I. Overview: What illegal dismissal triggers

In Philippine labor law, a dismissal is generally illegal when it is effected without a just cause or authorized cause, or when due process requirements are not observed (or both), depending on the ground invoked. Once a termination is adjudged illegal, the law’s core remedial policy is restoration of the employee to the status quo ante—meaning the worker should, as much as practicable, be returned to the position as if the illegal dismissal did not happen.

The standard consequences of illegal dismissal are:

Reinstatement (actual return to work), without loss of seniority rights and other privileges; and
Full backwages from the time compensation was withheld up to actual reinstatement (or finality of judgment in lieu scenarios).

Where reinstatement is not viable, the remedy shifts to separation pay in lieu of reinstatement, in addition to backwages. Separately, courts may also award damages and attorney’s fees when statutory or jurisprudential standards are met.

A common point of confusion: separation pay for illegal dismissal is not the same as separation pay for authorized causes, and they follow different rationales and computation rules.

II. The remedies in illegal dismissal

A. Reinstatement

Reinstatement is the preferred remedy. It may be:

Actual reinstatement: employee returns to the workplace; or
Payroll reinstatement: employee is paid wages while not physically reporting, usually when return is impracticable pending proceedings.

Reinstatement is not automatic in the sense that the court still evaluates feasibility. But the legal policy favors reinstatement unless there are reasons to deny it (discussed below).

B. Backwages

Backwages are meant to make the employee whole for the income lost due to unlawful termination. “Full backwages” generally cover:

Basic salary; and
Regular wage-related benefits that the employee would have received had employment continued (e.g., 13th month pay, regular allowances that are part of wage, and other benefits shown to be regularly granted and wage-integrated).

Backwages run from the date of dismissal until:

Actual reinstatement, if reinstated; or
Finality of decision / judgment, when separation pay is awarded in lieu of reinstatement (the precise cut-off can vary depending on the dispositive portion and how reinstatement is structured, but the typical approach is dismissal date to finality when reinstatement is not carried out).

Backwages are distinct from damages: they are not punitive; they are restorative.

C. Separation pay in lieu of reinstatement (for illegal dismissal)

If reinstatement is no longer feasible or not ordered, the employee is awarded separation pay in lieu of reinstatement. This is frequently granted when:

The position no longer exists;
The employer’s business has closed (in a manner relevant to feasibility);
The relationship has become so strained that a viable working relationship is unlikely;
Reinstatement is impracticable due to supervening events; or
The employee requests separation pay in lieu of reinstatement (often granted if justified).

This separation pay is computed as a function of the employee’s length of service, commonly:

One (1) month pay for every year of service, with a fraction of at least six (6) months treated as one year.

This is different from authorized cause separation pay, which is often ½ month pay per year (for some authorized causes) or 1 month per year (for others) depending on the ground, and has a different statutory basis and purpose.

III. The limits and disqualifiers: when separation pay is not awarded (or is reduced)

A. Serious misconduct / causes reflecting moral depravity

A critical limit: separation pay is generally not granted to an employee validly dismissed for serious misconduct or analogous just causes reflecting bad faith, fraud, moral turpitude, or willful wrongdoing. The rationale is that separation pay is rooted in equity; it is not designed to reward wrongdoing.

But note: in illegal dismissal, the dismissal is unlawful—so the question becomes whether the employee’s conduct nonetheless justifies denying equitable relief. In practice, courts evaluate whether the facts show circumstances that make an award inequitable, even if the termination was illegal for procedural defects or incorrect classification.

B. “Strained relations” doctrine as a limit (and as a basis)

“Strained relations” is often invoked to justify separation pay in lieu of reinstatement, especially for positions of trust, managerial roles, or where a harmonious working relationship is essential. However:

It is not supposed to be a default shortcut; it must be based on evidence and the nature of the position and relationship.
It’s more commonly applied where actual reinstatement would be counterproductive or unrealistic.

As a limit: if “strained relations” is not substantiated, reinstatement may remain the proper remedy.

C. Employee’s own choice: opting for separation pay

Employees sometimes choose separation pay instead of reinstatement for practical reasons. Courts may allow this, but the award still follows in-lieu principles and is not an extra “bonus” on top of reinstatement.

D. Good faith of employer does not erase liability for backwages

Even if the employer claims good faith, full backwages typically remain due once dismissal is declared illegal, because backwages are compensatory. Good faith is more relevant to damages, not to backwages.

IV. How monetary awards are computed: the core components

A final award in an illegal dismissal case commonly has several “buckets.” The computation depends on the dispositive portion of the decision and the proven pay/benefits.

