Final Pay, Separation Pay, Back Pay, Backwages, Severance Pay, Separation Package, Retirement Pay, Terminal Pay, and Financial Assistance: What’s the Difference?
Final pay is often confused with separation pay. These two concepts are different.
To clarify the pay given to employees at the end of employment, for whatever reason that he was separated, I will discuss the difference among these terms and many others that workers normally use when they end their employment.
Final pay is a loose term used by companies, more particularly HR department, to refer to the salary and benefits to which the employee who was separated is entitled to. This is not a technical term found in the Labor Code.
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Severance pay is a legal term used abroad, mostly in the United States, to refer to the payment to an employee who was separated from employment. For instance, the severance pay regulations (5 CFR 550.706) provide that employees who resign because they expect to be involuntarily separated are considered to have been involuntarily separated for severance pay purposes. This is akin to separation pay since the reason for termination is beyond the control of employee.
However, there are some practitioners who use the term “severance pay” in the Philippines. Yet, this is a loose term in the country with no technical meaning.
Separation package is another loose term which refers to the aggregate sum of pay and benefits received by an employee after the end of his employment. There is no provision in the Labor Code that mentions separation package.
Back pay is a technical term in foreign jurisdiction also which is the amount of salary and other benefits that an employee claims that he or she is owed after a wrongful termination. It is generally calculated from the date of termination to the date a claim was finalized or judgment was rendered. To a certain extent, this is akin to backwages in the Philippines.
Back pay has no strict technical meaning in the Philippine jurisdiction more particularly under the Labor Code.
But in the case of Bustamante vs. NLRC (G.R. No. 111651, November 28, 1996), the Supreme Court mentioned backpay as similar to backwages. But the Court discussed the term in reference to Republic Act No. 875, the Industrial Peace Act, approved on 17 June 1953. Hence, backpay is an old term for backwages commonly used in the decisions of the defunct Court of Industrial Relations (CIR).
Separation pay is a technical term found under the Labor Code and numerous Supreme Court decisions. Separation is the amount of money required by law to be paid to an employee in the following cases:
- Terminated due to installation of labor-saving device, redundancy, retrenchment, or closure or cessation of operations or undertaking under Article 298 [formerly Article 283] of the Labor Code, as amended.
- Terminated due to incurable disease under Article 299 [formerly Article 284] of the Labor Code
- Employee who cannot be reinstated as disposed of by the labor tribunal in its decision and in lieu thereof the employer is ordered to pay separation pay
- Employee who was terminated for cause but the is awarded the sum in the spirit of social justice
- Employee who was given the sum as financial assistance as contained in the company policy or agreement with employee
On the other hand, the term backwages has been defined as payment for earnings lost by a worker due to his illegal dismissal. Backwages are generally granted on grounds of equity. Payment thereof is a form of relief that restores the income lost by reason of such unlawful dismissal. It is not private compensation or damages, but is awarded in furtherance and effectuation of the public objectives of the Labor Code. Nor is it a redress of a private right but, rather, in the nature of a command to the employer to make public reparation for dismissing an employee, either due to the former’s unlawful act or bad faith. (St. Theresa’s School of Novaliches Foundation vs. NLRC, G.R. No. 122955, April 15, 1998)
Learn more about employee dismissal, separation, retirement, and backwages from the book Guide to Valid Dismissal of Employees Second Edition by Atty. Villanueva
Article 294 [formerly Article 279] of the Labor Code provides that an employee who is unjustly dismissed from work shall be entitled to reinstatement without loss of seniority rights and other privileges and to his full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement.
Financial assistance is not mandatory. It can be agreed upon by the parties. Sometimes the Court awards financial assistance for equitable consideration or in the spirit of social justice and equity.
There have been instances when the Court awarded financial assistance to employees who were terminated for just causes, on grounds of equity and social justice. The same, however, has been curbed and rationalized in Philippine Long Distance Telephone Company vs. National Labor Relations Commission.
In the PLDT case, the Court recognized the harsh realities faced by employees that forced them, despite their good intentions, to violate company policies, for which the employer can rightfully terminate their employment. For these instances, the award of financial assistance was allowed. But, in clear and unmistakable language, the Court also held that the award of financial assistance shall not be given to validly terminated employees, whose offenses are iniquitous or reflective of some depravity in their moral character.
When the employee commits an act of dishonesty, depravity, or iniquity, the grant of financial assistance is misplaced compassion. It is tantamount not only to condoning a patently illegal or dishonest act, but an endorsement thereof. It will be an insult to all the laborers who, despite their economic difficulties, strive to maintain good values and moral conduct. (Supra Multi-Services, Inc., vs. Labitigan, G.R. No. 192297, August 03, 2016)
Terminal pay is another loose term to refer to the last sum of money that the employee receives due to the termination of his relationship with the company.
Retirement pay is the sum of money given to an employee who retired pursuant to the company established retirement plan or in its absence to the mandate of Article 302 [formerly 287] of the Labor Code, as amended.
Hence, the following terms are not found in the Labor Code:
- Final Pay,
- Severance Pay,
- Separation Package,
- Terminal Pay,
- Backpay, and
- Financial Assistance.
The following terms are found in the Labor Code and have respective their technical meaning:
- Separation Pay
- Backwages
- Retirement Pay
For instance, an employee who resigned is not entitled to separation pay, backwages or retirement pay.
An employee who was dismissed for just cause is not entitled to separation pay, backwages or retirement pay.
However, said employee is entitled to receive his salary or wage pertaining to the services that he already rendered.
If X resigned on August 15, 2018 to take effect September 15, 2018 and his company has a withholding policy for resigning employee with ten-day payroll processing period, the following may happen:
Payroll cut-off:
Salary every 15th covers work rendered from 21st of previous month to 5th of the current month.
Salary every 30th covers work rendered from 6th to 20th of the month.
Thus, the salary of X from August 6 to September 15 will most likely be withheld. If he was able to clear himself of his accountabilities, he will receive at least the following:
- Salary from August 6 to September 15
- Service Incentive Leave
- Proportionate 13th month pay
There is no single term in the Labor Code that technically refers to the aggregate pay that X will receive. Thus, the loose terms “final pay”, “back pay”, “terminal pay” are usually used by workers.
Atty. Villanueva’s books are available at National Book Store branches nationwide
If X however, was dismissed due to theft effective immediately on August 15, 2018, under the same withholding policy and he was able to comply with clearances, he will receive at least the following:
- Salary from August 6 to August 15
- Service Incentive Leave
- Proportionate 13th month pay
If X was terminated due to redundancy with five (5) years of service effective September 15, 2018, he will receive the following:
- Separation pay [monthly salary x 5 years]
- Service Incentive Leave
- Proportionate 13th month pay
The same rule will apply for termination due to installation of labor-saving device, retrenchment and closure or cessation of operations. Although in the case of retrenchment and closure the payment shall be ½ month for every year of service.
If X sued the company and won before the Labor Arbiter with finality finding that his dismissal was illegal, he will be entitled at least to the following:
- Full Backwages
- Reinstatement or separation pay in lieu of reinstatement, as the case may be
- SIL
- Proportionate 13th month pay
If X sued the company but lost and yet the Court took pity and awarded him “financial assistance” in the spirit of social justice and equity and the employer did not appeal, then he will be paid such amount.
If the company policy or X’s contract states that even if the employee has resigned or is terminated he is entitled to financial assistance, then he will be entitled to such amount.
By far, the above is the interplay of the terms involving payment to an employee who said goodbye to his employer in the given reason/s.
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