A comprehensive guide to severance pay

Layoffs can occur unexpectedly to anyone. When you experience a layoff, it is important to know what benefits you have under employment law. These benefits can protect you during a time of crisis. One important benefit to be aware of is severance pay.

Severance pay is money that employers give to employees in the event of employee layoffs.

According to Philippine labor regulations, employees terminated for valid reasons are entitled to a severance pay. Therefore, both employers and employees must understand the Philippine labor laws governing separation pay. This understanding enables them to take appropriate steps and conclude their employment relationship in a just and harmonious manner.

In this article you will get an in-depth look at separation pay in the Philippines, including how it works, who is eligible for it, and how to calculate it.

Read on to learn:

• What is severance pay?
• Employee's eligibility and entitlement during a retrenchment
• How to calculate separation pay
• Example of how to calculate separation pay
• Difference between separation pay and employee's final pay
• Conclusion
• FAQs

What is severance pay/separation pay? 

A severance pay refers to the compensation an employer pays an employee who was terminated for certain authorized causes. It is sometimes referred to as "redundancy pay," but is more commonly known as "separation pay". This compensation softens the blow for the employees. It acts as a financial support to help ease the burden on employees as they cover their expenses while searching for another job.

Separation pay plays a vital role in helping a company maintain good relationships with its employees. It gives employees a sense of security by providing them with a financial cushion if they lose their jobs.

This can contribute to a higher level of job satisfaction and can help maintain a positive relationship between the employer and employee when they are let go. This is also beneficial to the reputation of the company, and it reduces the company's chances of getting into legal trouble.

Company's legal obligations for severance pay in the Philippines

According to the Labor Code of the Philippines, companies are legally mandated to provide separation pay to terminated employees if they are let go for the following authorized causes:

1. installation of labor-saving devices - implementing technology to reduce manual work.;
2. redundancy - unnecessary termination due to role no longer needed;
3. retrenchment to prevent losses - layoffs to avoid financial decline;
4. closure and cessation of business - permanent shutdown of operations
5. disease / illness - medical conditions affecting work ability

If your employer chooses not to provide you with separation pay, they must provide acceptable reasons for their decision. If you were let go due to your own fault, performance, or misconduct, you will not receive separation pay.

The Labor Code also lays out strict due process requirements that companies must follow when they terminate employees for authorized causes. These requirements are:

• Employers must give the employee a written notice that indicates the authorized cause used as grounds for termination. At least 30 days notice period before the date of termination must be given.
• Employers must submit a copy of the notice to their local Department of Labor and Employment (DOLE) Regional Office.

Failure to follow due process makes a company liable for illegal dismissal. In this case, you can take legal action by lodging an illegal dismissal complaint before the National Labor Relations Commission (NLRC).

Your employer would have to prove that their dismissal is legal and valid. If it was found to be invalid, you would be entitled to reinstatement or compensation.

Employee's eligibility and entitlement during a retrenchment 

Employees eligibility for severance pay

In the Philippines, both regular and probationary employees are eligible to severance pay.

The probationary period lasts for six months maximum unless there is an apprenticeship agreement. Once your employment exceeds six months, you are automatically considered a regular employee and must be given separation pay.

If you were laid off before regularization, you are still entitled to separation pay equivalent to one month of your basic pay.

However, for both regular and probationary employees, the reason for termination must be for authorized causes. If you were terminated for a just cause, you will not be eligible for separation pay.

Let us discuss it in more detail in the next section.

Exceptions and exclusions

Philippine employment laws and company policies mandate the provision of separation pay. However, there are some exceptions and exclusions that can make you ineligible to receive it. If you fall under these exceptions, the company is not obligated to pay severance and they will not be liable to illegal dismissal.

Just Causes

As mentioned above, you will not be given separation pay if you are let go for just causes. These just causes include:

• Serious misconduct or willful disobedience
• Gross and habitual neglect of duty
• Fraud or willful breach of trust
• Commission of a crime or offense against the employer, his family or representative
• Analogous other reasons

A company is not obligated to offer separation pay if employment contracts are terminated due to the employee's own misconduct.

Some examples of gross misconduct in the workplace include disclosure of trade secrets, poor performance, discrimination, sexual harassment, unethical practices, theft, fraud, and insubordination.

Voluntary Resignation

Separation pay is given to involuntarily dismissed employees. If you decide to voluntarily resign from your job, you won't be eligible for a severance package.

Failing the Probationary Period

If you fail to meet the company's standards for regularization during your probationary period, you can be terminated legally. This will make you ineligible for separation pay.

