The Labor Code of the Philippines governs employment practices, labor relations, and company regulations in the country. It aims to protect the rights and welfare of employees. Additionally, it outlines the legal standard for salaries, working hours, benefits, and conditions of employment.
What is Separation Pay?
Separation pay, also known as severance pay, is a type of compensation an employee receives when their employment ends due to reasons specified in the Philippine Labor Code. Additionally, it serves as a financial buffer to help employees while looking for a new job.
Who is Entitled to Separation Pay?
Employees who got terminated are qualified to receive severance pay or separation pay. However, separation pay is not provided if the company closes due to bankruptcy. The following conditions are the reasons why an employee may be terminated:
- Retrenchment
- Redundancy
- Cessation of business operations
- Installation of labor-saving devices
- Suffering from a disease not treatable within six (6) months
Who is Not Entitled to Separation Pay?
According to Article 297 of the Labor Code, an employer may terminate an employee if the employee intentionally breaches the trust that the employer or their authorized representatives have placed in them. In addition, employees who got terminated due to the following reasons are not entitled to receive separation pay:
- Serious misconduct or willful disobedience by the employee of the lawful orders of their employer or representative in connection with their work;
- Gross and habitual neglect by the employee of their duties;
- Fraud or willful breach by the employee of the trust reposed in him by their employer or duly authorized representative;
- Commission of a crime or offense by the employee against the person of their employer or any immediate member of their family or their duly authorized representatives; and
- Other causes analogous to the foregoing.
Additionally, employees who voluntarily resigned cannot receive a separation pay.
When to Receive Separation Pay?
The Labor Code of the Philippines does not specify an exact timeframe for the release of separation. However, employers are expected to release separation pay within thirty (30) days from the employee’s last working day. Employers are also required to provide a written notice of termination to inform the employee about the termination of their contract. The notice must also be submitted to the Regional Office of the Department of Labor and Employment (DOLE) where the company is located. Furthermore, the notice should include the reason for termination and the effective date, and it must be submitted within thirty (30) days before the termination date.
How Much Tax is Deducted from Separation Pay?
According to Section 32(B)(6)(b) of the 1997 Tax Code, separation pay is exempt from tax deduction if the employee’s separation is due to sickness, death, or any other physical disability, or for reasons beyond their control, such as retrenchment, redundancy, or cessation of business operations. Other income received by the employee before separation is subject to tax, as specified in Section 24 of the same Code.
Revenue Memorandum Order (RMO) No. 26-2011 provides guidelines on the tax treatment of separation benefits received by officials and employees on account of their separation pay from employment due to death, sickness, or other physical disability. It also enumerated the Issuance of Certificate of Tax Exemption from income tax and from withholding tax.
Furthermore, RMO No. 66-2016 clarifies that separation benefits due to retrenchment, redundancy, installation of labor-saving devices, and business closure , which is beyond the control of the employer and the employee, are also exempt from tax income and withholding taxes.
How to Compute Separation Pay?
Separation pay serves as an additional payment to employees at the end of their employment. However, according to Article 298 and 299 of the Labor Code, separation pay is based on the reason for termination and the employee’s length of service. Additionally, the computation should be based on the employee’s latest salary rate.
If an 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:
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 pay or half a month pay for every year of service:
(One month’s salary ÷ 2) x Years of service = Total separation pay
How to File a Request for Tax Exemption of Separation Benefits?
Revenue Memorandum Order No. 26-2011 outlines the guidelines for the tax treatment of separation benefits. To request a tax exemption for separation benefits received due to death, sickness, or physical disability, the following documents must be submitted to the Revenue District Office (RDO) where the employer is registered:
- Letter Request from the official or employee (or their heirs) or the employer for the exemption of separation benefits from income tax and withholding tax.
- Certificate True Copy of Death Certificate, if due to death.
- If due to sickness or physical disability:
- Sworn affidavits from the employer’s physician or the employee’s attending physician and the Head of Office/Entity or their representative, confirming that the employee is suffering from a serious illness or physical disability affecting their duties and life.
- Clinical record indicating the history of illness or physical disability and initial diagnosis.
- Laboratory examination or medical certificate confirming the illness or disability.
Furthermore, as per the guidelines of the Department of Labor and Employment (DOLE), the employer must prove that the termination was beyond the employee’s control and that the separation benefits are not subject to withholding tax. If the termination is deemed illegal or the reason for termination is not listed in the National Internal Revenue Code (NIRC), the company could face additional charges for corporate income tax and withholding tax on compensation, as well as interest and penalties.
What Happens if Separation Pay is Delayed?
There is no specific law that addresses an exact timeframe for the release of separation, but employers are expected to release it within thirty (30) days from the date of the employee’s last working day. If an employer fails to release the separation pay, the employee may file a complaint to the Department of Labor and Employment (DOLE) or seek legal action to practice their employment rights.
Need further information and assistance regarding 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.
