Rachel Ann Asis Siñel Report on Social Legislation

20090202736

REPUBLIC ACT NO. 7641

December 9, 1992

RETIREMENT PAY LAW

AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS

AMENDED, OTHERWISE KNOWN AS THE LABOR CODE OF THE PHILIPPINES, BY
PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE SECTOR
EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE
ESTABLISHMENT

Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known
as the Labor Code of the Philippines, is hereby amended to read as follows:

"Art. 287. Retirement. - Any employee may be retired upon reaching the
retirement age established in the collective bargaining agreement or other
applicable employment contract.

"In case of retirement, the employee shall be entitled to receive such retirement
benefits as he may have earned under existing laws and any collective
bargaining agreement and other agreements: Provided, however, That an
employee's retirement benefits under any collective bargaining and other
agreements shall not be less than those provided herein.

"In the absence of a retirement plan or agreement providing for retirement

benefits of employees in the establishment, an employee upon reaching the
age of sixty (60) years or more, but not beyond sixty-five (65) years which is
hereby declared the compulsory retirement age, who has served at least five
(5) years in the said establishment, may retire and shall be entitled to
retirement pay equivalent to at least one-half (1/2) month salary for every
year of service, a fraction of at least six (6) months being considered as
one whole year.

"Unless the parties provide for broader inclusions, the term one-half (1/2)
month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th
month pay and the cash equivalent of not more than five (5) days of service
incentive leaves.

"Retail, service and agricultural establishments or operations employing

not more than (10) employees or workers are exempted from the coverage
of this provision.

"Violation of this provision is hereby declared unlawful and subject to the penal
provisions provided under Article 288 of this Code."

Sec. 2. Nothing in this Act shall deprive any employee of benefits to which he may be
entitled under existing laws or company policies or practices.

Sec. 3. This Act shall take effect fifteen (15) days after its complete publication in the
Official Gazette or in at least two (2) national newspapers of general circulation,
whichever comes earlier.

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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 resources 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 of Labor Code, which 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

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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.)

The previous articles stated the grounds where an employee can be entitled to a
separation pay upon the termination of his services to the employer. An employee may
also be terminated for just causes as enumerated below under Article 282 of the Labor
Code. Generally, employees falling under this article are not entitled to separation
pay.

Art. 282. Termination by employer. An employer may terminate an employment for

any of the following causes:

a. Serious misconduct or willful disobedience by the employee of the lawful orders of his
employer or representative in connection with his work;

b. Gross and habitual neglect by the employee of his duties;

c. Fraud or willful breach by the employee of the trust reposed in him by his employer or
duly authorized representative;

d. Commission of a crime or offense by the employee against the person of his employer
or any immediate member of his family or his duly authorized representatives; and

e. Other causes analogous to the foregoing.

Is separation pay taxable?

Under Section 32(B)(6)(b) of the 1997 Tax Code, any amount received by an official
or employee or by his heirs from the employer as a consequence of separation of
such official or employee from the service of the employer due to death, sickness
or other physical disability or for any cause beyond the control of the said official
or employee is exempt from taxes regardless of age or length of service. The
phrase “for any cause beyond the control of the said official or employee” in effect

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connotes involuntariness on the part of the official or employee. The separation from
the service of the official or employee must not be of his own making. (Sec 4(f).
Revenue Regulations No 1-68; Sec 2(b)(2), Rev. Regs. No 6-82, as amended).
Therefore, separation pay under the foregoing ruling shall not be subject to income tax
and consequently to withholding tax.

Notes:

The computation of separation pay shall be based on the latest salary rate, unless
the same was reduced by the employer to defeat the intention of the Labor Code,
in which case, the separation pay shall be based on the rate before the deduction.

The amount of the separation pay shall be multiplied with the number of years of
actual service. In computing the length of service, a fraction of at least six (6)
months is considered as one (1) whole year.

Generally, an employee who resigns is not entitled to separation pay except when it is
stipulated in his employment contract or collective bargaining agreement, or such is an
established practice or policy of the company. An employee resignation is presumed to be
voluntary.

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.

