Final Pay in the Philippines: Guide for Computation and Rules

What is final pay, when is it given, and how is it computed? Here is a summary of the guidelines from DOLE to guide you.

What is Final Pay?

Final pay, as defined by the Labor Advisory №06–20 that was released by Department of Labor and Employment (DOLE), is the sum of all salaries and monetary benefits due to the employee regardless of the reason for the termination of the employment contract.

Final pay is also referred to as back pay and last pay. Payment of final pay must be released within 30 days from the date of separation unless the company policy states that it should be given earlier than 30 days from the date of separation. It is also the last monetary transaction between the employer and the employee after termination.

Related:

Final Pay vs. Separation Pay

The final pay is the total of the last remuneration and benefits an employee gets from the business after they leave. Separation pay, also referred to as severance pay, is a monetary benefit that employees may claim from the company at the time of their severance if the reason for severance is among those recognized by the Labor Code of the Philippines as authorized causes. The separation pay is given in addition to the final or back pay. The separation pay is designed to help the employee while they are still looking for a job.

There are several reasons why the separation pay may not be awarded to the employee. For example, here are some of the reasons duly recognized by the Department of Labor and Employment:

• a. Voluntary Resignation
• b. Willful disobedience of lawful orders
• c. Serious misconduct/s
• d. Habitual and gross negligence of duties
• e. Fraud or intentional breach of trust
• f. Commission of any crime against the employer or other personnel
• g. Other similar causes as may be stated in the employee’s manual or Code of Conduct

On the other hand, here are the authorized causes for termination defined by the Labor Code that allows an employee to claim a separation pay.

• a. Redundancy
• b. Retrenchment
• c. Closure of business not due to bankruptcy
• d. Installation of labor-saving devices
• e. Employee’s sufferance of disease not treatable within six (6) months and continued employment is prohibited by law

Separation Pay Computation

For employees who are qualified to receive severance pay, the amount they will receive is equivalent to either of the following:

• Their monthly salary
• A month’s salary for every year of service
• Half a month’s salary for every year they have worked for the company

Whichever has the higher amount and depending on the reason for termination

Separation pay computation makes use of the following formulas, depending on which is suitable based on the reason for termination:

a. SP = basic monthly salary x years of service

b. SP = (basic monthlysalary/2) x years of service

Let’s say employee A has been working for the company for seven (7) years before separation from work due to the installation of labor-saving devices. Employee B has been working for the company for four (4) years before getting terminated from work due to retrenchment. Both employees earn a basic monthly salary of Php 18, 500.

For employee A, the computation of severance pay goes like this:

SP = Php 18,500 x 7 = Php 129,500

For employee B, the computation of severance pay goes like this:

SP = (Php 18,500/2) x 4 years = Php 37,000

The difference in the formulas used to compute their severance pay is due to the reason that employee B was terminated due to retrenchment, or reduction of expenses due to economic difficulty.

What is included in the final pay?

The final pay is a totality composed of several monetary benefits that must be given to the employee as instructed by the law. Moreover, below are some of the components of the final pay:

• a. Salary earned by the employee that is still not paid;
• b. Cash equivalent of unused Service Incentive Leave (SIL);
• c. Cash equivalent of unused sick, vacation, and other leaves;
• d. Separation or severance pay, if applicable;
• e. Retirement pay, if applicable;
• f. Income tax claim for any excess tax withheld if any;
• g. Any other types of compensation earned as stated in an individual or collective agreement;
• h. Cash bond/s or deposit/s to be returned to the employee, if any;
• i. Pro-rated 13th-month pay.

How to compute final pay in the Philippines?

Generally, the final pay is the sum of the employee’s unpaid earned salary, cash equivalents from convertible leaves, severance pay, and pro-rated 13th-month pay.

Computing for the correct amount of final pay can be tricky even though the formula itself consist mainly of addition. That is because the factors of final pay are not constant. First, you must make sure that you have all the necessary details in order to start computing.

Final pay computation sample situation

For example, Employee X earned a basic monthly salary of Php 16, 750 for the last five (5) years of service. Then in March, the company lets him go due to retrenchment. In addition, he has three (3) remaining SILs, one sick leave, and two vacation leaves, and each leave is equivalent to Php 645.

Furthermore, his severance pay amounts to Php 41, 875. This is from the basic monthly salary, years of service, and reason for separation from work, which in total is higher than his basic monthly salary.

Additionally, his prorated 13th-month pay is Php 4,187.50. Lastly, he left at the end of the month and has one month’s worth of unpaid salary for collection. Other than those, he has not earned any other benefit or compensation and has no excess tax.

Based on the information given regarding employee X, his final pay can be computed using this formula:

Final pay = Unpaid earned salary + (total number of unused leaves x cash equivalent) + severance pay + 13th-month pay.

Following this formula, the final pay can be computed as Php 16, 750 + ( 6 x Php 645) + Php 41, 875 + Php 4, 187.50. Employee X’s final pay amounts to Php 66, 682.50.

Finally, the final pay computation may vary a lot depending on the contributing factors and the nature of which the employee was separated from work.

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Originally published at https://www.eezi.com on April 3, 2023.