How to calculate separation pay 

If you qualify for separation pay, the specific reason for your termination will dictate how your severance will be calculated. There are two ways to calculate your pay:

1. Employees terminated due to retrenchment, business closure, or disease will receive one-half month's pay for each year of service.
2. Employees terminated due to redundancy, installation of labor-saving devices, or impossible reinstatement will receive one month's pay for each year of service.

Severance packages may vary from one company to another. Some employers may offer higher amounts of compensation than the minimum legal requirements. You can consult your supervisor or check your employment contract to find out how much compensation you will receive upon losing your job.

Example of how to calculate separation pay 

Let us look at two examples demonstrating the two calculation methods above.

Example 1

Employee A is terminated due to redundancy after being with the company for 5 years and 10 months. They earn a basic pay of 20,000 PHP per month.

• Employee A must receive one month's pay for each year of service because they were let go due to redundancy.
• One thing to note is that a fraction of six months is considered one year.
• So, in this case, Employee A is considered to have been working for 6 months. To calculate Employee A's redundancy pay, multiply 20,000 PHP by 6.
• The final amount will be 120,000 PHP.

Calculation:

Monthly Salary x Years of Service = Separation Pay

20,000 x 6 = 120,000 PHP

Example 2

Employee B was retrenched after being with the company for 3 years and 2 months. They earn a basic pay of 30,000 PHP per month.

• Since Employee B was retrenched, they must receive one-half month's pay for each year of service.
• So, 30,000 PHP must be divided by two and multiplied by three. The separation pay for Employee B will be 45,000 PHP.

Calculation:

Monthly Salary/2 x Years of Service = Separation Pay

30,000/2 x 3 = 45,000 PHP

Difference between separation pay and employee's final pay 

There may be some confusion between "separation pay" and "final pay" as these two terms tend to be used interchangeably. However, they are two very different things.

Separation pay is a cash benefit awarded to workers if they are let go or laid off due to specific authorized causes.

An employee's final pay (more commonly known as "back pay") is the sum of all money owed by the company to the employee when they leave. It includes all of the financial benefits the employee is entitled to including, but not limited to:

• The employee's unpaid wages
• Prorated 13th-month pay
• Leave conversion cash equivalent
• Separation pay (if applicable)
• Retirement pay (if applicable)
• Income tax withheld
• Other benefits as stipulated in their employment contract

All employees will get their final pay when they leave, whether they leave voluntarily or not. On the other hand, only eligible employees receive separation pay.

Calculating Final Pay with Separation Pay

Let us look at this example of Employee C to see how to calculate final pay:

• Employee C has a basic pay of 20,000 PHP and they were let go for redundancy.
• So, their separation pay is 40,000 PHP. Their unpaid prorated wages are 4,545 PHP, and they have 3 remaining leave credits worth 956.17 PHP each.
• Finally, they have a prorated 13th-month pay of 5,000 PHP. To find this employee's final payment, we need to add all of this to get:

4,545 + 40,000 + 2868 + 5,000 = 52,413 PHP

• PHP 52,413 is the total final payment owed to Employee C by their company.

Conclusion 

The termination process is often quite stressful. Having a clear understanding of separation pay can help both employers and employees get through layoffs gracefully. It will give the employee financial peace of mind for a while, and it can be a goodwill gesture that will help maintain a positive relationship between the company and their staff. This will allow the two parties to part ways respectfully and cordially.

In the Philippines, the government and companies have policies governing severance packages for employees. These rules determine how much termination pay they will receive and what they need to do to get compensation. Policies can vary from one employer to another.

If you are facing termination, make sure you find out how your company handles the process. Then, make the necessary preparations to ensure everything goes smoothly. If you have any questions or concerns, consider seeking advice from legal or HR professionals.

FAQs 

Here is a list of frequently asked questions about severance pay:

1. What are the key factors that determine eligibility for severance pay?
   The key factor is the reason for your termination. Only employees terminated for authorized causes are eligible for separation pay.
2. How is severance pay calculated, and what main components does the calculation consider?
   There are two ways to calculate separation pay depending on the reason for your termination:
   Employees terminated due to retrenchment, business closure, or disease will receive one-half month's pay for each year of service.
   Employees terminated due to redundancy, installation of labor-saving devices, or impossible reinstatement will receive one month's pay for each year of service.
3. Can an employee negotiate their severance pay with their employer?
   Yes, as an employee, you can negotiate for a better severance package. You may also get a better deal if you have contributed a lot to the profitability and success of the company.
4. Are there any legal requirements for employers to provide severance pay?
   Yes, in the Philippines companies are mandated to provide separation pay to employees terminated for authorized causes.