A. Determining the “monthly pay” base

Basic monthly salary: usually the stated monthly rate or the daily rate × 26 (or as supported by payroll practice and evidence).
Wage-integrated allowances: allowances that are shown to be part of wage or regularly paid as part of compensation may be included.
Exclusions: reimbursements and purely contingent benefits are usually excluded unless proven to be regular and wage-integrated.

Practical note: computation is evidence-driven. The employee must prove wage rates and the regularity of claimed benefits; the employer’s payroll records are often decisive.

B. Backwages computation (conceptual formula)

Backwages = (Monthly pay + proven wage-related benefits) × number of months from dismissal to cut-off Plus proportionate components such as:

13th month pay attributable to the backwages period; and
Other proven regular benefits.

Cut-off rules vary based on remedy:

If reinstated: up to actual reinstatement (including payroll reinstatement structures);
If separation pay in lieu: often up to finality or until the point specified by the ruling.

C. Separation pay in lieu of reinstatement computation

The prevailing equitable computation in illegal dismissal cases is:

Separation pay = 1 month pay × years of service
A fraction of at least 6 months counts as 1 year.

Years of service is counted from date of hire to the date of termination (or sometimes to the date of finality depending on how the ruling frames it; typically it is to dismissal date for length-of-service computations, while backwages cover the post-dismissal period).

D. Distinguishing from authorized cause separation pay

Authorized cause separation pay is computed depending on the authorized cause invoked (e.g., redundancy, retrenchment, closure not due to serious losses, disease). In illegal dismissal, when separation pay is granted, it is not because there was an authorized cause; it is because reinstatement is not feasible and separation pay is used as a substitute remedy.

E. Final pay items (distinct from illegal dismissal awards)

Regardless of illegal dismissal, employees may also be entitled to:

Unpaid wages;
Pro-rated 13th month pay;
Cash conversion of unused service incentive leave (and other convertible leave) where applicable;
Other contractual or policy-based benefits already earned.

These are not “damages” for illegal dismissal; they are earned benefits.

V. Damages and attorney’s fees: when they are awarded and their limits

Damages are not automatic in illegal dismissal. The standards differ by type.

A. Nominal damages (procedural due process defects)

Nominal damages are typically awarded when:

The dismissal is for a just cause or authorized cause (i.e., substantively valid), but
The employer failed to comply with statutory due process requirements (notice and hearing requirements in just cause; notices to employee and DOLE for authorized causes).

Nominal damages are not a substitute for backwages and do not “convert” an otherwise valid dismissal into illegal dismissal. They are a monetary recognition that the employee’s right to due process was violated.

Limits: nominal damages are generally fixed by jurisprudence within ranges depending on the type of cause and circumstances, rather than computed via salaries and time periods.

B. Moral damages

Moral damages may be awarded when the employer acted:

In bad faith,
In a manner that is oppressive or malicious,
Or where the dismissal was attended by circumstances causing serious anxiety, besmirched reputation, social humiliation, or similar injuries.

Illegal dismissal alone does not automatically justify moral damages. There must be proof of bad faith or wanton conduct and a factual basis for the claimed mental and emotional suffering.

Limits: moral damages are discretionary and must be reasonable. They are not computed as a mathematical function of wages; they are assessed based on the facts.

C. Exemplary (punitive) damages

Exemplary damages are awarded when:

The employer’s act is done in a wanton, fraudulent, oppressive, or malevolent manner; and
There is a basis for moral or other damages (exemplary damages are generally not awarded in a vacuum).

These damages are meant to deter similar conduct.

Limits: they must remain proportionate and grounded in the evidence of egregious conduct.

D. Actual damages

Actual damages require proof of pecuniary loss (receipts, records, etc.). In labor cases, these are less common because backwages already address income loss; actual damages may arise for distinct, proven losses.

E. Attorney’s fees

Attorney’s fees (often 10% of the total monetary award) may be granted when:

The employee is forced to litigate to recover wages or lawful benefits; or
The employer acted in a way that justifies fees under law and equity.

Limits: not automatic; it depends on findings in the decision.

VI. Common computation issues and how they are resolved

A. What counts as “wages” for computation

Disputes often arise on whether to include:

Allowances (transport, meal, COLA)
Incentives, commissions
Benefits like HMO, rice subsidy, phone allowance
Overtime and premium pay

General approach:

Include what is proved to be regular and part of wage (or regularly received as a matter of course).
Exclude what is contingent, reimbursable, or not shown to be regularly received.

