Understanding Final Pay | Compute Last Pay in the Philippines

With the surge in layoffs in the current times, losing a job or transitioning from one company to another can be a challenging experience emotionally, mentally, legally, and financially. Amid these uncertainties, understanding financial rights has become more critical than ever. Whether you are facing termination or voluntary resignation in the Philippines, understanding your last pay is important to ensure you get all monetary benefits. The final pay, or the last pay in the Philippines, includes components like unused leave credits, unpaid earned salary, pro-rated 13th-month pay, and separation pay. This blog will guide you on computing the last pay, clarifying misconceptions, and understanding the legal framework regarding these computations.

Understanding Final Pay

Final pay is an employee's total amount upon separation from their employer. Understanding final pay is essential to ensure fair payment. Usually, employees need clarification on final pay and separation pay. Knowing the difference between them is essential, as they both serve different purposes and are calculated differently. Final pay includes all the earnings due to the employees until the last working day, whereas separation pay only applies to employees terminated or laid off under certain conditions. The following are the key components of the Final Pay:

Understanding Separation Pay

Separation pay is compensation given to employees who are laid off or terminated under authorized causes defined by the labor laws in the Philippines. This pay acts as a safety net for employees during transitions and helps cover financial needs while the employee is looking for a new job. The company becomes obligated to provide financial support to terminated employees.

Darwinbox ensures accurate computation of separation pay, minimizing errors and delays while complying with labor laws.

Who is Eligible for a Separation Pay?

As per Article 283 of the Philippine Labor Code, the following are the reasons under which employees are eligible for a separation pay:

• Redundancy: When the role is no longer required.
• Retrenchment: When employees are terminated to prevent losses.
• Closure of Business: When a business is closed down, it is not due to serious losses.
• Installation of Labor-Saving Devices: Labor-saving devices like automation tools due to reduced workforce needs.
• Illness or Disease: When the employment is prohibited by law.

These conditions ensure that the employees fairly receive severance pay in the Philippines. However, as outlined by DOLE, employees are not eligible for severance pay or separation pay if they are fired for serious misconduct or other causes.

How Darwinbox Helps Simplify Final Pay Computations

Darwinbox is a leading HR platform designed to simplify payroll, final pay, and separation pay processes. By automating complex calculations and ensuring compliance with Philippine labor laws, Darwinbox helps HR teams:

• Ensure accurate computations for unpaid salaries, pro-rated 13th-month pay, and leave encashments.
• Handle separation pay calculations for different termination scenarios.
• Streamline record-keeping for individual and collective agreements.
• Minimize delays and errors through robust payroll management features.

Whether you're an HR professional or a business owner, Darwinbox's user-friendly interface helps streamline the final pay process while ensuring compliance with labor regulations.

Explore how Darwinbox can transform your HR operations and ensure a smooth employee transition.

How is Separation Pay Calculated?

Separation pay computation depends on the reason for termination and the length of the employee's service:

Entire Month's Salary for Every Year of Service:

• This applies if the employment contract is terminated due to redundancy or closure, not severe losses.
• Employees either receive one month's salary for every year of service or one month, whichever is higher.

Half Month's Salary for Every Year of Service:

• This condition applies in case of illness or retrenchment.
• Employees receive either one month's salary or half a month's salary for every year served, whichever is higher.

Example

After working in the company for 4 years, John was laid off due to redundancy. He would be entitled to separation pay as follows:

Monthly Salary = ₱25,000

Separation pay = ₱25,000 x 4 = ₱1,00,000

Difference Between Final Pay and Separation Pay

Though both final pay and separation pay provide compensation upon leaving an employer, these two serve different purposes.

Legal Framework Governing Final Pay

Various laws and regulations govern final pay computation in the Philippines:

• Philippine Labor Code: It outlines the rights of employees regarding termination and final compensation.
• Collective Bargaining Agreements (CBA): Employees covered by a CBA may have specific provisions regarding financial incentive schemes around final pay that may be more favorable than those mentioned in the Labor Code.
• Labor Advisory: The Department of Labor and Employment (DOLE) provides guidance on labor practices and employee rights.

Individual or Collective Agreement

In the Philippines, both individual and collective agreements play an important role in defining the terms of employment regarding compensation, benefits, and conditions for final pay and separation pay. Individual or collective agreements play different roles and provide different benefits to employees.

Individual Agreement

The individual agreement is the contract between the employee and the employer that mentions the specific terms of employment. It may include work hours, salary, benefits, and other relevant conditions. These are important for unique arrangements that may not be covered by standard company policy or labor laws.

Collective Agreement

These are discussed and negotiated between employers and a group of employees. A collective agreement is usually represented by a union. These cover the terms that apply to all the employees within a unit. These agreements help create more favorable company policies for the employees.

