Disclaimer: The following discussion is provided for informational purposes only and does not constitute legal advice. For specific concerns regarding redundancy and separation pay disputes—including the inclusion or exclusion of allowances—in the Philippines, it is best to consult a licensed attorney or the Department of Labor and Employment (DOLE).

1. Overview of Redundancy Under Philippine Labor Law

Under Philippine law, redundancy is one of the authorized causes for terminating employment. It arises when a position is deemed excess or unnecessary in the organization’s manpower complement. Redundancy may result from factors such as reduced business volume, streamlining of operations, adoption of new technology, or reorganization.

Legal Basis

Labor Code of the Philippines, particularly Article 298 (formerly Article 283), permits an employer to terminate an employee based on authorized causes, including redundancy, retrenchment, closure of business, and disease.
Omnibus Rules Implementing the Labor Code provide further detail on the procedure and documentation required.

2. Requirements for a Valid Redundancy

The Supreme Court of the Philippines and the Department of Labor and Employment (DOLE) have consistently required employers to show good faith and fairness when implementing a redundancy. The elements commonly cited are:

Written Notice to the affected employees and to the DOLE at least 30 days prior to the intended date of termination.
Good Faith in Abolishing the Position. Employers must prove a genuine business necessity or economic reason for eliminating specific positions.
Fair and Reasonable Criteria for selecting who among the employees holding similar positions will be terminated. Criteria might include efficiency, seniority, or performance records.
Payment of Separation Pay as required by law.

Failure to comply with these requirements may render the redundancy invalid and expose the employer to potential illegal dismissal claims.

3. Separation Pay for Redundancy

Statutory Rate

For termination due to redundancy, the Labor Code requires employers to pay separation pay of at least one month’s pay or at least one month’s pay for every year of service, whichever is higher. Commonly, this is referred to as:

Separation Pay = One Month Pay or One Month Pay per Year of Service (whichever is higher)

Where the employee has served a fraction of a year, it is customary to use the pro-rated basis for that fraction.

What Counts as “Pay”?

A recurring issue in redundancy disputes is which components of compensation should be included in the “one month’s pay” used in the separation pay formula. Employers and employees often differ on whether various allowances, bonuses, or benefits should be added to the basic salary.

4. Allowance Inclusion or Exclusion in Redundancy Pay

General Rule on Inclusion

Generally, basic salary is the starting point for computing separation pay. However, Philippine jurisprudence has recognized situations where certain regular allowances are considered part of the employee’s salary if they are:

Regularly received by the employee (i.e., integrated into the wage structure);
Not contingent on specific events (e.g., purely discretionary bonuses, performance-based pay that is uncertain, or reimbursement of expenses are often excluded);
Granted to all employees uniformly, rather than limited to special circumstances.

Allowances that are necessary and routinely given to the employee to enable them to perform their job—such as fixed transportation allowances or fixed meal allowances that are part of regular wage—are typically included if they form part of the employee’s “regular wages.” On the other hand, purely discretionary allowances or those given irregularly (such as performance bonuses, incentives, or one-time grants) are more likely to be excluded.

Cost of Living Allowance (COLA)

In some cases, the Cost of Living Allowance (COLA) is treated separately from basic pay. However, depending on whether the COLA has been integrated into the employee’s salary structure, the Supreme Court has included COLA in the computation of overtime pay, holiday pay, and even separation pay in certain rulings.

Hence, when COLA is regularly paid as part of the monthly compensation and integrated by policy or by established practice, it may be included. If an employer can show that COLA is entirely distinct from basic wage and not intended to be part of the salary, it may be excluded from the computation of redundancy pay.

Hazard Pay, Night Shift Differential, and Other Special Allowances

Hazard Pay: If it is granted specifically for risky conditions inherent in a particular role (e.g., work in hazardous environments), it is often considered a special benefit rather than part of basic salary. Therefore, it is not typically added to the separation pay calculation unless the employer’s policy or collective bargaining agreement (CBA) expressly treats it as an integrated wage component.
Night Shift Differential (NSD): This is a statutory or contractual benefit for work done during nighttime hours. Since NSD is contingent on the actual hours worked, it is not regularly included in computing monthly basic pay for redundancy unless a practice or agreement clearly indicates otherwise.
Other Special/Contingent Allowances: If allowances are sporadic, performance-based, or reimbursements (e.g., representation allowance, per diem, travel reimbursement), they usually are excluded from redundancy pay computations.

