When do you give separation pay?

Labor Law Resignation AWOL 9 min read , November 14, 2020

When is an employee entitled to separation pay? Does it cover all employees who leave their work? How much are you supposed to pay? We tackle these in today's article.

Everybody wants Separation Pay

Once, I sat in a mediation session at the NLRC SENA for a client's terminated employee. This employee was found guilty of fraudulently modifying the collection receipts so that he can keep the excess and therefore terminated. After he was terminated, he was coached by a fellow worker to go to the NLRC to file a case against the employer.

In the mediation session, he then lays out that he wants the last pay due to him and in addition, he wants separation pay. This got my attention.

Three businesswomen
Photographer: Tim Gouw | Source: Unsplash

The mediator asks, "Mr. Employee, why are you asking for separation pay?" The employee turns to the mediator, "Isn't it obvious Ma'am? I was separated from the company, and therefore, they should pay me separation pay."

Biiiiiiig misunderstanding here.

This episode exemplifies the problem I see all too often when it comes to this concept. The term "separation pay" has been thrown around carelessly, when in fact it has a technical meaning under the labor code.

That's why people are getting confused when employees are entitled to it. The misconception that most people have is that if you are "separated" for any reason, then you should be paid.

However, the law says otherwise.

Book case of old books.
Photographer: Clarisse Meyer | Source: Unsplash

What does the law say about separation pay?

Let's get everybody back on the right page here and dive into the law to see what it "officially" says about separation pay:

Separation pay is a monetary award given for employees terminated under authorized causes. This is because the termination wasn't their fault, but rather, spurred by circumstances which were beyond their control.

To make that easier to understand, we have to make a distinction between the two ways employment can terminated: just and authorized causes.

Just Causes

Just causes are violations that the employee does which leads to them being terminated from work. They are covered by Article 296 of the labor code. Examples of these things include: serious misconduct, willful disobedience, gross and habitual neglect, and so on and so forth. For our discussion, let's just term it as "things that employees do themselves that get them fired".

Authorized Causes

The next category involves Article 297 and Article 298 of the labor code under authorized causes for termination of employment. These are situations wherein without any fault on the part of the employee, circumstances led to his termination.

Let me illustrate that with an example: the factory decides to remove employees because it installed new machines to make work faster. Or the business has slowed down significantly and the owner has decided to close up shop thereby leaving employees without any place to work. Another instance is when an employee comes down with a life threatening disease which endangers him or his workmates.

Chocolate Factory
Photographer: Walter Otto | Source: Unsplash

In all these 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.

Again, I can't stress it enough that there is no fault on the part of the employee. They didn't necessarily do anything wrong in this case, but the circumstances dictated their termination from work.

"Pampalubag loob" in Labor Law

Now that we know about the 2 types of termination, I will now introduce you to the concept of "pampalubag loob". This is a term which refers to small amounts or tokens you give to ease the feelings or compensate for the trouble you caused. I especially like how it was defined in the www.tagaloglang.com website:

  • Something used to soothe one’s wounded pride;
  • Something that soothes hurt feelings; or
  • A conciliatory gesture, amelioration, mitigation, gratuity, consolation.

These encapsulate the feeling perfectly.

When I teach workshops, this is how I frame our topic to make it easier to understand: "separation pay is the legal equivalent of pampalubag loob".

Stated otherwise, the law provides for "separation pay" to ease the shock of getting terminated if the employee didn't have anything to do with the termination.

Just a sudden attempt to express the concept of crime.
Photographer: niu niu | Source: Unsplash

Shouldn't Violators get separation pay too?

Some people may ask, "But Attorney, whether it was a just or authorized cause for termination, the fact is an employee will lose their job. Shouldn't both of them be entitled to separation pay?" Simple answer is no because that would destroy the distinction made by the law. Violators are not entitled to "pampalubag loob" because their termination was their own fault.

Look at it this way: if an employee comes in late 4 times out of the week, or steals from you, or worse, curses you... would it make sense to reward these people? They have done something wrong, and it would be equally wrong to reward them for offensive behavior.

