Separation pay is required when employment ends for an authorized cause. Redundancy or labor-saving devices: at least one month's pay or one month's pay per year of service, whichever is higher. Retrenchment, closure not due to serious losses, or disease: at least one month's pay or half a month's pay per year of service, whichever is higher. A fraction of at least six months counts as a full year. Voluntary resignation and dismissal for just cause generally don't earn separation pay.
When Is Separation Pay Required?
Separation pay is owed when an employer ends employment for an authorized cause under Articles 298 and 299 of the Labor Code — reasons tied to the business or the employee's health, not to misconduct.
| Cause of separation | Minimum separation pay |
|---|---|
| Installation of labor-saving devices | 1 month's pay, or 1 month's pay per year of service — whichever is higher |
| Redundancy | 1 month's pay, or 1 month's pay per year of service — whichever is higher |
| Retrenchment to prevent losses | 1 month's pay, or ½ month's pay per year of service — whichever is higher |
| Closure not due to serious business losses | 1 month's pay, or ½ month's pay per year of service — whichever is higher |
| Disease (Article 299), where continued work is prohibited by law or harmful to health | 1 month's pay, or ½ month's pay per year of service — whichever is higher |
| Closure due to serious business losses | None required by law |
In computing years of service, a fraction of at least six months counts as one whole year.
Who Does Not Get Separation Pay?
- Employees who resign voluntarily — unless the contract, company policy or a CBA grants it.
- Employees dismissed for just cause under Article 297, such as serious misconduct or fraud.
- Employees whose fixed-term or project employment simply ends as agreed, unless the contract provides otherwise.
They still receive their final pay: unpaid salary, prorated 13th month pay and other earned benefits.
Notice Requirement
For terminations under Article 298, the employer must serve written notice on both the affected employees and the DOLE at least one month before the termination takes effect. Skipping notice can make the employer liable for damages even when the cause is valid.
How to Compute Separation Pay: Examples
Employee with a monthly salary of ₱30,000 and service of 6 years and 7 months. Because 7 months is at least six months, it counts as 7 years.
Example 1: Redundancy
- 1 month's pay per year: ₱30,000 × 7 = ₱210,000
- Minimum of 1 month's pay: ₱30,000
- Separation pay (higher amount): ₱210,000
Example 2: Retrenchment or Closure Not Due to Serious Losses
- ½ month's pay per year: ₱15,000 × 7 = ₱105,000
- Minimum of 1 month's pay: ₱30,000
- Separation pay (higher amount): ₱105,000
Example 3: Short Service, Retrenchment
Same salary, 1 year and 2 months of service (counts as 1 year):
- ½ month's pay per year: ₱15,000 × 1 = ₱15,000
- Minimum of 1 month's pay: ₱30,000 — this is higher, so it applies
Is Separation Pay Taxable?
Separation pay received because of death, sickness or other physical disability, or any cause beyond the employee's control — such as redundancy, retrenchment or closure — is exempt from income tax under the National Internal Revenue Code. Separation pay given for a voluntary resignation under company policy is generally taxable.
Separation pay is paid on top of final pay. Process both together, and issue BIR Form 2316 — see our 2316 guide.
Employer Checklist
- Document the authorized cause (for redundancy, the criteria used to select positions).
- Serve written notice to employees and DOLE at least one month ahead.
- Compute years of service, rounding a fraction of six months or more up to a full year.
- Apply the correct formula and the one-month minimum.
- Release separation pay together with final pay, with a written breakdown.
Kinsweldo keeps each employee's hire date and salary history, so service years and final pay are ready when you need them. It's free for up to 5 employees.
Frequently Asked Questions
Not by law. Voluntary resignation does not require separation pay unless the employment contract, company policy or a CBA grants it. Resigning employees still get their final pay.
At least one month's pay per year of service, or one month's pay, whichever is higher. A fraction of at least six months counts as a full year.
Yes. A fraction of at least six months is counted as one whole year. Less than six months is not counted.
Yes, when it is paid because of a cause beyond the employee's control, such as redundancy, retrenchment, closure, death, sickness or disability.
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