Separation Pay Rules and How To Properly Compute If Termination Is Due To Redundancy, Retrenchment, Or Closure
Separation pay is one of those items mandated to be given by law to employees under certain situation.
Article 298 [formerly 283] of the Labor Code (get a copy of the re-numbered Labor Code 2018 Edition by Atty. Villanueva), the employer may also terminate the employment of any employee due 
to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of the law on termination, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof.
Further, in case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. 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.
Thus, separation pay shall be paid in the event of:
- Redundancy
- Retrenchment not due to serious business losses or financial reverses
- Closure or cessation of operations not due to serious business losses or financial reverses
Let’s say company A validly terminated X due to redundancy. X rendered 5 years of service and is receiving a salary of P16,000.00 at the time of termination. The separation pay should be computed as follows:
P16,000.00 per year of service x 5 years = P80,000.00
Thus, X should be given a separation pay of P80,000.00
What if X served for only 4 months?
X should be given only P16,000.00 because the law states that he should be given at least one month pay or at least one month per year of service whichever is higher. Since he served less than one year, the second rule cannot apply. Thus, the first rule governs which is at one-month pay.
Let’s say company B validly terminated Y due to retrenchment. The company is losing money but not amounting to serious financial reverses. Y rendered 5 years of service and is receiving a salary of P16,000.00 at the time of termination. The separation pay should be computed as follows:
P8,000.00 per year of service x 5 years = P40,000.00
Thus, Y should be given a separation pay of P40,000.00
What if Y served for only 6 months?
Y should be given only P16,000.00 because the law states that he should be given at least one month pay or at least one-half (1/2) month pay per year of service whichever is higher. Since he served less than one year, the second rule cannot apply. Thus, the first rule governs which is one-month pay. Further, even assuming that his 6 months be considered one year the amount to be given is still P16,000 considering that it is a higher value than P8,000 (P8,000 x 1 year = P8,000).
Let’s say company B validly terminated Z due to closure of its Aqua Culture Division. The company is losing money but not amounting to serious financial reverses. Z rendered 5 years of service and is receiving a salary of P16,000.00 at the time of termination. The separation pay should be computed as follows:
P8,000.00 per year of service x 5 years = P40,000.00
Thus, Z should be given a separation pay of P40,000.00
What if Z served for only 4 months?
Z should be given only P16,000.00 because the law states that he should be given at least one month pay or at least one-half (1/2) month pay per year of service whichever is higher. Since he served less than one year, the second rule cannot apply. Thus, the first rule governs which is one-month pay.
Let’s say company B validly terminated M due to retrenchment on account of serious financial reverses as shown by its Audited Financial Statements. Y rendered 5 years of service and is receiving a salary of P16,000.00 at the time of termination. The separation pay should be computed as follows:
P00.00 per year of service x 5 years = P00.00
M cannot be given separation pay pursuant to the cases of North Davao Mining [G.R. No. 112546. March 13, 1996] and Reahs vs. NLRC [G.R. No. 117473. April 15, 1997]. These two cases are discussed in the book Guide to Valid Dismissal of Employees Second Edition.
LEARN MORE ABOUT THE RULES ON VALID TERMINATION FROM GUIDE TO VALID DISMISSAL OF EMPLOYEES SECOND EDITION BY ATTY. ELVIN B. VILLANUEVA
What if M served for only 4 months?
It doesn’t matter. Under the same ruling, separation pay cannot be granted. “You cannot squeeze blood out of a dry stone.”
In all of the above cases, if the employee served for a fractional service of at least 6 months, it shall be considered as one year.
Hence, if X served 1 year and 6 months, the computation should already be 2 years. Thus, P16,000 x 2 = P32,000 as the separation pay for redundancy.
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