).
Closure not due to serious losses? YES separation pay is owed.

B) How much?

For closure not due to serious losses:

Separation Pay = the greater of:

One (1) month pay, or

One-half (1/2) month pay × Years of Service with ≥ 6 months counted as one whole year.

“One month pay” means the employee’s latest basic monthly salary (exclude purely discretionary allowances and variable premium pays unless they’re integrated into basic pay by contract/CBA/practice).
Rounding rule: 6 months or more in the last incomplete year counts as 1 whole year; less than 6 months is ignored.
Daily-paid employees: Convert to a “one month pay” using your company’s lawful monthly salary factor (e.g., monthly basic rate or daily rate × the correct work-days factor per policy/CBA). Then apply the same formula.

C) Worked examples (closure not due to serious losses)

Regular monthly-paid

Latest basic salary: ₱20,000
Service: 3 years, 8 months → 4 years (round up)
½ month × 4 = 2 months; compare with 1 month minimum → 2 months
Separation pay = 2 × ₱20,000 = ₱40,000

Short tenure

Latest basic salary: ₱25,000
Service: 5 months → rounds down (no full year)
½ month × 0 = 0, compare with 1 month minimum → ₱25,000

Closure due to proven serious losses

Any tenure/salary → ₱0 separation pay (but final wages and pro-rated 13th-month still apply).

Tip for HR: Use the latest basic salary rate, apply the 6-month rounding, compute ½ month per year, then compare against the 1-month floor.

6) 13th-month pay when the company closes

A) Entitlement & timing

Entitled: All rank-and-file who worked ≥1 month during the calendar year.
Pro-rated: Computed up to the last day worked.
Pay-out: If separation occurs before Dec 24, pay the earned pro-rated 13th-month with final pay (generally within 30 days from separation).

B) Computation

13th-Month Pay = (Total basic salary actually earned within the calendar year ÷ 12)

Include: Basic salary actually earned for the period (at each month’s rate). Salary increases are naturally captured because you sum what was actually earned.
Exclude (unless contract/CBA integrates them into basic pay): Overtime, premium pay, night shift differential, holiday pay, discretionary allowances, and similar non-basic items. COLA is generally excluded unless integrated into basic.

C) Worked examples (pro-rated due to closure)

Separated Aug 15

Monthly basic: ₱20,000
Months actually earned: Jan–Jul (7 months) = ₱140,000; Aug half-month = ₱10,000 → ₱150,000 total
13th-month = ₱150,000 ÷ 12 = ₱12,500

Variable salary during the year

Jan–Mar: ₱18,000; Apr–Jun: ₱20,000; Jul–Sep: ₱22,000; separated Sep 30
Total basic earned: ₱18,000×3 = ₱54,000 + ₱20,000×3 = ₱60,000 + ₱22,000×3 = ₱66,000 → ₱180,000
13th-month = ₱180,000 ÷ 12 = ₱15,000

Note: If there were unpaid basic wages that will be settled in final pay (e.g., last cutoff), include them in the “basic salary actually earned” before computing 13th-month.

7) Taxes, SSS/PhilHealth/Pag-IBIG, and quitclaims

Separation pay (closure): Tax-exempt (cause beyond employee’s control). Do not include in the ₱90,000 cap.
13th-month: Combined with “other benefits,” tax-exempt up to ₱90,000/year; any excess is subject to withholding tax.
Government contributions: Continue remitting statutory contributions on wage income as usual up to the separation date. Separation pay itself is not subject to SSS/PhilHealth/Pag-IBIG.
Quitclaims: Employers often request a Release, Waiver, and Quitclaim. These are generally valid if the consideration is reasonable and the employee signed voluntarily without fraud/duress. They cannot waive statutory minimums (e.g., separation pay required by law, 13th-month earned).

8) Special scenarios & edge cases

Temporary suspension of operations (≤ 6 months): Employment may be placed on “floating” status (no work, no pay) without separation pay during the suspension. If the firm fails to resume after 6 months (and proceeds to closure), terminations take effect and separation pay rules above apply from the closure date.
Sale, merger, or reorganization:
- Asset sale with closure of the seller’s business: Seller typically owes separation pay (unless serious losses are proven). A buyer may hire employees but is not obliged unless agreed.
- Stock sale (same employer entity continues): No closure occurs; employment continues; no separation pay.
Project/seasonal/fixed-term employees: If the project/season simply ends as scheduled, no separation pay (that’s a different authorized end). But if employment is terminated early due to closure, the closure rules (and separation pay, if no serious losses) apply.
Probationary employees: Covered by separation pay on closure (if not due to serious losses) and by pro-rated 13th-month for time actually worked.
Attendance/disciplinary cases: Authorized cause (closure) is separate from just causes. Employees separated for closure still get the statutory benefits; those terminated for just cause don’t get separation pay (but they still get pro-rated 13th-month for basic pay already earned).

9) Checklists

For employers (closure)

Plan & evidence: Determine if closure is due to serious losses; prepare proof (audited FS) if invoking exemption from separation pay.
Notices (≥ 30 days before effectivity): To employees and DOLE.
Compute:
- Separation pay (if no serious losses): max(1 month, ½ month × years), round ≥6 months up.
- Pro-rated 13th-month (sum actual basic pay earned ÷ 12).
- Other terminal pay: unpaid wages, SIL conversion, prorated allowances if contractually due, etc.
Taxes & remittances: Apply ₱90k cap for 13th-month/other benefits; separation pay exempt.
Release: Final pay within 30 days; issue COE and BIR 2316; settle government remittances; prepare quitclaims (optional).

For employees

Verify:
- Notice period (30 days) and effectivity date.
- Separation pay math (apply 6-month rule and 1-month floor).
- Pro-rated 13th-month based on actual basic pay earned.
- Final pay timing (generally within 30 days) and tax treatment (separation pay should be non-taxable).
- Collect COE, BIR 2316, final payslips/remittance records.
Consider applying for SSS unemployment benefits (involuntary separation) if eligible.

10) Common pitfalls & practical tips

Calling it “losses” without proof doesn’t excuse separation pay. The burden is on the employer to prove serious losses.
Using the wrong base for “one month pay.” Use the latest basic monthly rate (or its lawful equivalent if daily-paid), not take-home pay.
Ignoring the 6-month rounding rule can underpay long-tenured staff.
For 13th-month, remember: sum the year’s actual basic pay (reflecting raises, unpaid days, etc.) then divide by 12—don’t just take the latest monthly rate.
Managers are not statutorily entitled to 13th-month, but check your CBA, policy, or established practice.
Final pay delays: Unless a more favorable policy applies, target ≤ 30 days from separation.

11) At-a-glance formulas

Separation pay (closure not due to serious losses) max( 1 × Latest Basic Monthly Pay , 0.5 × Latest Basic Monthly Pay × Years of Service* ) Count ≥6 months as 1 full year.
13th-month pay (pro-rated) Sum of Basic Salary Actually Earned in the Calendar Year ÷ 12
Tax
- Separation pay (authorized-cause closure): Non-taxable
- 13th-month + other benefits: Tax-exempt up to ₱90,000/year (excess taxable)

If you want, tell me your exact facts (last basic salary, start/end dates, any raises, daily vs monthly, and whether the company claimed “serious losses”), and I’ll run the numbers precisely and lay out a ready-to-file breakdown you can hand to HR.