5. Common Points of Dispute

Whether an Allowance is “Regular” or “Contingent.” Employees often argue that allowances have become de facto salary components through long-standing practice, while employers claim they are discretionary or contingent.
Existence of a Collective Bargaining Agreement (CBA). In unionized workplaces, the CBA may clearly specify which allowances are to be included in separation pay. If so, the CBA provisions generally prevail.
Contractual Provisions in Employment Agreements. Individual employment contracts or company policies may define how separation pay is computed. The principle of non-diminution of benefits applies if the employer’s policy historically integrated certain allowances into wage calculations.
Documentation of Good Faith and Fair Criteria. Even if the computation of pay is correct, a redundancy may still be invalid if it is not supported by a genuine business rationale or if procedural requirements (30-day notice to employee and DOLE) were not followed.

6. Relevant Jurisprudence and DOLE Guidelines

Philippine Supreme Court cases have addressed the issue of allowances in separation pay on multiple occasions. While not exhaustive, the guiding principles from these decisions include:

Integration Test: If the allowance has been habitually or consistently included in the employee’s pay and considered part of wages, it is integrated into the salary for purposes of computing benefits (including redundancy pay).
Nature of Allowance: If the allowance is meant to reimburse expenses or is purely discretionary, it is typically excluded.
Contract or CBA Stipulations: Where the employer and employee (or union) have express provisions about what constitutes “salary” for benefit computation, such stipulations often take precedence.

DOLE, in various Labor Advisories and Department Orders, has generally echoed these judicially established principles. Notably, no single Department Order comprehensively enumerates which allowances are automatically included or excluded; instead, DOLE and the courts will look at factual evidence and consistent company practice.

7. Handling Redundancy Pay Allowance Exclusion Disputes

7.1 Employer’s Perspective

Documentation: Maintain detailed records showing the nature of each allowance, how it is paid, and whether it is contingent or discretionary.
Clear Policy or Contract Provisions: Spell out which components form part of “basic wage” or “salary” and which are not included in separation pay.
Consultation with Employees and/or Union: Engage in dialogue to avoid ambiguity, especially in unionized settings, by clarifying inclusion or exclusion of allowances in writing.

7.2 Employee’s Perspective

Review Pay Slips and Company Policy: Determine if allowances are regularly received and integrated with the monthly pay.
Gather Evidence of Regularity: Show consistency or historical practice that the allowance was treated as a de facto salary component (e.g., if it was used as the basis for computing overtime or 13th-month pay).
Assert Rights in Case of Non-Compliance: If there is disagreement on the interpretation, employees may file a complaint at the National Labor Relations Commission (NLRC) or request labor arbiters to rule on the correct computation.

8. Practical Tips to Avoid or Resolve Disputes

Clarity in Documentation: The employment contract or company handbook should explicitly define “basic salary” and specify how each benefit or allowance is treated.
Consistency in Pay Practices: If an allowance is consistently included in an employee’s 13th-month pay or used as a basis for calculating overtime, the employer may find it challenging to exclude it during redundancy computations.
Compliance with Notice Requirements: Provide employees and DOLE the 30-day written notice. The absence of notice can lead to claims of illegal dismissal, even if the rationale for redundancy is valid.
Transparent Selection Criteria: Implement and document objective selection criteria—such as seniority or performance metrics—to reduce suspicion of targeted terminations masquerading as redundancies.
Open Communication Channels: Engage in early discussions with employees or their representatives to head off legal disputes and to negotiate a mutually acceptable separation package.

9. Conclusion

In the Philippines, redundancy is a recognized authorized cause for terminating employees, provided the employer observes substantive and procedural due process, including payment of separation pay. Disputes regarding the inclusion or exclusion of allowances hinge primarily on whether the allowances are integrated into the employee’s basic salary or are purely discretionary or contingent.

Employers must exercise good faith, use fair and objective criteria, and comply with statutory notice and separation pay requirements. Employees, for their part, should review company policies, pay slips, and contractual provisions to ascertain whether specific allowances should be included in the redundancy pay computation. Ultimately, clarity, consistency, and documented company practices—supported by established legal principles—are key to preventing and resolving redundancy pay allowance exclusion disputes.

Note: For complex or high-stakes redundancy situations, it is advisable to seek professional legal counsel or approach the DOLE for guidance.