A departing employee has completed their last day of work with your PH business. Questions now arise in relation to how to compute the Back Pay of the departing employee!
Have they completed their client handovers? Have they returned their company laptop and keycard? Have they completed their exit interview?
How and when will they receive their Back Pay……?
In the Philippines, there are quite specific rules and requirements when it comes to paying a departing employee their Back Pay. In fact, there is a DOLE Labor Advisory that provides specific guidance for this very situation.
In this article, we outline the key items to consider from the perspective of payroll in the Philippines when an employee has left the company and their Back Pay is now falling due.
Back Pay v Final Pay
First things first!
It’s important to clarify that, in the Philippines, people generally use two primary terms to describe the same concept. When speaking about the last payment that an employee receives from an employer when departing the company, people will commonly refer to “Back Pay”, and slightly less commonly, to “Final Pay”.
So, for the purposes of this article, please note that the terms Back Pay and Final Pay will be used interchangeably but will effectively refer to the same thing!
Labor Advisory No. 06, Series of 2020
Labor Advisory No. 06, Series of 2020, entitled “Guidelines on the Payment of Final Pay and Issuance of Certificate of Employment”, was issued by DOLE in January 2020.
The purpose of this Advisory was to outline specific guidelines for employers when computing the value of Back Pay for departing employees as well as certain other requirements that must be completed at the same time.
Labor Advisory No. 06-20 merely considers and applies various laws and rules that already exist within the Labor Code of the Philippines and its Implementing Rules and Regulations. This DOLE Advisory just provides for a helpful and easy-to-reference guide on the topic of Back Pay.
First Off – What is Back Pay in the Philippines?
Back Pay relates to the total sum of wages, compensation or monetary benefits that are owed or outstanding to an employee from their employer at the point at which their employment ends – whatever the reason may be.
According to Labor Advisory No. 06-20, Back Pay in the Philippines may include any or all of the below:
- Salary or compensation that an employee has already earned (generally during their last few weeks of employment).
- Any Unused Service Incentive Leave that would be converted to cash (in accordance with Article 95 of the Labor Code).
- Unused sick leave, additional vacation leave or other forms of leave provided for by the employer. Note: Such payments would only apply if they are already provided for under a specific company policy, contract or a collective bargaining agreement.
- Separation Pay (only applicable in certain circumstances). The grounds for eligibility to receive Separation Pay in the Philippines are provided for under Articles 298 and 299 of the Labor Code.
- 13th Month Pay. If an employee leaves during a calendar year, they will still be entitled to a pro-rated 13th Month Pay. Check out our article for all you need to know about 13th Month Pay in the Philippines!
- Retirement Pay (if applicable).
- Reimbursement of excess withholding tax. This might arise where an employer has withheld too much tax on an employee’s compensation during the calendar year. You can also reference our recent explainer which outlines the key elements of Withholding Tax on Compensation in the Philippines!
- Any other form of compensation or benefits to which an employee might be entitled under their contract of employment, company policy or collective agreement.
When Does Back Pay Have to Be Paid?
In short, Back Pay must be released within 30 days from the last date of employment. This applies whether the employee was terminated by the employer or resigned themselves.
According to DOLE, the purpose for this timeframe is to balance the needs of the employer to manage properly and the rights (and needs!) of the employee to be paid!
HR Teams – Be Aware! There may be in place a company policy, employment contract or collective bargaining agreement which requires a shorter time period for the payment of Back Pay.
So make sure you know the internal practices or policies of your company when considering the time period for releasing Back Pay or Back Pay!
Certificate of Employment
Employees will regularly request a Certificate of Employment from their previous employer. This may be to show a prospective new employer or merely just for their own record-keeping purposes.
The Certificate of Employment should generally confirm that the employee did, in fact, work for the employer and the dates that the employment commenced and ended. A brief description of the role and responsibilities can also be included.
Whatever the reason, Labor Advisory No. 06-20 requires that an employer should issue a Certificate of Employment to an employee (or former employee) within 3 days from the date of a request.
Employers – Be Aware! This is not a very long timeline! So make sure that any such request is routed through to HR and actioned without delay!
What Documents and Information Will Be Issued With Back Pay?
BIR Form 2316 is a form that both employers and employees are required to sign and submit at the beginning of each year.
Form 2316 outlines the total value of compensation paid to each individual employee as well as the accumulated value of taxes withheld from that employee throughout the prior calendar year.
However, where an employee leaves the company during the calendar year, they will obviously not be around at the start of the following year to receive and sign BIR Form 2316 and return it to the employer.
As a result, BIR Form 2316 should be issued to any departing employee at the time when they receive their last salary payment. BIR Form 2316 is likely to be requested by any new employer during the Onboarding stage as it will help them to understand prior tax payments.
For more detail information, check out our Explainer on BIR Form 2316!
When an employee is leaving a business, there are a number of items to be considered.
Has the employee returned their laptop? Has their access to emails and files been turned off? Have clients been made aware that they are leaving? Is there a succession plan in place?
Sometimes items or tasks can fall through the cracks – but once the employee is gone, usually, that means they are actually gone!
So make sure to put in place robust processes and controls for departing employees to help ease any potential administrative, financial and operations headaches.
In particular, make sure you have a clear process in place for computing and applying Back Pay and that you are aware of your obligations!
Mandatory Government Contributions
One last but very key consideration is the completion of the mandatory contributions to each of the three government agencies here in the Philippines – SSS, Pag-IBIG and PhilHealth.
Before an employee leaves the business, an employer should review and validate that it is 100% up to date and compliant with the mandatory government contributions in relation to that departing employee.
This is extremely important, because once the employee leaves, it can sometimes be very difficult to rectify prior contributions that have either been missed or have not been paid for whatever reason. It can be difficult to liaise with the departed employee and obtain information or actions required to remedy or rectify outstanding or unpaid contributions!
So, employers – save yourself potential future difficulties by ensuring your government mandatories are up to date and complete for any departing or departed employees!
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Just one part of the CloudCfo Payroll Service includes supporting companies with computing the computations and complying with their statutory requirements for Back Pay in the Philippines.
If you are seeking to optimise your payroll function here in the Philippines, don’t hesitate to Contact Our Expert Team to understand how your entire payroll function can become more efficient Feel free to also reach via email to email@example.com.