Separation Pay

Summary

What is separation pay? What are the instances in which payment of separation pay is sanctioned? Distinguished separation pay from retirement pay?

Separation Pay Meaning Separation pay, as generally understood, refers to the amount due to the employee who has been terminated from service for causes authorized by law (not due to employees fault or wrong-doing) such as installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking. Separation pay is intended to provide the employee with the wherewithal during the period he is looking for another employment. (See Gabuay v. Oversea Paper Supply, G.R. No. 148837, August 13, 2004.) Five Instances when Separation Pay is due to Employee There are at least five instances in which an employee is entitled to payment of separation pay upon severance of employment: 1. When the termination of employment is due to causes authorized by law, such as installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking. This is provided under Art. 283, Labor Code of the Philippines. The provision states, viz.: Article 283. Closure of establishment and reduction of personnel. The employer may also terminate the employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this title, by serving a written notice on the workers and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due to the installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or

at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. 2. When the severance of employment is cause by a disease, particularly when the employee is found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as the health of his co-employees. This is found in Art. 284, ibid., the full text states, viz.: Article 284. Disease as ground for termination. An employer may terminate the services of an employee who has been found to be suffering from any disease and whose continued employment is prohibited by law or is prejudicial to his health as well as the health of his co-employees: Provided, That he is paid separation pay equivalent to at least one month salary or to one-half month salary for every year of service, whichever is greater, a fraction of at least six months being considered as one whole year. 3. When the termination from service of the employee has been declared illegal, but his reinstatement to his former position is no longer feasible for some valid reason, e.g., when reinstatement is rendered impossible due to subsequent closure of business, or when the relationship between employer and employee has become strained (doctrine of strained relations). (See Gabuay v. Oversea Paper Supply, G.R. No. 148837, August 13, 2004.) 4. In case of pre-termination of employment contract in job-contracting arrangement. (See Department Order 18-02, Rules Implementing Article 106 to 109 of the Labor Code.) 5. In exceptional cases, where separation pay is awarded as a measure of social or compassionate justice. Here, payment of separation pay may be ordered by the court even if the dismissal from service is found to have been for valid or just cause, i.e., even if the employee is found to have been at fault. (See PLDT vs. NLRC, No. L-80609, August 23, 1988.) Distinguished from Retirement Pay Separation pay should not be confused with retirement pay. Separation pay is the amount due to the employee where the cessation of employment is due to causes authorized by law (or for any of the other causes stated above). Retirement pay, on the other hand, is the amount to be paid to the employee who has reached the compulsory retirement age or who availed of voluntary retirement.

Redundancy Concept Redundancy is one of the authorized causes for termination of employment under Article 283 of the Labor Code of the Philippines. Redundancy exists where the services of an employee are in excess of what is reasonably demanded by the actual requirements of the enterprise. A position is redundant where it superfluous, and superfluity of a position or positions may be the outcome of a number of factors, such as over hiring of workers, decreased of volume business, or dropping of a particular product line or service activity previously manufactured or undertaken by the enterprise. In Wiltshire, the Court held that an employer has no legal obligation to keep on the payroll employees more than the number needed for the operation of the business. (See Wiltshire File Co., v. NLRC, 1991; Coats Manila Bay vs. Ortega, 2009) Adequate Proof of Redundancy It is the employers burden to show that redundancy exists. It is not enough for a company to merely declare that it has become overmanned. It must produce adequate proof of such redundancy to justify the dismissal of the affected employees (Asufrin vs. San Miguel Corporation, 2004). Evidence must be presented to substantiate redundancy such as but not limited to the new staffing pattern, feasibility studies/proposal, on the viability of the newly created positions, job description and the approval by the management of the restructuring (Panlilio vs. NLRC, 1997). Requirements of a Valid Redundancy Program The employer must comply with the following requisites to ensure the validity of the implementation of a redundancy program: 1. A written notice served on both the employees and the Department of Labor and Employment (DOLE) at least one month prior to the intended date of retrenchment as required by the Labor Code; 2. Payment of separation pay equivalent to at least one month pay or at least one month pay for every year of service, whichever is higher; 3. Good faith in abolishing the redundant positions; and 4. Fair and reasonable criteria in ascertaining what positions are to be declared redundant and accordingly abolished. (See Caltex vs. NLRC, 2007, ) Separation Pay

