All About Separation Pay

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Calculating Separation Pay


Separation pay is given to employees in instances covered by Articles 298 and 299 (formerly Articles 283 and 284) of the Labor Code of the Philippines. An employee’s entitlement to separation pay depends on the reason or ground for the termination of his or her services. An employee may be terminated for just cause (i.e., gross and habitual neglect of duty, fraud, or commission of a crime), and other similar causes as enumerated under Article 297 (formerly Article 282) of the Labor Code and, generally, may not be entitled to separation pay. On the other hand, where the termination is for authorized causes, separation pay is due.

A. One-Half (1/2) Month Pay per Year of Service

An employee is entitled to receive a separation pay equivalent to one-half (1/2) month pay for every year of service, a fraction of at least six (6) months being considered as one (1) whole year, if his/her separation from the service is due to any of the following authorized causes:

  1. Retrenchment to prevent losses (i .e., reduction of personnel effected by management to prevent losses);
  2. Closure or cessation of operation of an establishment not due to serious losses or financial reverses; and
  3. When the employee is suffering from a disease not curable within a period of six (6) months and his/her continued employment is prejudicial to his/her health or to the health of his/her co -employees.

In no case will an employee get less than one (1) month separation pay if the separation is due to the above stated causes.

B. One-Month Pay per Year of Service

An employee is entitled to separation pay equivalent to his/her one-month pay for every year of service, a fraction of at least six (6) months being considered as one whole year, if his/her separation from service is due to any of the following:

  1. Installation by employer of labor-saving devices;
  2. Redundancy, as when the position of the employee has been found to be excessive or unnecessary in the operation of the enterprise; and
  3. Impossible reinstatement of the employee to his or her former position or to a substantially equivalent position for reasons not attributable to the fault of the employer, as when the reinstatement ordered by a competent authority cannot be implemented due to closure or cessation of operations of the establishment/employer, or the position to which he or she is to be reinstated no longer exists and there is no substantially equivalent position in the establishment to which he or she can be assigned.

C. Notice of Termination

The employer may terminate the employment of any employee due to the above-mentioned authorized causes by serving a written notice on the employee and the Department of Labor and Employment through its regional office having jurisdiction over the place of business at least one (1) month before the intended date thereof.

D. Basis of Separation Pay

The computation of separation pay of an employee shall be based on his/her latest salary rate.

E. Inclusion of Regular Allowance in the Computation

In the computation of separation pay, it would be an error not to integrate the allowance with the basic salary. The salary base properly used in computing the separation pay should include not just the basic salary but also the regular allowances that an employee has been receiving.

F. Coverage from Income Tax of Separation Pay

Exempted from taxation is the separation pay received by an
employee as a result of his/her separation from the service of the employer due to death, sickness or other physical disability or for other cause beyond the control of said employee such as retrenchment, redundancy or cessation of business operations.