Final pay and separation pay are two different forms of payment that are often confused for one another. Knowing the difference between the two can help you understand the details of your employment contract and know what to expect from an employer after you leave a job. In this guide, we’ll explain the key differences between final pay and separation pay.
What Is Final Pay?
Final pay, last pay or back pay is the wages and other payment entitlements that an employer is obliged to pay to an employee when employment ends, regardless of whether the employee has given notice or not. May it be resignation or termination, the employee is entitled to receive his/her Final Pay.
What are included in the Final Pay Computation?
Unpaid earned salary of the employee;
Cash conversion of unused Service Incentive Leave (SIL) pursuant to Article 95 of the Labor Code;
Cash conversions of remaining unused vacation, sick or other leaves pursuant to a company policy, or individual or collective agreement, if applicable;
Pro-rated 13th month pay pursuant to Presidential Decree No. 851 (PD 851);
Separation pay pursuant to Articles 298-299 of The Labor Code, as renumbered, company policy, or individual or collective agreement, if applicable;
Retirement pay pursuant to Article 302 of the Labor Code, as renumbered, if applicable;
Income tax claim for the excess of taxes withheld, if applicable;
Other types of compensation stipulated in an individual or collective agreement, if any; and
Cash Bond/s or any kind of deposit/s due for return to the employee, if any.
What Is Separation Pay?
Separation pay is different to final pay and involves an employer voluntarily making additional payments to an employee at the end of the employment relationship. It is not mandatory for employers to provide separation pay, and typically only applies if there is an agreement between the employer and employee setting out these arrangements. But, when an employee is forced to resign due to legally authorized causes, the company is mandated by law to pay the employee a separation pay.
Pursuant to Article 298 and 299 of the Labor Code of the Philippines, separation pay is given to an employee who was terminated due to any of the following authorized causes:
1. Installation of labor saving devices;
3. Closure of establishment;
4. Retrenchment to prevent loses (Reduction of personnel);
5. When an employee is suffering from any disease not curable within a period of six (6)
months and his/her continued employment is prejudicial to his/her health and the
health of his co-employees.
Backwages on the other hand, is given if an employee was dismissed or terminated from employment without following the due process or for any other unlawful reason and the court awards him the payment of such. This means that the employee has filed a case for illegal dismissal before the DOLE National Labor Relations Commission (NLRC) and won the case. According to Article 294, Presidential Decree 442, Labor Code, an employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of regular allowances, and other benefits or their monetary equivalent computed from the time his compensation was suspended from him up to the time of his actual reinstatement. This aims to compensate the worker for what he has lost due to his unjust dismissal and to penalize the employer for illegally dismissing the employee.
How Are Final Pay and Separation Pay Calculated?
Final pay is calculated by adding up the employee’s normal wages, any bonus payments, and any unpaid entitlements. Separation pay, on the other hand, is not based on specific entitlements and instead serves as an extra payment to employees at the end of the employment relationship. But for employees who are forced to resign due to authorized cause, the basis on the computation of separation pay is dependent as to the cause of termination. Separation pay should be equivalent to either one-half (1/2) month or one (1) month pay for every year of service wherein a fraction of at least six (6) months is considered one (1) whole year. Moreover, the computation should be based in the latest salary rate of the affected employee including the regular allowances that the employee is currently receiving.
Pursuant to Section 32(B)(6)(b) of Tax Code of 1997, as amended, any amount received by an official or employee or by his/her heirs from the employer as a result of separation from service due to sickness, death, or any other physical disability and for reason that the employee has no control such as retrenchment, redundancy, or cessation of business operations, it shall be exempt from taxation.
Under Revenue Memorandum Order (RMO) No. 26-2011, the 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 and the Issuance of Certificate of Tax Exemption from income tax and from withholding tax has been enumerated. Further amendment has been issued last December 6, 2016 i.e. RMO 66-2016 which also exempts from income and withholding tax the separation benefits paid due to other causes beyond the control of said official or employee, such as but not limited to, retrenchment, redundancy, installation of labor-saving devices and closure of business.
When Do Employees Receive Final Pay and Separation Pay?
According to Labor Advisory No. 06-20, the Final Pay shall be released within thirty (30) days from the date of separation or termination of employment , unless there is a more favorable company policy, individual or collective agreement thereto.
Are There Any Protections for Employees Receiving Final Pay or Separation Pay?
Employees who are separated due to an authorized cause are mandated by law to be entitled to separation pay. It depends on the authorized cause of termination, separation pay should be equivalent to either one-half (1/2) or one (1) month pay for every year of service wherein a fraction of at least 6 months is considered one (1) whole year.
As clearly defined in DOLE Bureau of Working Conditions, one-half (1/2) month pay for every year of service is to be given to employees who are separated due to any of the following:
1. Retrenchment to prevent losses (i.e., reduction of personnel effected by management to
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.
4. Lack of service assignment of security guard for a continuous period of six (6) months.
And one-month pay for every year of service wherein a fraction of at least six (6) months is considered as one whole year, if the employee is separated due to 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;
4. Lack of service assignment of security guard by reason of age.
The employer is mandated to serve a written notice of termination to the employee and to the Department of Labor and Employment through its regional office having jurisdiction of the place of the business at least one month before the intended date of separation. Notice may be done by accomplishing RKS Form 5 of 2020x and submit to the regional office having jurisdiction over the workplace or by accomplishing and submitting via online at the DOLE Establishment Reports System (https://reports.dole.gov.ph/).
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Source: DOLE Handbook Worker’s Statutory Monetary Benefits