B. 13th month pay in backwages

13th month pay is normally integrated into backwages computation as a proportionate amount corresponding to the backwages period, subject to proof of entitlement.

C. Mitigation / interim earnings

A recurring question: does the employee’s later employment reduce backwages? In Philippine illegal dismissal doctrine, backwages are generally not reduced by interim earnings (the remedy is designed to fully restore the income that should not have been lost due to illegal dismissal). The specifics still depend on the governing doctrine applied in the ruling.

D. Effect of supervening closure or business changes

If the business legitimately closes or the position is abolished after dismissal, courts may treat reinstatement as impracticable and award separation pay in lieu, but they examine:

Timing,
Good faith,
Whether the closure/abolition is genuine.

E. Computation of “years of service”

Typically:

Count from start date to date of dismissal (for the length-of-service factor),
Apply the 6-month fraction rule.

Disputes arise when employees have breaks in service or changes in status; evidence and employment records govern.

VII. Illustrative computation framework (template)

Assume:

Monthly basic salary: ₱30,000
Regular monthly allowance integrated as wage: ₱2,000
Dismissed: January 1, 2024
Decision final: January 1, 2026
Years of service: 7 years and 8 months

A. Backwages (simplified)

Monthly pay base = ₱32,000 Backwages period = 24 months Backwages = ₱32,000 × 24 = ₱768,000 Add 13th month attributable to backwages period (simplified): 13th month per year ≈ ₱32,000 × 1 = ₱32,000 For 2 years: ₱64,000 Total backwages + 13th month (simplified) = ₱832,000

(Other proven benefits may be added.)

B. Separation pay in lieu of reinstatement

Years of service = 7 years 8 months → fraction ≥ 6 months counts as 1 year → 8 years Separation pay = ₱32,000 × 8 = ₱256,000

C. Attorney’s fees (if awarded at 10%, simplified)

10% × (₱832,000 + ₱256,000) = 10% × ₱1,088,000 = ₱108,800

D. Damages (if awarded)

Moral/exemplary/nominal damages are added as fixed amounts determined by the court based on evidence and governing standards.

Important: This is a template illustration. Real computations depend on:

The exact cut-off date ordered,
Proven pay components,
Whether reinstatement was actually carried out,
And specific findings on damages and fees.

VIII. Interplay of remedies: what combinations are (and are not) proper

A. Reinstatement + backwages

This is the standard combination.

B. Separation pay in lieu + backwages

This is the standard when reinstatement is not ordered or not feasible.

C. Separation pay + reinstatement (generally not both)

As a rule, separation pay in lieu replaces reinstatement. The typical structure is either/or, not both, unless the decision has a special or exceptional framing (rare and fact-specific).

D. Damages on top of backwages/separation pay

Possible, but only when legal standards are met:

Moral/exemplary damages require bad faith/oppression and supporting facts.
Nominal damages relate to due process violations in otherwise valid dismissals.
Attorney’s fees require basis in law/equity.

IX. Strategic and evidentiary considerations that affect monetary awards

A. Evidence that increases or decreases the award

Key documents:

Contract and company policies
Payslips, payroll registers, SSS/PhilHealth/Pag-IBIG records
13th month and tax records
Proof of regular allowances/commissions/incentives
Organizational charts, job descriptions (for feasibility of reinstatement)
Evidence of bad faith/oppression (for damages)

B. When moral/exemplary damages become realistic

Patterns that commonly support damages findings:

Public humiliation, defamatory announcements, escorting out in a degrading manner
Fabricated charges, falsified documents
Targeted retaliation (e.g., union activity) supported by evidence
Discriminatory dismissal supported by proof
Refusal to comply with reinstatement orders without lawful basis

Absent these, the case may still yield backwages and reinstatement/separation pay, but not damages beyond what is compensatory.

X. Practical takeaways: the “limits” in one view

Illegal dismissal = reinstatement + full backwages as the baseline remedy set.
Separation pay is typically in lieu of reinstatement when reinstatement is not viable, commonly computed as 1 month pay per year of service (fraction ≥ 6 months = 1 year).
Damages are not automatic.
- Nominal damages relate to procedural due process defects in otherwise valid dismissals.
- Moral/exemplary damages require bad faith/oppression and supporting facts.
Attorney’s fees may be awarded (often 10%) when the employee is compelled to litigate, subject to the ruling’s findings.
The pay base and inclusions/exclusions depend heavily on evidence of wage components and benefit regularity.