Employee Benefits when the Company is Closing
If a company is going to close or windup its operations, and some of the affected employees are of the retirement age, are you required to pay both separation pay and retirement pay?
This legal memorandum discusses the answer to this question, the tax consequences, and the possibility of paying both separation and retirement pay.
On Separation Pay
Article 298 of the Labor Code provides:
“Closure of Establishment and Reduction of Personnel – The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof.
In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least (1) month pay for every year of service, whichever is higher.
In cases of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.” [Emphasis supplied.]
The employer may terminate the employment of any employee due to authorized causes provided by law, in this case, due to closure or cessation of operation of an establishment not due to serious losses or financial reverses.
The computation of separation pay of an employee shall be based on the latest salary rate. It is important to note that the salary base in computing the separation pay should include not just the basic salary but also the regular allowances that an employee has been receiving.
On Retirement Pay
We presume that the company does not have a retirement plan because if it does, or if the retirement plan provides for retirement pay which is lower than the benefits outlined under the Labor Code, then we have to go back to the provisions of the Labor Code, ignoring the company retirement plan, to the extent that it is lower than the minimum provided by law.
Where both the employer and the employee contribute to a retirement fund in accordance with a collective bargaining agreement or other applicable employment contract, the employer’s total contribution thereto shall not be less than the total retirement benefits to which the employee would have been entitled had there been no such retirement fund. In case the employer’s contribution is less than the retirement benefits provided under the law, the employer shall pay the deficiency.
Article 302 of the Labor Code provides:
“Any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract.
In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.
Unless the parties provide for broader inclusions, the term ‘one-half (1/2) month salary’ shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves.
Retail, service and agricultural establishments or operations employing not more than ten (10) employees or workers are exempted from the coverage of this provision.
Violation of this provision is hereby declared unlawful and subject to the penal provisions under Article 288 of this Code.” [Emphasis and underscoring supplied.]
Article 302 of the Labor Code only applies in a situation where (1) there is no Collective Bargaining Agreement (“CBA”) or other applicable contracts providing for retirement benefits for employees; or (2) there is a CBA or other applicable employment contracts providing for retirement benefits for employees, but such benefits are below the requirements set by law.
Absent a retirement plan or agreement providing for retirement benefits of employees in the establishment, the minimum retirement pay due the employee is “one-half (1/2) month salary” which shall include all of the following:
- Fifteen (15) days salary based on the latest salary rate;
- Cash equivalent of five (5) days of service incentive leave;
- One-twelfth (1/12) of the thirteenth month pay. (1/12 x 365/12 = .083 x 30.41 = 2.5)
As held by the Court in Capitol Wireless, Inc. v. Honorable Secretary Ma. Nieves R. Confesor, it is clear in the law that the term “one-half (1/2) month salary” means 22.5 days: 15 days plus 2.5 days representing one-twelfth (1/12) of the 13th month pay plus 5 days of service incentive leave.
Tax Consequences of Separation Pay and Retirement Pay
The separation pay is exempt from tax since the cause of separation is closure of business and is beyond the control of the employee.
As regards the retirement pay, if the company has a private retirement plan for its employee, it may be considered as tax-exempt, but only if it the plan is registered with the Bureau of Internal Revenue.
Pursuant to Section 32(B) (6) (b) of the Tax Code of 1997, as amended, any amount received by an employee as a consequence of separation of such employee from the service of the employer due to causes beyond the control of the employee shall not be included in the gross income and shall be exempt from taxation. Thus, the separation pay of the employee in this case shall be exempted from taxation, whether income tax or withholding tax.
Similarly, retirement pay received by employees of private firms may be exempt from tax. Section 32(B)(6) of the Tax Code provides for the following requirements for retirement benefits to be tax-exempt:
1. The benefits received must be in accordance with a reasonable private benefit plan maintained by the employer;
2. The retiring official or employee must have been in the service of the same employer for at least 10 years and the employee should be at least 50 years old at the time of his retirement; and
3. Such tax exemption privilege on retirement benefits must be availed of by an official or employee only once.
It must be emphasized that the retirement plan must be approved by the Bureau of Internal Revenue to make it tax-exempt as per Revenue Regulations No. 12-86. If there is no retirement plan, retirement benefits received by the employee under the law are exempt from tax under Section (B)(6) of the Tax Code.
Payment of Both Retirement Pay and Separation Pay
A company may be made to pay both separation pay and retirement pay if there is an existing retirement plan, and there is no express provision in the plan which states that an employee who already received separation pay would no longer be entitled to retirement benefits.
Retirement pay and separation pay are two distinct benefits granted under the law. Retirement pay is paid by reason of retirement, while separation pay is required in case an employee’s services is terminated by reason of authorized causes as identified under the law.
The simultaneous award of both benefits is based on the case of Aquino vs. NLRC, which states:
“In arriving at our conclusion, we are guided by the principle that any doubt concerning the rights of labor should be resolved in its favor, pursuant to the social justice policy. The Court feels that if the private respondent really intended to make the separation pay and the retirement benefits mutually exclusive, it should have sought inclusion of the corresponding provision in the Retirement Plan and the Collective Bargaining Agreement so as to remove all possible ambiguity regarding this matter.
We may presume that the counsel of the respondent company was aware of the prevailing doctrine embodied in the cases earlier cited. Knowing this, he should have made it a point to categorically provide in the Retirement Plan and the CBA that an employee who had received separation pay would no longer be entitled to retirement benefits. Or to put it more plainly, collection of retirement benefits was prohibited if the employee had already received separation pay. x x x”  [Emphasis and underscoring supplied.]
As such, in the absence such provision under the retirement plan, a company may be obliged to pay both separation pay and retirement pay to the affected employees if there is an existing retirement plan and, more importantly, there is no provision in the plan that renders receipt mutually exclusive.
In the absence of any provision under the Labor Code, the agreed upon retirement plan, or any contract concluded between them, which precludes the payment of retirement pay upon the grant of separation pay, the affected employees will be entitled to both.
About Nicolas and De Vega Law Offices
If you want to learn how to terminate an employee based on other causes or need help in labor matters, we can help you. Nicolas and De Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.
 Bureau of Working Conditions, Handbook on Worker’s Statutory Monetary Benefits (2018); Kindly note that the computations are based only on the figures provided by LCMS, working on the assumption that the salary of P28,023.96 includes allowances, if applicable.
 Sec. 3.3. Rule II, Implementing Rules of the Retirement Pay Law.
 Bureau of Working Conditions, Handbook on Worker’s Statutory Monetary Benefits (2018).
 G.R. No. 117174. November 13, 1996.
 BIR Ruling No. 057-2014; Sec. 32 (B) (6 ) (b) of the National Internal Revenue Code, as amended.
 Aquino v. NLRC, G.R. No. 87653, February 11, 1992.