It’s rarely a welcome conversation when the topic of severance pay arises. It implies that the company may not be doing as well as you hoped and is parting ways with an employee you would have otherwise liked to have kept employed. Indeed, ending a professional relationship brings challenges and emotions for both sides.
Severance pay both offers a cushion for departing employees and fulfills a legal obligation with clearly defined requirements under Philippine labor laws. Learning and handling this requirement correctly can make the difference between costly HR issues and a smooth, compliant transition that respects the company’s and the employee’s rights alike.
To help you understand its ins and outs, this article covers the essentials of severance pay in the Philippines. Learn more about what conditions are required, who counts for severance pay, and how to calculate it. With these insights, you can handle severance pay professionally and compassionately.
What is Severance Pay?
Severance pay, also known as separation pay, is a form of financial compensation given to employees who are terminated under specific conditions. It aims to ease the impact on employees facing unexpected job loss and provide a measure of security as they transition out of employment.
One should not confuse severance pay with back pay or final pay, as the latter covers unpaid wages, unused leave, or other earned benefits. Meanwhile, severance pay is typically provided as a separate amount mandated by law when employment ends but not due to the fault of the employee.
The distinction is important because while final pay is a standard entitlement for all departing employees, severance pay is only required under particular conditions outlined in the Philippine Labor Code.
Failing to comply with severance pay regulations can result in serious consequences. Terminated employees who believe they’ve been denied rightful severance pay may file a complaint with the Department of Labor and Employment (DOLE), leading to potential penalties, costly settlements, damage to your employer branding, and litigation for offending employers.
Who is Eligible for Severance Pay
Under the Philippine Labor Code, severance pay is mandatory in specific situations where employment is terminated for reasons beyond the employee’s control. These include:
Installation of labor-saving devices: When a company installs technology or devices that reduce the need for certain job roles, affected employees are entitled to severance.
Redundancy: If a role is no longer necessary due to restructuring, overlapping duties, or overemployment, severance pay is required for redundant employees.
Retrenchment or layoffs: Employers facing financial difficulties may terminate employees to cut costs, but they must provide severance to those affected.
Closure or cessation of business operations: When a business shuts down permanently, eligible employees should receive severance.
Health issues or incurable disease of employee: Employees unable to work due to severe illness are entitled to compensation if terminated.
Illegal dismissal: If an employee was dismissed unlawfully and reinstatement is no longer an option, they are entitled to separation pay.
Exemptions
Employees dismissed for the following reasons are not eligible for separation pay:
Voluntary resignation: Employees who choose to leave their position on their own accord are not entitled to severance pay.
Serious misconduct: Employees dismissed for engaging in grave or improper behavior that violates company policy or ethics are ineligible for severance pay.
Willful disobedience: Employees who deliberately refuse to follow lawful and reasonable instructions from their employer do not qualify for severance pay.
Gross neglect: Employees terminated for consistently failing to perform their duties responsibly or with due care are exempt from receiving severance pay.
How is Severance Pay Calculated?
In the Philippines, severance pay is typically calculated based on the employee’s length of service and the reason for termination. According to the Labor Code, the formula is as follows:
(1 or ½ monthly salary) x (years of service), depending on the reason for termination.
- In cases of redundancy, installation of labor-saving devices, or closure due to business reasons, the severance pay must be one month’s salary for every year of service.
- In cases of retrenchment or cessation of business operations, the severance pay must be half a month’s salary for every year of service.
If the termination happened at least six months into the year, the severance pay should count as a full year during calculation.
For example, if an employee earning PHP 20,000 monthly has worked for five years and is terminated due to the closure of business operations, they are entitled to PHP 50,000 (PHP 10,000 x 5 years).
These rules cover both regular and probationary employees. Contractual or project-based employees are generally not entitled to separation pay, though your specific working arrangements may have some allowances.
Compliance and Compassion
Ensuring fair and legally compliant severance pay is a crucial part of ending employment relationships responsibly. As you learn to handle these regulations, it’s important to conduct severance in a way that aligns with the Labor Code and respects your employees.
However, managing labor compliance can add stress to an already demanding HR workload. That’s where expert support can make all the difference. Manila Recruitment, a premier Philippine recruitment agency, is here to ease your compliance burden, offering tried and tested end-to-end recruitment.
Contact us today to ensure seamless compliance and a team that’s set up for success!
DISCLAIMER: The information in this webpage / blog / article / infographic we have published and the associated commentary are presented as general information and is not a substitute for obtaining legal advice in this area. Manila Recruitment does not accept liability for any action taken based on the information presented or for any loss suffered as a result of reliance on the information provided.
Passionate about promoting the ingenuity of Filipino talent, Arvin is a sought-after resource person in the field of career development. He regularly delivers keynote speeches and conducts workshops throughout the Philippines, sharing his insights and strategies for improving employability and promotability.
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