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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Separation pay refers to the compensation given to an employee who is terminated from employment due to authorized causes provided in Articles 298 and 299 of the Labor Code of the Philippines.
An employee’s entitlement to separation pay depends on the ground for his/her termination.
Where the termination of an employee is for authorized causes, separation pay is due.
Separation pay refers to the compensation given to an employee who is terminated from employment due to authorized causes provided in Articles 298 and 299 of the Labor Code of the Philippines.
This benefit applies to an employee in instances of authorized termination of employment covered by Articles 298 and 299 of the Labor Code of the Philippines. An employee’s entitlement to separation pay depends on the reason or ground for the termination of his or her services. Where the termination is for authorized causes, separation pay is due.
Article 298 of the Labor Code provides that:
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, 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.
Article 298 of the Labor Code provides that:
An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as to the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one (1) month salary or to one-half (1/2) month salary for every year of service, whichever is greater, a fraction of at least six (6) months being considered as one (1) whole year. (Emphasis supplied.)
As held in the case of Keng Hua Paper Products Co., Inc. v. Carlos Ainza, et al. (G.R. No. 224097, February 22, 2023):
For retrenchment, the three (3) basic requirements are: (a) proof that the retrenchment is necessary to prevent losses or impending losses; (b) service of written notices to the employees and to the Department of Labor and Employment at least one (1) month prior to the intended date of retrenchment; and (c) payment of separation pay equivalent to one (1) month pay, or at least one-half (1/2) month pay for every year of service, whichever is higher.
Is an employee who has resigned entitled to separation pay?
As a general rule, the law does not require employers to pay employees that have resigned any separation pay, unless there is a contract that provides otherwise or there exists a company practice of giving separation pay to resignees. (Italkarat 18, Inc. v. Juraldine Gerasmo, G.R. No. 221411, September 28, 2020)
Did you know that separation pay is exempt from taxation?
BIR Ruling No. 057-2014 provides that:
“Pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as amended, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in the gross income and shall be exempt from taxation under Title II of the same Code.”
Related Article/s:
Guidelines on the payment of final pay and issuance of certificate of employment
Separation Pay of a Retrenched or Laid-Off Employee due to COVID-19, not subject to tax
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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