DEPARTMENT ORDER NO. 18 - 02

(Series of 2002)
.
.
RULES IMPLEMENTING ARTICLES 106 TO 109
OF THE LABOR CODE, AS AMENDED

Section 10. Effect of Termination of Contractual Employment. - In cases of termination of

employment prior to the expiration of the contract between the principal and the
contractor or subcontractor, the right of the contractual employee to separation pay or
other related benefits shall be governed by the applicable laws and jurisprudence on
termination of employment.

Where the termination results from the expiration of the contract between the principal
and the contractor or subcontractor, or from the completion of the phase of the job, work
or service for which the contractual employee is engaged, the latter shall not be entitled
to separation pay. However, this shall be without prejudice to completion bonuses or
other emoluments, including retirement pay as may be provided by law or in the contract
between the principal and the contractor or subcontractor.

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Voluntary Resignation and Separation Pay

Voluntary Resignation

Resignation is defined as the voluntary act of an employee who finds himself in a

situation where he believes that personal reasons cannot be sacrificed in favor of the
exigency of the service and he has no other choice but to disassociate himself from his
employment. (Virgen Shipping Corp. vs. Barraquio, G.R. No. 178127, April 16, 2009
citing Valdez vs. NLRC.)

The key is that resignation must be a “voluntary act”, and that the employee must have
knowingly and voluntarily dissociate himself from his employment for his own personal
reasons. It does not cover cases where the employee is forced to resign with the use of
threats, intimidation, coercion or manipulation, or where resignation is imposed as a
penalty for an offense.

The common practice of allowing an employee to resign, instead of terminating him for
just cause so as not to smear his employment record, also fall under the category of
voluntary resignation. (See J Marketing Corp. vs. Taran, G.R. No. 163924, June 28,
2009).

Separation Pay

An employee who voluntarily resigns from his work is not entitled to separation
pay. There is no provision in the Labor Code which grants separation pay to
voluntarily resigning employees.

Separation pay as a rule is paid only in those instances where the severance of
employment is due to factors beyond the control of the employee. Thus, in case of
retrenchment to prevent losses where the employee is forced to depart from the
company due to no fault on his part, separation pay is required by law to be paid to the
dismissed employee.

The case is totally different in case of voluntary resignation where severance of

employment is due to employee’s own initiative. The law does not oblige the employer to
give separation pay if the initiative to terminate employment comes from employee
himself.

However, by way of exceptions, there are at least two instances where an employee
who voluntarily resign is entitled to receive separation pay, as follows:

1. When payment of separation pay is stipulated in the employment contract

or Collective Bargaining Agreement (CBA, for companies with existing
bargaining agent or union);
2. When it is sanctioned by established employer practice or policy.

In Hinatuan Mining Corporation, et al. vs. NLRC, et al., G.R. No. 117394, February 21,
1997, the court ruled viz.:

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“It is well to note that there is no provision in the Labor Code which grants separation
pay to voluntarily resigning employees. Separation pay may be awarded only in cases
when the termination of employment is due to: (a) installation of labor saving devices,
(b) redundancy, (c) retrenchment, (d) closing or cessation of business operations, (e)
disease of an employee and his continued employment is prejudicial to himself or his co-
employees, or (f) when an employee is illegally dismissed but reinstatement is no longer
feasible. In fact, the rule is that an employee who voluntarily resigns from employment is
not entitled to separation pay, except when it is stipulated in the employment contract or
CBA, or it is sanctioned by established employer practice or policy.”

Special cases

In addition to the exceptions cited above, there are other cases where the court may
award separation pay to voluntarily resigning employee. For example, in Alfaro vs. CA,
G.R. No. 140812, August 28, 2001, the Court ordered the payment of separation pay
despite holding that the employee voluntarily resign from service, and although such
payment was not mandated under the CBA or employment contract. Same conclusion
was arrived at in J Marketing.

In both of the above cases, the employer agreed to give separation pay to the employee
as an incident of the latter’s resignation, but later on renege in the performance of such
commitment. The Court held that such practice should not be countenanced.

In Alfaro, the Court ruled as follows:

“Generally, separation pay need not be paid to an employee who voluntarily resigns.
However, an employer who agrees to expend such benefit as an incident of the
resignation should not be allowed to renege in the performance of such commitment.”