Separation Pay in the Philippines — When and How Much
Learn when you're entitled to separation pay, how it's computed, and what the Labor Code says.
What Is Separation Pay?
Separation pay is the amount an employer is required to pay an employee who is terminated or laid off due to authorized causes under the Labor Code. It serves as financial support to help the worker transition to new employment.
It is important to note that separation pay is not required for termination due to just causes (such as serious misconduct, willful disobedience, or gross neglect of duty), unless the employer chooses to grant it voluntarily or it is provided in the employment contract or CBA.
Legal basis: Labor Code of the Philippines, Article 298 (Closure of Establishment and Reduction of Personnel), Article 299 (Disease as Ground for Termination)
Authorized Causes That Require Separation Pay
Under Articles 298 and 299 of the Labor Code, separation pay is required when termination is due to:
| Authorized Cause | Separation Pay Rate |
|---|---|
| Installation of labor-saving devices | 1 month pay OR 1 month per year of service, whichever is higher |
| Redundancy | 1 month pay OR 1 month per year of service, whichever is higher |
| Retrenchment (to prevent losses) | ½ month pay per year of service |
| Closure / Cessation of business (not due to serious losses) | ½ month pay per year of service |
| Disease (not curable within 6 months) | 1 month pay OR ½ month per year of service, whichever is higher |
How to Compute Separation Pay
Separation Pay = Latest Monthly Salary × Rate × Years of Service
Example (Redundancy): An employee with a latest monthly salary of PHP 25,000 who has worked for 8 years and 7 months:
- Years of service: 8 years + 7 months = 9 years (rounded up since 7 months ≥ 6)
- Separation pay: PHP 25,000 × 1 month × 9 years = PHP 225,000
Example (Retrenchment): Same employee under retrenchment:
- Separation pay: PHP 25,000 × ½ month × 9 years = PHP 112,500
Tax Treatment
Separation pay received due to involuntary causes (redundancy, retrenchment, closure, or disease) is generally tax-exempt under the NIRC as implemented by BIR.
However, separation pay received through voluntary resignation or mutual agreement without an authorized cause is subject to income tax.
Compute Your Final Pay
Use our calculator to compute your total final pay, including separation pay, pro-rated 13th month, and leave conversion.
Open Final Pay Calculator →Frequently Asked Questions
Do I get separation pay if I resign voluntarily?
Generally, no. Separation pay is only required when termination is due to authorized causes under the Labor Code (such as redundancy, retrenchment, closure, or disease). However, if your employment contract or company policy provides separation pay for resignations, you may be entitled to it.
What authorized causes entitle me to separation pay?
Under Articles 298 and 299 of the Labor Code, separation pay is required for: installation of labor-saving devices, redundancy, retrenchment to prevent losses, closure/cessation of business, and disease that cannot be cured within 6 months and continued employment is prohibited by law or prejudicial to the employee's health.
How is separation pay computed?
For redundancy or installation of labor-saving devices: at least 1 month pay or 1 month per year of service, whichever is higher. For retrenchment or closure: at least 1/2 month pay per year of service. For disease: at least 1 month pay or 1/2 month per year of service, whichever is higher. A fraction of 6 months or more is considered one whole year.
Is separation pay taxable?
Separation pay received due to involuntary causes (such as redundancy, retrenchment, or closure) is generally tax-exempt. However, separation pay from voluntary resignation is subject to income tax.