A departing employee has completed their final day of work with your business. Questions now arise…
Have they completed their client handovers? Have they returned their company laptop and keycard? Have they completed their exit interview?
Have they received their Final Pay……?
In the Philippines, there are specific rules and requirements when it comes to paying a departing employee their Final Pay. In fact, there is a specific DOLE Labor Advisory that provides guidance for this very situation.
In this article, we outline the key items to consider from a finance and compliance perspective when an employee has left the company and their Final Pay has now become due.
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 Final 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 Final Pay.
First Off – What is Final Pay?
Final 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, Final Pay 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 recent 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 Final Pay Have to Be Paid?
In short, Final 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 Final Pay.
So make sure you know the internal practices or policies of your company when considering the time period for releasing Final 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!
Any Other Documentation To Be Issued With Final 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 final pay/salary. 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 Final Pay and that you are aware of your obligations!
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CloudCfo offers the highest quality in outsourced payroll services for companies in the Philippines.
Just one part of the CloudCfo Payroll Service includes supporting companies with computing the computations and complying with their statutory requirements for Final Pay.
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!