What You Need to Know About Final Pay and Separation Pay

October 27, 2018 | Ronnie Anzano

No matter how much you love your employees or how much your employees love working with your company, there will always be the possibility that you have to let them go. An employee’s separation from your company can be caused by a number of things, whether be it a personal choice of the employee or a choice you made for the company.

Aside from dealing with the paperworks your employee has to give, you also need to deal with the financial concerns of an outgoing employee. The most common issue an employer or an HR personnel has to face is the misunderstanding some employees have between separation pay and final pay. Some employees can be entitled to them upon the end of his/her employment, but some are not. It is the Human Resources department’s responsibility to inform and educate the employees about their differences to be able to have a smoother and easier termination or resignation process.

Final Pay

An outgoing employee will receive his/her final pay, also called back pay regardless if he/she was terminated or have resigned from the company. The final pay is usually given within 30-60 business days after your employee’s last day working with your company if he/she have given all the requirements and have completed the clearance provided by the HR department. The final pay is the sum of all the salary the company still has to give. The computation for this includes:

  1. Final salary – some employees leave the company earlier or later than the scheduled payday. Because of this, some hours go unpaid. The extra salary will then be added to the back pay.
  2. Leave Conversion – depending on the existing by-laws in your company, an outgoing employee can receive cash for their unused leave credits if your policy states that leave credits can be converted to cash.
  3. Pro-rated 13th month pay – a company has to give pro-rated 13th month pay to an outgoing employee if he/she leaves the company before the year ends. A simple computation for this would be to multiply your employee’s monthly basic salary and the number of months he/she have worked with the company that year. The product would then be divided by 12, which is how many months there are in a year.

For example, if your employee’s basic salary is Php 12,000 and they have worked for 5 months with your company that year, the computation would be: Php 12,000 × 5 months / 12 = Php 5,000

  1. Tax refund – if the sum of the total amount of your employee’s estimated taxes and withholding taxes is greater than the tax he/she owes, he/she will receive a tax refund.
  2. Deductions and/or liabilities – this will be deducted to the employee’s back pay if he/she has to pay for lost or damaged office equipment, or if he/she still has loans to pay.

Separation Pay

Separation pay on the other hand will only be received by employees with “authorized causes”, or this can be called as valid termination or legal termination. Those employees who leave the company by resignation will not receive separation pay unless it is stated in their Collective Bargaining Agreements (CBAs) or in their contracts that they are entitled to them. This of course will depend on the company rules. Employees who were terminated because of “just causes” such as inefficiency, serious misconduct, and/or habitual neglect of duties will not receive separation pay. There are different kinds of authorized causes for termination and the amount employees are entitled to receive differ as well.

If employees were terminated because of retrenchment, closure or cessation of operation, or disease, employees are entitled at least to their basic salary for 1 month or one-half of their monthly basic salary for every year they have been with the company, whichever is higher.

Employees who were terminated because of the installation of any labor-saving device and redundancy on the other hand must receive at least the amount of their basic salary for 1 month or their salary for 1 month multiplied with the number of years they have been with the company, whichever is higher.

Keeping all these in mind will help not just your outgoing employees, but also your company. Knowing and providing what your employees are entitled to will give a harmonious work environment and experience, and will save you from negative feedbacks and backlash. Proper treatment of your employees will truly make your company a trusted and reliable place to be.