If you do this, you invite more employees to violate your rules because they will be rewarded anyway even if they get fired. Instead of curbing problem behavior, you will end up perpetuating it.

Again, separation pay is given for people who were unfortunate enough to be terminated based on authorized causes. It does not apply to people who get terminated due to violations or their own doing under just causes.

How much should you pay as separation pay?

Now that we're clear which employees are entitled to separation pay, let's talk about how much separation pay is supposed to be. There are 2 general rates for separation pay under Article 297 and Article 298 of the labor code. I've summarized them here for easy reference:

One-Half (1/2) Month Pay per Year of Service when...

You should provide 1/2 month's worth of pay for every year of service for the following grounds

  1. Retrenchment to prevent losses (i.e., reduction of personnel effected by management to prevent losses);
  2. Closure or cessation of operation of an establishment not due to serious losses or financial reverses; and
  3. Employee is suffering from a disease not curable within a period of six (6) months and his/her continued employment is prejudicial to his/her health or to the health of his/her co-employees.

One-Month Pay per Year of Service when...

You should provide 1 month's worth of pay for every year of service for the following grounds:

  1. Installation by employer of labor-saving devices (or automation);
  2. Redundancy, as when the position of the employee has been found to be excessive or unnecessary in the operation of the enterprise; and
  3. Impossible reinstatement of the employee to his or her former position or to a substantially equivalent position for reasons not attributable to the fault of the employer.

Important note for both categories: a fraction of at least six (6) months being considered as one (1) whole year.

Let's do a sample computation on this

Juan was employed as a rank and file employee for the last 5 years with a manufacturing firm that creates velcro board shorts. However, a new distributor from China came in and was able to supply the local market with goods that cost half of what they were selling it for. As a result, the company decided to shut down the velcro board shorts division on the basis of retrenchment to prevent further losses to the company. Here's how Juan's separation pay will be computed:

  • 5 years x rate of 1/2 of 15,000 = Php 37,500

Let's do another one based on the 2nd group of separation pay rates.

Pedro is paid 15,000 a month in the same company. He stayed with the company for 5 years. On the 5th year, he got replaced with a new machine which automated his function. He was therefore terminated on the basis of authorized causes (installation of labor saving devices). The computation for his separation pay goes:

  • 5 years x rate of 15,000 = Php 75,000
Photographer: Bayu | Source: Unsplash

What if they stayed less than a year?

There's a caveat here. In separation pay, the lowest sepration pay that you can give would be 1 month's worth of salary. This comes into play when you're dealing with authorized causes that only give 1/2 month's salary. If the employee worked for only a year or less, then the computation would yield only 1/2 worth of salary. In this case, the law says that you should bump that up to at least 1 month's worth for separation pay purposes.

But what if I still want to give them extra?

There are some circumstances wherein an employer, regardless of how an employee leaves the company, wants to give a certain amount to help them out. Here are some examples I've seen on the field:

  • Employee is faced with a case. Manager, in light of the years of service of the employee, offers him the option of resigning instead of facing a full-blown case. To make it easier, management offers a certain amount to help him transition.
  • Employee is terminated for consistent tardiness. However, the business is a small family owned company and everyone knows each other. The owners know that the children of the employee would be affected. Therefore, even employee is not entitled to anything because it is a just cause termination, management gives a token amount.
  • Employee is terminated because the plant upgraded its software package. A computer program now does what the employee used to do. Employee is given separation pay since it was an authorized cause termination, but the employers want to give an additional amount.

What do we do in these circumstances?

If you're going to give amounts in addition to or aside from the separation pay, please refrain from calling it "separation pay" because it isn't that. Do not contribute to the confusion by calling it "separation pay" when it isn't.

My recommendation: let's call it "financial assistance" or something equivalent. Anything except calling it "separation pay" because you will end up confusing more employees and contributing to the entitlement mentality that every separation from employent is supposed to be paid.

When you give this additional amount, be sure to say this to the employee,"This is not separation pay, this is financial assistance and it is being given voluntarily. I hope it helps you out."

Hope this was able to clarify a few things for you. So what realizations did you get from reading this? Let me know in the comments!