Are Dismissed Employees Entitled to Separation Pay?

Under Philippine laws, the employee and employer have reciprocal rights: the employee may not be forced to serve against his or her will, and the employer may not be compelled to keep an employee if there is legal reason to end the employment.

When employment is terminated by the employer, the question that often arises is: is the employee entitled to separation pay?

Separation pay refers to the amount an employee receives at the end of his employment to serve as financial relief.

Employers, however, are not obliged to grant separation pay in all cases. The circumstances surrounding each case must be assessed to determine if separation pay is legally required.

Lawful Termination

To legally terminate an employment, the employer must comply with two types of requirements: substantive and procedural.

Substantive requirements involve the reason for termination. Legally accepted reasons are classified as one of the following:

  • Just cause
  • Authorized cause

Procedural requirements refer to the steps that have to be taken in the course of the termination.

Just Cause for Termination

Just cause refers to employee’s actions that result in serious consequences to the company’s operations and/or profitability. These include:

  • Serious misconduct
  • Willful disobedience of a superior’s lawful order (commonly known as insubordination)
  • Gross and habitual neglect of duties
  • Serious breach of employer’s trust

Authorized Cause for Termination

An authorized cause for termination is a circumstance or condition that compels the employer to end an employment through no fault of the employee. It is premised on the concept that the employer has the right to run the business according to what he believes is best for it.

These circumstances and conditions include:

  • Introduction of a device that saves on labor
  • Redundancy
  • Financial losses necessitating employee retrenchment
  • Cessation of business
  • Employee’s illness which threatens his or other employees’ safety, and is not curable in six months
  • Imposed extended leave exceeding six months through no fault of the employee

In all these circumstances, the employer will be asked to show proof that the reason to terminate is legitimate and valid.

Due Process

Termination of employment has to be done in steps.

For just cause terminations, the steps involve:

  • Giving the employee written notice of the offenses charged against him. The notice must indicate possible termination if the charges are proven.
  • Giving the employee the opportunity to refute the charges, confront his accusers and their witnesses, and present his own witnesses and evidences.
  • Giving the employee a second notice if it is determined that the employee has indeed committed the offenses.

 For authorized cause terminations, the steps are:

  • Issuing a notice of termination to the employee 30 days before the end of employment.
  • Issuing a similar notice to the Department of Labor and Employment 30 days before the end of employment.

 When is separation pay required?

 Just cause terminations:

If the offense charged against the employee is proven, the employer is not required to grant separation pay. But if the employer fails to observe due process, he may be financially liable to the employee, even as the dismissal is upheld.

 Authorized cause terminations:

In most situations, the employer is required to grant separation pay. In cases of introduction of labor-saving processes and of redundancy, separation pay is typically one month’s salary for every year of service. In cases of retrenchment due to financial losses, cessation of business or illness, separation pay is normally half month’s pay for every year of service or one month’s pay, whichever is higher.

If the business was closed due to severe financial losses, it may be exempt from granting separation pay.

There could be other circumstances that would determine the need for separation pay or the amount to be paid. Consult our lawyers at Duran & Duran-Schulze Law to learn more.