Separation Pay: How To Compute And Who Are Qualified?

Separation Pay: How To Compute And Who Are Qualified?

Separation pay is defined as the amount entitled to an employee at the time of his dismissal or termination from work. This form of compensation is intended to provide the employee with the financial means to sustain his finances while he looks for a new job. However, this very broad definition should not be taken at face value because this is not always applicable to everyone.  

By law and by right, separation pay is only granted in very specific circumstances.

When is an employee qualified for separation pay?

So when is an employee entitled to separation pay? Is everyone who resigns entitled to this compensation? Apparently, this compensation isn’t just given to anyone. There are some conditions that must be met by an employee according to the law. 

According to the labor code

It states that an employer must provide a separation pay to the employee in the event of his or her resignation if its due to the following causes:

  • Installation of any labor-saving device
  • Redundancy
  • Retrenchment
  • Closure or cessation of operation of the establishment the employee is working for
  • Suffering from a disease, i.e. one that makes the employment illegal or that’s harmful to the health of the employee and his or her colleagues.

According to the Supreme court

  • When reinstatement is no longer possible
    It is already impossible for a dismissed employee to retain his/her previous position because of the cessation of business, or the position no longer exists and there is no other role to which he/she can be assigned.
  • Strained relations
    This is when the work relations between the employer and the employee are no longer desirable and the work environment is no longer conducive for both parties. Separation pay should be provided to the employee. 

According to DOLE

  • Lack of service assignment of security guard for a continuous period of six months;
  • Lack of service assignment of a security guard by reason of age; and
  • Lack of reassignment of deployed personnel after three months.

Who is not qualified for the separation pay?

The following disqualifies an employee from this kind of compensation.

  • Separation pay must be indicated in your employment contract or corporate policy. You will, however, receive your back pay if you resign.
  • If you’re fired for any of these legitimate reasons (as defined by the Labor Code), you won’t be eligible for separation compensation.
  • Serious misconduct or intentional disobedience by an employee of their employer’s or representative’s authorized commands in the course of their employment
  • Employee’s frequent and blatant disregard for their responsibilities
  • Employee fraud or willful breach of the trust entrusted to them by their employer or a lawfully authorized representative.

How to compute your separation pay?

The computation for the separation pay is simple: it’s the sum of your one-month salary plus 1 month’s salary for every 1 year of service you’ve completed with the company.  

For your information

One month salary + one month pay for every year of service.


Monthly salary: ₱30,000

Year of service: 3 years

₱30,000 + (3 x ₱30,000) = ₱120,000

Separation pay vs back pay

As mentioned, separation pay is compensation given to an employee upon his or her dismissal from service but it depends on whether or not it’s included in their contract. Also, its monetary coverage is computed according to the years of service by the employee.

On the other hand, back pay also known as the final payment is the remaining compensation due to the employee. This includes the following:

  • The salary for the last month of his or her service. 
  • Incentives or commission that is due to the employee based on his or her contract. 
  • Pro-rated 13th-month pay that is due to him or her in the given year. 
  • Sick leave credit encashment if any (or if the company policy allows it).

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