Separation Pay and Length-of-Service Claims After Agency Transfer
A comprehensive guide for Philippine practitioners (updated July 2025)
1. Overview
“Agency transfer” happens when an employee is moved from one juridical employer to another without a break in the actual work rendered. Two broad settings dominate Philippine practice:
- Private-sector contracting/outsourcing – e.g., security guards or janitors whose principal changes contractors.
- Government or GOCC reorganization – an plantilla position is abolished and the incumbent is absorbed by another bureau or government-owned entity.
In both settings the employee’s most pressing questions are:
- Am I entitled to separation pay?
- If yes, should my prior years with the former agency be credited in computing it?
2. Separation Pay in the Private Sector
| Trigger | Statutory Basis | Quantum |
|---|---|---|
| Authorized causes (redundancy, retrenchment, closure, installation of labor-saving devices) | Art. 298 [283] Labor Code | 1 month pay or ½-month pay per year of service* whichever is higher; redundancy & closure w/out serious losses = 1 month |
| Disease disabling for >6 months | Art. 299 [284] | ½-month pay per year of service* |
| Illegal dismissal w/ reinstatement no longer feasible | Jurisprudence (e.g., Session Delights v. CA, G.R. 172149, 2010) | 1 month pay per year of service, normally capped at 3 years unless bad-faith proven |
| Just causes (Art. 297) | No statutory grant; discretionary equity only (e.g., PLDT v. NLRC, G.R. 80609, 1986) | Usually none |
* A fraction of at least 6 months is counted as one full year.
2.1 How agency transfer affects entitlement
a. Genuine change of employer (“end-of-contract” turnover). When the principal hires a new legitimate contractor and the outgoing contractor permanently terminates the deployment, the guards, janitors, etc. are dismissed for “closure” or “redundancy.” Separation pay is owed by the outgoing contractor and computed up to the last day with that contractor. Prior service is not automatically credited by the incoming contractor, unless:
- there is absorptive hiring under an SLA provision or under successor-employer jurisprudence (see below); or
- a CBA or company policy recognizes portability of tenure.
b. Successor-employer situations. The Supreme Court treats certain transfers as a continuation of employment (e.g., PAFLU v. Security and Credit, G.R. 180074, 2016; San Miguel Foods v. Rivera, G.R. 217641-42, 2021):
- the same employees keep doing the same work at the same site;
- the principal exercises control over core terms; and
- the change is a device to defeat labor standards.
Here, separation pay is not triggered because employment is deemed uninterrupted; but length-of-service carries over for future benefits.
c. Mergers, acquisitions, spin-offs. Under BDO Unibank v. Bielsa (G.R. 226258, 2020) and Art. 298(3), the buyer or surviving corporation must absorb the workforce or else pay separation pay; credited service starts from original hiring date.
3. Length-of-Service Credits After Transfer
General rule: Length of service is reckoned from first day of paid work for the same employer. Exceptions extending credit:
- Statutory mandate – Art. 298(3) on sale/transfer of business; Art. 301 on bona-fide suspension (<6 data-preserve-html-node="true" months).
- Jurisprudential equity – where successive agency changes are “labor-only contracting”; courts treat principals as the real employer.
- Contractual undertaking – CBAs, project absorption agreements, or express clauses in the Service Agreement requiring the incoming contractor to recognize past service.
4. Government Sector Nuances
| Scenario | Governing Law | Separation/Gratuity | Service Credit |
|---|---|---|---|
| Agency abolished & employee not absorbed | RA 6656 (Reorganization Law), DBM-CSC Joint Circulars | Gratuity: ½-month basic pay per year, min 5k, max 18 months | Entire govt service counts toward GSIS retirement if later re-employed |
| Transfer with continuous appointment (e.g., item “lateral transfer”) | CSC Omnibus Rules, Rule VII | None; no interruption of service | Continuous |
| GOCC privatization | Proclamation 50, EO 889, GOCC GCG rules | Separation package stated in the privatization terms; often ≥1 month per year | Credited if rehired in government within 6 months (Sec. 8, RA 6656) |
Key points:
- No double recovery: an employee who receives RA 6656 gratuity and is rehired within one year must refund the gratuity on a pro-rata basis.
- Portability Law (RA 7699) allows combining GSIS and SSS contributions if the employee shifts between government and private employment after separation.
5. Prescriptive Periods & Forums
| Claim | Venue | Period |
|---|---|---|
| Separation pay (private) | NLRC via RAB | 3 years from accrual (Art. 306) |
| Illegal dismissal w/ separation pay in lieu | NLRC | 4 years (Art. 1146 Civil Code) |
| Money claims (government) | Commission on Audit, then CA | 6 years (Art. 1145(2)) |
| Disputes on agency transfer in gov’t | CSC | 15 days to appeal adverse action |
6. Practical Compliance Checklist for Employers
- Due-diligence before turnover: identify employees’ length-of-service and assess whether the arrangement triggers successorship.
- Pay separation on or before effectivity date if employment is truly severed.
- Insert a portability clause in the new Service Agreement when the principal insists on continuity.
- Document consent of employees if they are being absorbed, to avoid constructive dismissal claims.
- Coordinate with DOLE Field Office for closure/retrenchment reporting (Rule I-A, D.O. 147-15).
7. Common Litigation Pitfalls
- Treating the transfer as “end of contract” while the principal retains the same workers – likely labor-only contracting; separation pay liability can shift to the principal.
- Paying ½-month instead of 1 month per year in redundancy cases.
- Ignoring fractions: 6 months = 1 year in the computation formula.
- Overlooking the ₱5,000 minimum gratuity under RA 6656 for laid-off government staff.
8. Emerging Trends (2023-2025)
- Security Industry Tripartite Council Resolutions now encourage principals to shoulder at least 50 % of separation costs when they switch guard providers.
- CSC Resolution 2200597 (2024) treats transfer to a newly formed “shared services unit” as continuity for leave credits and step increments, reducing disputes on length-of-service.
- DOLE’s draft amendment to D.O. 174 (April 2025) proposes mandatory escrow to secure payment of separation pay by contractors undergoing closure.
9. Take-Away
Whether separation pay will be owed—and how much of your past service counts—turns on who your real employer is at the moment of transfer:
- If the employment bond is legally severed, separation pay is due but prior years stop there.
- If the transfer is a continuation in disguise, you keep your tenure—but you give up instant separation pay because you were never actually dismissed.
Prudent parties memorialize the arrangement in writing, consult DOLE/CSC early, and compute based on the specific statutory formula that fits the scenario.