How is an employee’s severance pay computed in the Philippines?

In the Philippines, retrenchment is a legal process where an employer reduces the workforce to prevent further business losses. The Labor Code of the Philippines allows companies to retrench employees under specific circumstances, such as economic downturns or financial instability. However, the law ensures that retrenched employees are compensated fairly.

Legal Grounds for Retrenchment

Retrenchment is a valid exercise of management prerogative but must comply with legal requirements. Under Article 298 of the Labor Code, for retrenchment to be valid, it must be based on legitimate reasons like economic losses, operational restructuring, or technological advancements. Additionally, retrenchment must be carried out in good faith and without discrimination.

Notice Requirement

The employer is required to provide at least 30 days' written notice to both the affected employee and the Department of Labor and Employment (DOLE) before the retrenchment takes effect. Failure to provide the required notice may lead to legal complications.

Severance Pay or Separation Pay

Employees who are retrenched are entitled to receive separation pay, which is intended to provide financial relief during the transition period. The Labor Code mandates that the separation pay be equivalent to one month’s salary or at least one-half month’s salary for every year of service, whichever is higher.

For example:

If an employee has worked for five years and earns ₱15,000 monthly, the computation for their separation pay would be:
- Half-month salary for every year of service: ₱15,000 ÷ 2 = ₱7,500
- Total separation pay: ₱7,500 × 5 years = ₱37,500

However, if the computed amount is less than one month’s salary, the employee must receive at least one month’s salary as severance pay. In this case, the employee would receive ₱37,500 as their separation pay, since it exceeds their one-month salary of ₱15,000.

Additional Benefits

In addition to separation pay, retrenched employees may be entitled to other benefits such as:

Pro-rated 13th-month pay for the current year
Unused leave credits
Any other benefits stipulated in the employee's contract or company policy

Legal Recourse for Wrongful Retrenchment

If an employee believes that their retrenchment was not justified or that they did not receive adequate compensation, they may file a complaint with DOLE or the National Labor Relations Commission (NLRC). Retrenched employees have the right to seek legal remedies if the process is not followed correctly or if they are unfairly treated.

In conclusion, retrenchment in the Philippines is a lawful measure that employers can take, but it must be done in compliance with labor laws. Employees should understand their rights, particularly in terms of the severance pay they are entitled to receive.