When employees leave or are terminated, employers usually hear them say, "How much will I get as back pay? How much is my separation pay? How about last pay?" But do they mean the same thing? Are there differences between these amounts? When do I give each of these to leaving employees? And what amount is fair?
These are the questions employers usually get from employees who are leaving the company. And they ask for these, whether it was a case of resignation or termination.
But they sound the same!
At first glance, they seem to mean the same thing. And I think that's the reason why they get confused with each other all the time.
But since you are dealing with technical terms which have legal implications, it would be better if you take the time to learn when they are supposed to be used. Ignorance is no excuse because there are very real consequences if you ignore them.
This reminds me of the word "bat" which seems common enough, right? However, this common word can both be used as a baseball "bat" or the animal (and Bruce Wayne's inspiration) that flies around. Imagine the chaos when you use the word in the wrong context. Same thing with these legal terms. They can cause major misunderstandings and bloated expectations.
What does the law say?
Let's see what the law has to say about these things and see if we can make it easier to understand for everyone.
"Last pay" is the totality of all payments due to an employee who retires or resigns or is terminated due to just or authorized causes. It consists of the unpaid salaries, benefits, bonuses, if any.
In other words, these are things that the employee has already earned but have yet to receive. The employee worked for it, and it is only fair that it be distributed to the employee at the end of employment.
What is it composed of?
Examples of last pay computation include:
- Salary – This is the salary which has accrued after the last payroll period.
- 13th month pay – this benefit is tied together with your employment. Basically, it is considered earned as you work throughout the year. Just compute the proportion you've already earned based on the time you've ended your employment.
- Leave benefits – can pertain to Service Incentive Leaves, Vacation or Sick leaves that you haven't availed of yet, provided that your company policy converts them to cash. Otherwise, you're just entitled to the proportionate 5 day SIL leave given as a minimum by the labor code.
- Tax refund – check with accounting if there are excess tax amounts withheld at the time of leaving.
These amounts are usually offset by any pending loan payments or payments for lost or damaged office property.
Back pay is notoriously confused with last pay. Why? Because literally, they mean the same thing. However, we should be aware that there is a technical meaning given to back wages by the law.
Back wages only becomes relevant when an employee is illegally dismissed and a decision has been rendered by the labor arbiter on it. Back wages refer to the salaries and benefits of an ILLEGALLY DISMISSED EMPLOYEE if the Court declares his/her dismissal as illegal. Back wages shall consist of the salaries and benefits of the illegally dismissed employee during the period that he/she was "dismissed" or "terminated".
In other words, the back pay is a form of a penalty to punish erring employers for violating the due process rights of their employees. If there's no labor decision, there's no back pay to speak of. If you want the unpaid salaries, you're talking about last pay, not back pay.
What's the computation for this?
The base figure in the determination of full back wages is fixed at the salary rate received by the employee at the time he was illegally dismissed. The award shall include the benefits and allowances regularly received by the employee as of the time of the illegal dismissal, as well as those granted under the Collective Bargaining Agreement (CBA), if any.
What about separation pay? Separation pay is another form of benefit given to certain employees under the labor code. This only becomes relevant in 2 cases:
First, employees become entitled to separation pay when they are terminated due to authorized causes. What are authorized causes? They involve terminations done under Article 297 and Article 298 of the labor code. These are situations wherein without any fault on the part of the employee, circumstances led to his termination.
In authorized cases, the employee isn't at fault but as a result of the circumstances, the employer is allowed (or "authorized") to terminate the employment in order to address the situation. What could these circumstances be? Good thing you asked, I've done an extensive article on this topic and would encourage that you read it there: (When do you give separation pay?)
Second, separation pay is given when the court orders the employer to reinstate or allow back to work an illegally dismissed employee but the relationship between them has gotten so bad, that seeing each other at work is no longer an option. Therefore, instead of reinstatement, the court allows the employer to pay the employee separation pay instead of going back to work, so they can both move on and live out their lives in peace.
What to do with this information?
Now that you have a better understanding of the different terms and when they should be used, let's make it a point to change our forms and use the right terms with our teams so that everyone is on the same page.
To recap, here's what we learned:
- Last pay refers to salaries and benefits already earned, but have yet to be received.
- Back pay is a penalty awarded to the employee and paid by erring employees because they violated the employee's rights to due process; and
- Separation pay is relevant when an employee has been terminated due to authorized causes or reinstatement is no longer possible for an illegally terminated employee.
So what did you think about this article? Any changes that you want to do to the way you talk about amounts and salaries? What learning did you pick up? Share them in the comments with me.