On January 31, 2020, the Department of Labor and Employment (DOLE) issued Labor Advisory No. 6 Series of 2020, which addresses the release of final pay and the issuance of Certificate of Employment to employees. In addition, final pay and separation pay are two different types of compensation given to employees upon the end of their employment.
What is the Difference Between Final Pay and Separation Pay?
Final pay
Final pay, also known as back pay and last pay, is the total amount of the last remuneration and benefits an employee receives from the company after resignation, which includes:
- Unpaid earned salary of the employee;
- Cash conversion of unused Service Incentive Leave (SIL);
- Cash conversion of unused vacation, sick or other leaves based on the company policy or agreement, if applicable;
- Pro-rated 13th month pay;
- Separation pay, if applicable;
- Retirement pay. if applicable;
- Income tax claim for the excess of taxes withheld, if applicable;
- Other types of compensation stipulated in an individual or collective agreement; and
- Cash Bond/s or any kind of deposit/s due for return to the employee.
Separation Pay
Separation pay is severance pay an employee receives upon the end of their employment or service to the company due to reasons specified in the Labor Code of the Philippines. However, employers cannot give separation pay if they close their company due to bankruptcy.
Who is Entitled to Receive Final Pay and Separation Pay?
Employees are entitled to receive final pay regardless of their reason for resignation. While, separation pay is given to employees who are terminated due to:
- Retrenchment
- Redundancy
- Cessation of business operations
- Installation of labor-saving devices
- Suffering from a disease not treatable within six (6) months
When to Receive Final Pay and Separation Pay?
Final Pay
According to Labor Advisory No. 06-20, the final pay must be released within thirty (30) days from the date of employee’s resignation, unless otherwise stated in the company policy or agreed upon by both parties.
Separation Pay
The Labor Code of the Philippines does not specify an exact timeframe for the release of separation, but it requires the employer to provide a written notice to inform the employee about the termination of their employment contract. The employer must also submit a written notice to the Regional Office of the Department of Labor and Employment (DOLE) where the company is located. Additionally, the notice should be provided within thirty (30) days before the termination date.
What is Deducted from Final Pay and Separation Pay?
Final Pay
For final pay, government contributions such as Social Security Services (SSS), Philippine Health Insurance Corporation (PHIC), and Home Development Mutual Fund (HDMF), and any applicable taxes are deducted.
Separation Pay
According to Section 32(B)(6)(b) of the 1997 Tax Code, separation pay is exempt from tax deduction if the separation is due to sickness, death, physical disability, retrenchment, redundancy, or cessation of business operations. However, other income received before separation is subject to tax, as outlined in Section 24 of the same Code.
Moreover, Revenue Memorandum Order (RMO) No. 26-2011 provides guidelines on the tax treatment of separation benefits received by the officials and employees. RMO 66-2016 exempts separation benefits from tax income and withholding taxes due to reasons that are beyond the control of the employer or employee.
How to Compute Final Pay and Separation Pay?
Final Pay
Final pay is calculated by adding up the employee’s total earnings, which includes their unpaid salary, pro-rated 13th-month pay, leave conversions, and if applicable, their tax refunds. However, deductions may be made due to the required government contributions, and if applicable, an employee’s tardiness, absences and withholding tax.
Therefore, an employee’s final pay can be computed with this calculation:
Total earnings – Total deductions = Final Pay
Separation Pay
Separation Pay is an additional payment given at the end of employment. According to Articles 298 and 299 of the Labor Code, separation pay is based on the reason for termination and the employee’s length of service, and is computed based on the employee’s latest salary rate.
In instances where the employee got terminated due to the installation of labor-saving devices or redundancy, they are entitled to receive the equivalent of one month’s salary for each year of their service, which is calculated as:
One month’s salary x Years of service = Total separation pay
On the other hand, if an employee got terminated due to business closure, cessation of operations, or health reasons, they are entitled to receive either one month’s salary or half a month’s pay for every year of their service. The formula for calculating separation pay with half a month’s salary is:
(One month’s salary ÷ 2) x Years of service = Total separation pay
How to File a Complaint with DOLE for Delayed Final Pay and Separation Pay?
It is advisable to inquire and follow up with the Human Resources (HR) department about the status of your final pay or separation pay before filing a complaint. However, if the company still fails to release the final pay or separation after following up, you can file a complaint with the DOLE.
To file a complaint, the petitioner must follow these procedures:
- Submit a Letter of Complaint. Visit the DOLE regional office and submit a letter of complaint detailing the issue. The complaint may be addressed to your company’s HR department, as they are responsible for processing your final pay or separation pay.
- Provide Necessary Documents. Provide all necessary documents, such as your resignation letter, clearance form, and correspondence with the HR department, to support your claim.
- Mediation and Conciliation. The DOLE will schedule a mediation and conciliation meeting between the employee and their employer to resolve the issue. This is to give opportunity for both parties to present their sides.
- Issuance of Compliance Order. If mediation fails, the DOLE may issue a compliance order requiring the employer to release the final pay or separation pay. Failure to comply with the order can result in penalties and further legal action.
Need further information and assistance regarding Final Pay and Separation Pay? Talk to our team at Duran & Duran-Schulze Law to know more about the requirements and process. Call us today at (+632) 8478 5826 or +63 917 194 0482, or send an email to info@duranschulze.com for more information.
