When is an Employee Entitled to Separation Pay?

Separation pay has been defined as the amount that an employee receives at the time of his severance and is designed to provide the employee with the wherewithal during the period he is looking for another employment. However, this broad definition must not be taken at face value. There are only limited instances wherein separation pay can be granted. These instances are as follows:

1. Termination is for any of the authorized causes under the Labor Code.


Employment may be terminated for the following authorized causes under the Labor Code:

1. Introduction of labor-saving devices
2. Redundancy
3. Retrenchment
4. Closure or Cessation of business 
5. Disease the employee found to be suffering and whose continued employment is prohibited by law or is prejudicial to his health as well as the health of his co-employees.

As such, separation pay must be paid when the termination is based on the above-mentioned authorized causes except when the closure of the company is due to financial losses.

For authorized causes, the law requires the employer to give written notices to both the worker and the Department of Labor and Employment 30 days ahead of the projected separation.

Related post: Are Contractual employees entitle to receive a separation pay?Know more about it here.

2. Where there is illegal dismissal and reinstatement is no longer feasible

strained employee employer relation

An illegally dismissed employee is entitled to two reliefs, namely backwages and reinstatement. However, where reinstatement is no longer feasible because of strained relations between the employee and the employer, separation pay is granted.

3. As a measure of social justice where the employee is validly dismissed for causes other than serious misconduct or those reflecting on his moral character

In this instance, the Supreme Court coined separation pay as financial assistance and allowed as a measure of social justice and based on exceptional circumstances. Hence, courts, in their discretion may grant separation pay based on compassionate justice taking into consideration the length of service of the employee, the amount involved, whether the act is the first offense, the performance of the employee, etc.

However, the Supreme Court sternly warned that separation pay shall be allowed as a measure of social justice only in those instances where the employee is validly dismissed for causes other than serious misconduct or those reflecting on his moral character. However, where the reason for the valid dismissal is habitual intoxication or an offense involving moral turpitude, like theft or illicit sexual relations with a fellow worker, there is no need to invoke compassionate justice

In view of the foregoing, an employee is not entitled to separation pay when he is terminated based on just causes. Pertinently, he is also not entitled to separation pay when he tenders his resignation. Resignation is defined as the voluntary act of an employee who finds himself in a situation where he believes that personal reasons cannot be sacrificed in favor of the exigency of the service and he has no other choice but to disassociate himself from his employment.

Thus, the elementary rule is that an employee who voluntarily resigns from employment is not entitled to separation pay, except when it is stipulated in the employment contract or Collective Bargaining Agreement or based on established employer practice in the company.

The computation of separation pay is based on the ground on which it is based. In case of termination due to the installation of labor saving devices or redundancy, the employee affected is entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher.

In case 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 including termination of employment on the ground of disease, 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.

In illegal dismissal cases, where reinstatement is no longer viable as an option, separation pay equivalent to one (1) month salary for every year of service should be awarded as an alternative. It must be emphasized that this payment of separation pay is in addition to payment of backwages.

A fraction of at least six (6) months shall be considered as one (1) whole year.

Nicolas & 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 4706126, +632 4706130, +632 4016392, or email us at info@ndvlaw.com.

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