Separation Pay vs Final Pay: What’s the Difference?


Difference Between Final Pay And Separation Pay

Talking to outgoing employees about final and separation pay can be quite tricky.  A lot of people don’t know that there’s a difference between the two, so you’ll first have to identify which of them you should discuss. If an employee is entitled to both, you may have to distinguish one from the other. Doing so demands ample knowledge of the laws on salary and wages, something that we HR leaders are expected to have.

So how exactly is final pay different from separation pay? Let’s all quickly review what Book VI of the Philippine Labor Code says.

Separation pay

Employees will get a separation pay if they’ve been let go for valid reasons, or, more specifically, for “authorized causes.” Being dismissed for an authorized cause does NOT mean getting the ax for reasons like serious misconduct, inefficiency, or habitual neglect of duties. The law files these under “just causes,” which are based on employees’ faults and shortcomings. An employee who was terminated out of a just cause isn’t entitled to a separation pay. Authorized causes, on the other hand, hinges on employers’ prerogative to make decisions that will keep their business running.

Based on the labor code, an authorized cause can be any of the following.

  • Installation of any labor-saving device
  • Redundancy
  • Retrenchment
  • Closure or cessation of operation of the establishment the employee is working for
  • Suffering from a disease, i.e. one that makes the employment illegal or that’s harmful to the health of the employee and his or her colleagues

Employees who get dismissed for the first two authorized causes (installation of any labor-saving device and redundancy) are entitled to a separation pay that’s worth their monthly basic pay or their monthly basic pay multiplied by the number of years they’ve served the company, whichever is higher.

On the other hand, employees whose termination is based on any of the rest of the authorized causes (redundancy, retrenchment, closure or cessation of operation, disease) are entitled to a separation pay that’s worth their monthly basic salary or half of it, multiplied by the number of years they’ve worked with the company, whichever is higher.

One thing to note: employees who resign from their jobs are not entitled to a separation pay, unless their contracts or Collective Bargaining Agreements (CBAs) say they should.

Final pay

The final pay is basically the sum of all the wages that companies have to give their outgoing employees, regardless of whether the employees resigned or were terminated. It generally includes:

  • The last salary due (i.e. payment for the hours the employees clocked in since their last pay)
  • Cash conversions of unused leave credits (if the contract says that leaves are convertible to cash)
  • Pro-rated 13th month pay
  • Separation pay (if applicable)
  • Income tax claim for the excess taxes withheld
  • Other types of compensation stipulated in the employees’ contracts or CBAs

In the end, what matters is we know exactly what the employees we serve are entitled to. Our knowledge of the little details saves us and our companies from big and costly troubles, things like complaints, lawsuits, and negative publicity on social media.


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