How to Compute Last Pay

Determine Your Basic Monthly Salary

• Locate your basic monthly salary in the employment contract or company policy.
• Example: Sarah’s monthly salary is ₱30,000.

Calculate Unpaid Salary

• Count unpaid working days from the last paycheck to the termination date.
• Formula:
  Unpaid Salary = (Monthly Salary ÷ 30) × Number of Unpaid Days
• Example: Sarah has 10 unpaid days.
  Daily Rate = ₱30,000 ÷ 30 = ₱1,000
  Unpaid Salary = ₱1,000 × 10 = ₱10,000

Compute Pro-rated 13th Month Pay

• Formula:
  Pro-rated 13th Month Pay = (Monthly Salary × Months Worked) ÷ 12
• Example: Sarah worked 8 months.
  Pro-rated 13th Month Pay = (₱30,000 × 8) ÷ 12 = ₱20,000

Calculate Cash Conversion for Unused Leave Credits

• Formula:
  Cash Equivalent = (Monthly Salary ÷ 30) × Unused Leave Credits
• Example: Sarah has 5 unused leave days.
  Cash Conversion = ₱1,000 × 5 = ₱5,000

Determine Separation Pay (if applicable)

• Separation pay varies based on the reason for termination:
  • Redundancy or Closure:
    Separation Pay = Monthly Salary × Years Worked
  • Retrenchment:
    Separation Pay = (Monthly Salary ÷ 2) × Years Worked
• Example: Sarah worked 3 years and was terminated due to redundancy.
  Separation Pay = ₱30,000 × 3 = ₱90,000

Sum All Components

• Formula:
  Final Pay = Unpaid Salary + Pro-rated 13th Month Pay + Cash Equivalent + Separation Pay
• Example:
  Final Pay = ₱10,000 + ₱20,000 + ₱5,000 + ₱90,000 = ₱1,25,000

Common Misconceptions About Final Pay and Separation Pay

There are many misconceptions about final pay and separation pay in the Philippines. Clarifying these is important for a smooth transition and payout.

• Misconception 1: All employees receive separation pay regardless of termination reason.
  Reality: No, not all employees are entitled to separation pay. They are only eligible in specific circumstances, like retrenchment or redundancy. Employees fired due to gross misconduct do not qualify for separation pay.
• Misconception 2: Final pay includes all forms of bonuses.
  Reality: Although final pay in the Philippines has earned salaries and benefits like the 13th pay, it does not automatically include different bonuses unless mentioned in the company policy or contract.
• Misconception 3: Employers can withhold final pay indefinitely.
  Reality: According to the DOLE guidelines, employers must release the final pay within 30 days after separation unless there is a genuine reason. The unpaid amount in such cases is known as back pay. Back pay can arise in situations like illegal dismissal, wrongful termination, etc. For fair compensation of back pay, it is essential for employees to keep track of their work.

What Deductions Can Be Made from Final Pay?

Employers might deduct specific amounts from an employee's final pay under certain circumstances like:

• Authorized causes: Deductions authorized by the employee in writing, like advances, loan repayments, income tax, etc.
• Negligence or losses: If negligence or misconduct damages company property, deductions may apply, provided these are clearly documented.

Additional Entitlements Upon Leaving Employment

Employees must request the necessary documents along with the final pay. The following are the documents that must be collected:

1. BIR Form 2316: This will summarize the income and taxes withheld throughout the year.
2. Certificate of Employment: This document will verify the employment history with the company.
3. Release Waiver or Quitclaim: This document states that the employee will not make any further claims. Employers require this before they release the final compensation.

Understanding Income Tax Claim

Employees must understand how income tax applies to the final pay computation. Income tax is deducted from the employee's monthly salary and can affect the final pay amount.

How Income Tax Affects Final Pay

• Withholding Tax: Employers must withhold a portion of the employee's salary for income tax. Hence, when calculating the final pay, the employer deducts the applicable tax from the total earnings up to the termination date.
• Tax Refund: Employees who overpaid income tax during the year are eligible for a tax refund when they file their annual income tax return.
• BIR Form 2316: As mentioned before, requesting BIR Form 2316 from the employer upon separation is essential. This form summarizes the total compensation stipulated and taxes withheld during the year.

To summarize, understanding income tax claims for the final pay helps employees calculate deductions and enables them to take reasonable steps in managing finances efficiently during transitions.

Conclusion

Every employee needs to understand the final pay computation in the Philippines to ensure that they receive fair and proper financial support upon separation from employment. Moreover, being aware of the relevant company policies and labor laws acts as a safety net for the employees to receive their compensation without any added complications. Ensure that records are kept updated and maintain proper communication with HR to ensure a smooth transition while changing companies.

Companies must use efficient tools like Darwinbox to manage HR processes like final pay computation, severance pay, smooth employee transitions, etc. Our user-friendly platform helps HR operations ensure compliance with Philippine labor laws and end-to-end employee management.