Published — June 1, 2022
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
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.
Aside from learning about the separation pay, you may also read: DOWNSIZING OF EMPLOYEES DUE TO COVID19
The COVID-19 pandemic continues to have a significant impact on the economy. Some employers reluctantly opted to downsize the number of employees to save the operation of their business while some resorted to closure. As an effect, many employees have lost their job. Such termination of employees is warranted under Article 283 (now 298) of the Labor Code of the Philippines which allows the employer to severe the employment of an employee due to retrenchment or closure of business.
Under the afore-cited provision of the Labor Code, it requires the employers to pay separation benefits to the affected employees equivalent to one month’s pay or at least half a month’s pay for every year of service. Please take note that a fraction of at least six months is to be considered a full year. Question, “Is the separation pay of a retrenched employee subject to tax?”. Section 32 (B) (6)(b) of the National Internal Revenue Code (Tax Code), as amended is very clear. Any amount received, separation pay in this case, by an employee or by his heirs from the employer as a consequence of his separation from the service of the employer for any cause beyond the control of the said employee shall be exempt from tax. The fact that the employee was separated from employment due to the inevitable effect of COVID-19 pandemic is certainly beyond his control.
Follow-up question, “Is the exemption from tax automatic?” The answer is NO. Under its Revenue Memorandum Order No. 66-2016, the Bureau of Internal Revenue (BIR) requires that a Certificate of Tax Exemption (CTE) from Income Tax and Withholding Tax be secured first. In case of Retrenchment, the documents which must be filed with the appropriate BIR office are the following:
1. Copies of the written notices served to the employee and the appropriate Regional Office of the Department of Labor and Employment (DOLE) at least thirty (30) days before the intended date of termination, specifying the grounds for separation; and
2. A board resolution, in case of a juridical entity, or sworn statement to be executed by the owner, in case of a sole proprietor, stating that:
a. the retrenchment is reasonably necessary and likely to prevent business losses;
b. the losses, if already incurred, are not merely de minimis, but substantial, serious, actual and real, or if only expected, are reasonably imminent, with appropriate supporting evidence of said losses;
c. the retrenchment is made in good faith for the advancement of its interests and not to defeat or circumvent the employees’ right to security of tenure; and
d. the selection of employees to be terminated has been made under fair and reasonable criteria.
For Closure or Cessation of Operation, the required documents are the following:
1. Written notice to the employee and the appropriate Regional Office of DOLE at least thirty (30) days before the effectivity of termination, specifying the ground for termination.
2. Board Resolution, in case of a juridical entity, or sworn affidavit to be executed by the owner, in case of a sole proprietor, stating the following:
a. that the management has decided to close or cease
operation of the company;
b. that the closure or cessation of operation has been made
in good faith; and
c. that there is no other option available to the employer
except to close or cease operation.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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