In case of termination due to redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. Proof of Losses Not Required Redundancy does not require the exhibition of proof of losses or imminent losses. In fact, of all the statutory grounds provided in Article 283 of the Labor Code, it is only retrenchment which requires proof of losses or possible losses as justification for termination of employment. (See Coats Manila Bay case.) Duplication of Work Not Necessary. Redundancy does not necessarily refer to duplication of work. That no other person was holding the same position prior to the termination of the employees services does not mean that his position had not become redundant. Indeed, in any well-organized business enterprise, it would be surprising to find duplication of work and two or more people doing the work of one person. (See Wiltshire case.) In redundancy, what is looked into is the position itself, the nature of the services performed by the employee and the necessity of such position. (Tierra International Construction Corp. vs. NLRC, 1992) Redundancy Arising from Contracting Out of Labor In several cases, the court upheld the dismissal on ground of redundancy even when the employer contracts out the services of another company to perform the same task as the redundant positions. Contracting out of labor has been held as a valid management prerogative. (See De Ocampo vs. NLRC, 1992; Serrano vs. NLRC, 2000.) Cases 1. The employer was engaged in the production of wooden doors and furniture. The complainants who were hired as mechanics were terminated by the employer when their positions were abolished, and contracted out to Gemac Machineries. The dismissal is proper. In contracting the services of Gemac, which the company has the right to do, the services rendered by the mechanics became redundant and superfluous, and therefore properly terminable. (De Ocampo vs. NLRC, G.R. No. 101539 September 4, 1992.) 2. As a result of the phasing-out of the companys security section, and contracting out the same with an independent contractor, the services of the complainant as head of the security checkers section, was terminated. The termination was for an authorized cause, i.e., redundancy. (Serrano vs. NLRC, G.R. No. 117040. January 27, 2000.)

Retrenchment Concept Retrenchment is an economic ground to reduce the number of employees. It is the reduction of personnel for the purpose of cutting down on costs of operations in terms of salaries and wages resorted to by an employer because of losses in operation of a business occasioned by lack of work and considerable reduction in the volume of business (See Alabang Country Club vs. NLRC, G.R. No. 157611, August 9, 2005 ). Retrenchment is sometimes also referred to as downsizing. It is aimed at saving a financially ailing business establishment from eventually collapsing. Basic Requisites of Valid Retrenchment To justify retrenchment, the following requisites must be complied with: 1. The retrenchment must be necessary to prevent business losses; and 2. The business losses sought to be prevented are serious, actual and real. Meaning of To Prevent Losses The phrase to prevent losses means that retrenchment is authorized to be undertaken by the employer sometime before the losses anticipated are actually sustained or realized. Actual losses need not set in prior to retrenchment. (Lopez Sugar Corporation vs. Federation of Free Workers, G.R. Nos. 75700-01, August 30, 1990.) Meaning of Serious, Actual and Real In order to be justified, the termination of employment by reason of retrenchment must be due to business losses or reverses which are serious, actual and real. Not every loss incurred or expected to be incurred by the employer will justify retrenchment, since, in the nature of things, the possibility of incurring losses is constantly present, in greater or lesser degree, in carrying on the business operations. (See Edge Apparel Inc. vs. NLRC, G.R. No. 121314, February 12, 1998 .) The following are the general standards to determine whether the business losses sought to be prevented are serious, actual and real, and sufficient to justify retrenchment of employees: 1. The losses expected should be substantial and not merely de minimis in extent; 2. The losses apprehended must be reasonably imminent; 3. The alleged losses if already realized, and the expected imminent losses sought to be forestalled, must be proven by sufficient and convincing evidence. (See Lopez Sugar Corporation case.)

Separation Pay In case of retrenchment to prevent losses, the separation pay shall be equivalent to one month pay or at least one-half month pay for every year of service, whichever is higher. A fraction of at least six months shall be considered one whole year. (Article 283, LC.) Temporary Retrenchment or Lay-Off Article 283 of the Labor Code of the Philippines speaks only of permanent retrenchment or lay-off. There is no specific provision in the Labor Code that governs temporary retrenchment, particularly the requisites for its implementation and maximum duration. To remedy this situation, the Court has applied by analogy Art. 286 to set a specific period that employees may remain temporarily laid, or, sometimes referred to as in floating status. (See Sebuguero vs. NLRC, G.R. No. 115394 September 27, 1995.) Article 286 provides: Article 286. When employment not deemed terminated. The bonafide suspension of the operation of a business or undertaking for a period not exceeding six months, or the fulfillment by the employee of a military or civic duty shall not terminate employment. In all such cases, the employer shall reinstate the employee to his former position without loss of seniority rights if he indicates his desire to resume his work not later than one month from the resumption of operations of his employer or from his relief from the military or civic duty. Applying the above provision in the case of temporary retrenchment, an employee who has been temporarily laid-off should be recalled or otherwise permanently retrenched after the lapse of six months. Failing this would be tantamount to illegal dismissal.

