Separation Pay Computation for Medical Incapacity After Long Service in the Philippines

Last updated for laws and doctrines widely applied up to 2024. This is general information, not legal advice.

1) Legal Basis and When It Applies

Termination by disease (medical incapacity) is governed by Article 299 of the Labor Code (renumbered; formerly Art. 284). An employer may end employment only if all of the following are present:

A disease or illness exists.
A competent public health authority certifies that the disease cannot be cured within six (6) months even with proper medical treatment or that continued employment is prohibited by law or prejudicial to the employee’s or coworkers’ health.
Separation pay is paid at the statutory minimum (see Section 4).

If the condition can be cured within six (6) months, termination on this ground is not allowed. The employer should allow treatment/leave (often aligned with SSS sickness benefits or company sick leave); after six months, if still incurable and duly certified, termination may then proceed.

Key due-process points (practice):

The law’s indispensable requirement is the certification by a competent public health authority (e.g., a public/government physician). Private/company doctors’ opinions are useful but not a substitute for the required public certification.
Provide the employee written notice, the medical findings, and a reasonable chance to respond or to submit contrary medical evidence. (While the Labor Code’s 30-day DOLE notice expressly covers authorized causes under Art. 298, many employers still give advance written notice to the employee as a best-practice for fairness and to minimize disputes.)

2) What Counts as a “Competent Public Health Authority”?

A government physician (e.g., city/municipal health officer, DOH facility doctor, government hospital specialist) who personally examines the employee and issues a medical certification that the disease cannot be cured within six months despite proper treatment (or that continued employment is unlawful/prejudicial).
Keep the certification specific (diagnosis where appropriate, prognosis, six-month curability assessment).
Handle health data as sensitive personal information under the Data Privacy Act—limit access and store securely.

3) Relationship to Other Exit Modes

Resignation due to illness is voluntary; separation pay is generally not due unless company policy/CBA says otherwise.
Retrenchment/Closure (Art. 298) is a different authorized cause with its own standards.
Retirement (R.A. 7641) can overlap in timing with illness, but employees typically cannot collect both separation pay and retirement pay for the same termination, unless a CBA, retirement plan, or consistent company practice expressly allows both. Usually, the more beneficial applies.

4) Statutory Separation Pay for Disease

Amount: At least one (1) month salary OR one-half (1/2) month salary for every year of service, whichever is higher.

Fraction of at least six (6) months counts as one (1) whole year.
“One-half month salary” is a term of art long applied in DOLE guidance and jurisprudence. For covered employees it is computed as:
- 15 days, + 1/12 of the 13th-month pay, + the cash equivalent of 5 days of Service Incentive Leave (SIL) → commonly summarized as 22.5 days per year of service.
If the employee is not legally entitled to SIL (e.g., certain field personnel or those already enjoying an equivalent/better leave), exclude the 5-day SIL. In that case, 1/2 month salary = 17.5 days (15 + 1/12 of 13th-month).

Salary base: use the employee’s latest regular salary rate. If the employee is not monthly-paid (e.g., daily/peace-rated or earnings fluctuate), use a reasonable monthly equivalent, often the 12-month average or the payroll factor your company consistently uses for conversions, applied uniformly.

Tax: Under the Tax Code (Sec. 32[B][6][b]), separation pay due to sickness or causes beyond the employee’s control is income-tax-exempt. (Other terminal pay items—e.g., pro-rated 13th-month—follow their own tax rules; the general “₱90,000 cap” applies to 13th-month and other bonuses, not to separation pay properly falling under the exemption.)

5) What “Long Service” Changes (and Doesn’t)

Long service increases the per-year component (“½-month per year”), which often exceeds the single “one-month salary” floor. The method doesn’t change; only the multiplier grows.

Counting service: From date actually hired to the effective date of separation.
Rounding: ≥ 6 months → round up to a full year; < 6 months → ignore the fraction.
Breaks in service: Handle per company policy/CBA and evidence (e.g., project gaps).
Leaves without pay generally do not reset tenure, but unusual arrangements can complicate computation—document your approach.

6) Step-by-Step Computation

Quick formulas

Let:

M = latest monthly salary
Y = years of service (rounded; ≥6 months → +1)
D = “days per year” for the ½-month rule
- 22.5 if SIL applies
- 17.5 if no SIL entitlement
DR = daily rate = M ÷ 30 (unless your payroll system uses a different lawful divisor consistently)

Then compute both options:

Floor: One-month salary = M
Per-year: ½-month per year = D × Y × DR

Separation pay = the higher of (1) and (2).

