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Clarifications regarding separation pay for resigned employees remain plentiful due to the ever-changing landscape of the workforce and corresponding regulations. Ultimately, separation pay in the Philippines serves as compensation for employees terminated for authorized causes. Meaning, those whose termination was not their fault are the beneficiaries.

Moreover, this guide will provide comprehensive information on Separation Pay eligibility criteria, methods on how to compute separation pay, tax implications, and more.

Separation Pay Eligibility

An employee is eligible for separation pay in two scenarios:

1. If the employee’s departure from the company is due to any authorized reasons, they are entitled to receive separation compensation. The pay is equivalent to half (1/2) a month’s salary for each year of service. A period of at least six (6) months is considered as one (1) whole year for calculation purposes. Authorized reasons include:
   • Retrenchment to prevent losses.
   • Closure or cessation of the establishment’s operations not resulting from serious financial difficulties.
   • When the employee suffers from an incurable disease for at least six (6) months, and their continued employment is detrimental to their health or the health of their colleagues.
   • Lack of assignment for a security guard for a continuous period of six (6) months.
2. If the employee’s departure from the company is due to specific reasons, they are entitled to receive separation pay equal to one month’s salary for each year of service. A fraction of at least six (6) months is considered as a full year. These reasons include:
   • Introduction of labor-saving devices by the employer.
   • Redundancy or when the enterprise deems the employee’s position excessive or unnecessary for its operations.
   • Impossibility of reinstating the employee to their former position or a substantially similar position for reasons not attributable to the employer’s fault. This includes situations where closure or cessation of the establishment prevents the competent authority from executing reinstatement.
   • Lack of assignment for a security guard due to age.

Also Read: GUIDE: Computing 13th Month Pay in the Philippines 

Separation Pay for Resigned Employee

Unfortunately, there is no separation pay for resigned employee. When an employee resigns of their own volition, they typically do not qualify for separation pay unless stipulated otherwise in the employment contract or company regulations. Given that resignation is an autonomous decision made by the employee, employers are not obligated to provide such compensation.

Who are Entitled to Separation Pay Philippines

Under the Philippine Labor Code or Separation Pay Labor Code, employers generally must issue separation pay to terminated employees for specific reasons.

• Installation of labor-saving devices – Article 298 of the Philippine Labor Code entitles employees terminated due to the introduction of labor-saving devices to separation pay.
• Redundancy – Similarly, Article 298 of the Philippine Labor Code entitles an employee terminated due to redundancy to separation pay.
• Retrenchment due to financial losses – Article 298 of the Philippine Labor Code also mandates that employees terminated due to retrenchment to prevent losses receive separation pay.
• Closing or cessation of operations – Article 299 of the Philippine Labor Code mandates that an employee terminated due to the closure or cessation of operations of the establishment or undertaking should receive separation pay.
• Disease – Article 284 of the Philippine Labor Code safeguards employees suffering from a disease or incapacity to perform their duties, rendering their continued employment illegal. Specifically, if an employee serves for more than six months under such circumstances, they are entitled to separation pay.

How to Compute Separation Pay in the Philippines

Below is a scenario showing how to compute Separation Pay in the Philippines:
Company B terminated Employee B, who had a fixed monthly salary of Php 25,000.00, due to redundancy. Employee B has served the company for ten years and four months. To accurately calculate the tenure, we count the period from the date of Employee B’s hiring until the effective date of their separation.

YEARS OF SERVICE	COMPUTATION	SEPARATION PAY COMPUTATION
Ten Years and four months Note: Since Employee B is already on the fourth month of the year, it will be counted as one full month of pay.	The latest salary rate of the employee multiplied by ten divided by two (as this situation falls under Redundancy).	Php 25,000 x 10/2= Php 125,000.00

Note: The separation pay granted to employees terminated due to redundancy, resulting from their separation from the company, is not subject to income tax or withholding tax. Therefore, it is exempt from both types of taxes.

Furthermore, it’s important to remember that separation pay does not grant automatically; instead, it provides specific compensation for employees terminated for valid reasons.

Also Read: GUIDE: How to Compute Retirement Pay

Is Separation Pay Taxable

In accordance with Section 32 (B) (6) (b) of the Tax Code of 1997, as amended, any amount received by an official, employee, or their heirs from the employer due to separation from service because of death, illness, physical disability, or any uncontrollable circumstance shall not be considered as part of gross income. Therefore, it is exempt from taxation under Title II of the same Code.

Furthermore, retrenched employees receive separation pay exempt from income tax and withholding tax.

Final Thoughts

In conclusion, understanding separation pay in the Philippines is crucial for both employers and employees. Learning the diverse circumstances of separation pay is vital as it ensures fair treatment for all parties involved. Whether it’s retrenchment, redundancy, or other authorized causes, knowing one’s rights and obligations regarding separation pay is essential.

Sources: (1), (2), (3)

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