Installation of Labor-Saving Devices

Installation of Labor-Saving Devices Concept The law authorizes an employer to terminate the employment of any employee due to the installation of labor saving devices. The installation of these devices is a management prerogative, and the courts will not interfere with its exercise in the absence of abuse of discretion, arbitrariness, or maliciousness on the part of management. (See Magnolia Dairy Products Corporation vs. NLRC, G.R. No. 114952, January 29, 1996.) The installation of labor-saving devices contemplates the installation of machinery to effect economy and efficiency in the method of production. Distinguished from Retrenchment The institution of new methods or more efficient machinery, or of automation is technically a ground for termination of employment by reason of installation of laborsaving devices but where the introduction of these methods is resorted to not merely to effect greater efficiency in the operations of the business but principally because of serious business reverses and to avert further losses, the device could then verily be considered one of retrenchment. (Edge Apparel vs. NLRC, G.R. No. 121314, February 12, 1998; See also Retrenchment.) Separation Pay In case of termination due to the installation of labor saving devices, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one month pay or to at least one month pay for every year of service, whichever is higher. (Article 283, Labor Code.) Case 1. An employee was terminated after the company instituted a modernization program. Under said program, the operations of the quality control unit, to which said employee was assigned, were all automated. The dismissal was upheld as valid. (Agustilo vs. Court of Appeals, G.R. No. 142875, September 7, 2001.)

Termination Process (Authorized Causes)

Requirements of Procedural Due Processs. For valid termination based on authorized causes such as installation of labor-saving devices, redundancy, retrenchment to prevent losses, and closure or cessation of operation, the employer must serve written notice to the individual employee concerned and to the appropriate Regional Office of DOLE at least 30 days before the effectivity of the termination. Also, the employer must observe the following requirements as part of the process of termination: 1. Good faith in the termination of employee, i.e., the implementation of the company program resulting to termination of employees must be for a valid cause and not merely a tool to circumvent the law on employees security of tenure; 2. The employer must adopt a fair and reasonable criteria in the selection of employee to be dismissed; and, 3. The employee must be paid separation pay not less than the amount fixed by law. Criteria in Selection of Employee to be Dismissed. In the selection of the employee to be dismissed, the employer must adopt of a fair and reasonable criteria which must be applied in good faith, such as: 1. Less preferred status of employee; 2. Efficiency rating; and 3. Seniority. Payment of Separation Pay. In termination of employment due to authorized causes, the employer is required to give separation pay to the employee concerned. The amount of separation pay depends on the specified cause of termination. 1. In case of termination due to the installation of labor-saving devices or redundancy at least one month pay or to at least one month pay for every year of service, whichever is higher. 2. In case of (a) retrenchment to prevent losses and (b) closures not due to serious financial reverses one month pay or at least one-half month pay for every year of service, whichever is higher. 3. No separation pay for closure due to serious business losses. 4. No separation pay is required when the closure of business is due to serious business losses or financial reverses. (North Davao Mining, 1996.)

5. When closure of the business establishment is forced upon the employer and ultimately for the benefit of the employees. The closure contemplated under Article 283 of the Labor Code is a unilateral and voluntary act on the part of the employer to close the business establishment. (National Federation of Labor vs. NLRC, 2000.) Effects of Termination. 1. If the termination is for authorized cause and the employee is given 30-day prior notice, the dismissal is valid. 2. If the termination is for authorized cause but the employee was not given 30-day prior notice, the dismissal is valid but the employer may be ordered to pay nominal damages to dismissed employee. In Jaka Food Processing vs. Pacot, 2005, the amount of nominal damages is P50,000.00. 3. If the dismissal is not for a valid authorized cause, the dismissal is illegal, whether or not there is 30-day prior notice. Consequently the employee shall be entitled to reinstatement and backwages, and damages if warranted.