Worked examples

Example A (long service, SIL applies):

Monthly salary ₱30,000, service 18 years & 7 months → 19 years
DR = ₱30,000 ÷ 30 = ₱1,000
Per-year: 22.5 × 19 × 1,000 = ₱427,500
Floor: ₱30,000
Pay ₱427,500 (higher amount)

Example B (mid-tenure, SIL applies):

M = ₱18,000, service 2 years & 2 months → 2 years
DR = 18,000 ÷ 30 = ₱600
Per-year: 22.5 × 2 × 600 = ₱27,000
Floor: ₱18,000
Pay ₱27,000

Example C (long service, no SIL entitlement):

Daily-paid; average M = ₱20,800; service 15 years & 9 months → 16 years
DR = 20,800 ÷ 30 ≈ ₱693.33
Per-year: 17.5 × 16 × 693.33 ≈ ₱194,133
Floor: ₱20,800
Pay ≈ ₱194,133

Tip: Always document the rates, divisor, tenure rounding, and SIL entitlement basis used.

7) What Else Must Be Paid on Exit (“Final Pay”)

Apart from separation pay, the employee is typically entitled to:

Unpaid wages up to last day worked
Pro-rated 13th-month pay for the current year
Cash conversion of unused earned leaves, per law/policy/CBA
Other accrued benefits (e.g., allowances due, company-specific benefits)
Clearance of accountabilities (lawful deductions only, or with written authorization)

As a policy benchmark, DOLE has directed employers to release final pay within 30 days from separation, unless a more favorable company/CBA timeline applies.

8) Paperwork Employers Should Prepare

Notice to employee explaining the medical basis and intended action
Certification by a competent public health authority (attach to the record)
Computation sheet (showing both the “one-month” floor and the per-year formula)
Final pay breakdown and payslips
Quitclaim/Release (optional but common): must be voluntary, informed, and for a reasonable consideration (i.e., at least the legal minimum) to be generally enforceable

9) Common Pitfalls (and How to Avoid Them)

No public-health certification. Dismissal is vulnerable; obtain the proper certificate.
Using “½ month” as literal 15 days only. Remember the 22.5/17.5-day rule for the per-year option (depending on SIL).
Ignoring the 6-month curability rule. If treatable within six months, termination is premature.
Forgetting rounding. ≥ 6 months counts as a full year for the per-year formula.
Tax withholding errors. Separation pay due to sickness is generally tax-exempt; don’t withhold income tax on that component.
Double-pay with retirement. Unless a plan/CBA clearly grants both, pay whichever is more beneficial, not both.
Data privacy lapses. Health information must be handled under the Data Privacy Act.

10) Interplay with SSS/ECC and Other Laws

SSS sickness benefit / disability pensions (and Employees’ Compensation for work-related illness) are separate from separation pay; they don’t erase the employer’s legal obligation to pay separation pay for disease-based termination.
If the condition amounts to a disability, consider obligations under the Magna Carta for Persons with Disability (reasonable accommodation, non-discrimination), balanced against genuine undue hardship and health/safety considerations.

11) Practical Checklist (Employer)

□ Obtain/validate public health certification (six-month curability assessed).
□ Evaluate reasonable accommodation or reassignment options first, where feasible.
□ Give written notice and allow the employee to respond or submit contrary medical findings.
□ Compute both amounts and pay the higher:
- One-month salary vs. ½-month-per-year (22.5 or 17.5 days × Y × DR).
□ Prepare final pay (wages, pro-rated 13th-month, leave conversions, etc.).
□ Apply tax rules correctly (separation pay due to sickness: tax-exempt).
□ Release payment within 30 days (or earlier, per policy/CBA).
□ Keep records (medical certification, computation, proof of payment, quitclaim if any).

12) Practical Checklist (Employee)

□ Ask to see the public health certification and understand its findings.
□ Verify the tenure count (rounding) and the salary base used.
□ Confirm whether SIL applies (affects 22.5 vs 17.5 days).
□ Check tax treatment (separation pay due to sickness should be tax-exempt).
□ Review final pay inclusions (pro-rated 13th-month, unused leave, allowances).
□ Seek clarification before signing any quitclaim; you can consult counsel.

Bottom Line

For medical incapacity, separation pay = the higher of (a) one month salary, or (b) ½-month salary per year of service (computed as 22.5 days per year if SIL applies, 17.5 days if not), with ≥6 months rounded up, using the latest salary rate, and tax-exempt if the separation is due to sickness. Validity hinges on a competent public health authority’s certification and fair process.