How to Terminate an Employee in the Philippines: A Step by Step Guide

• Foreign and domestic employers must understand and comply with the Philippines’ termination procedures, especially concerning complex open-ended contract provisions.
• Employees may be dismissed for personal fault, illness, and business-related grounds.
• Wrongful termination of the contract may lead to significant financial consequences for the employer.

The dismissal of an employee in the Philippines is a sensitive stage and can only be implemented by a ‘just’ or ‘authorized’ cause, as defined under the Labor Code.

Trial periods and fixed-term contracts can be terminated without difficulty, whereas open-ended contracts are subject to increased protection. As a matter of principle, the Philippines Labor Code prohibits the termination of indefinite work contracts. Some exceptions are still restrictively provided and serve as authorized or just grounds for termination. In any case, the justifications given by the employer will be systematically examined carefully, with the procedure set out in this article.

The Philippines labor law is construed to favor the employee, and as a result, the rightful termination of an open-ended contract will be in most cases accompanied by compensation for the employee. The procedure for terminating a contract can be reduced to four steps.

Step 1: Identifying the type of employment contract

There are three types of contracts by which the employee may have been hired – trial periods, fixed-term contracts, and indefinite contracts.

Trial periods

The probationary or trial period allows for an assessment of the employee’s skills and competencies, prior to definitive hiring. When setting a trial period for an employee, the employer must respect a legal period that cannot exceed six months. However, apprenticeship contracts may provide for longer periods of time.

The trial period is explicitly stated by the employment contract.

Fixed-term contracts

A contract is deemed to be of limited duration when:

• A term agreed by both parties for a specific project or undertaking has been specified. The completion of the termination of the project or undertaking is mentioned as the term of the contract; and
• The duration of which is specified in the contract is seasonal. The employee is hired to work until the end of the season.

Open-ended contracts

A contract is deemed to be of indefinite duration when:

• The employee has been engaged to do work ordinarily necessary or desirable for the employer’s usual trade or business. This excludes specific works planned for specified periods of time.

As a result, a person will be considered as a permanent employee if they have worked for the employer for at least one year (intermittently or not), as long as the activity in which the employee works continues to exist.

Step 2: Identifying the appropriate justification for dismissal

Once the nature of the contract has been identified, one must refer to the specific justifications for each type of contract to support the dismissal.

Concerning trial periods

Terminating the trial period before the end agreed to by the parties is allowed when:

– The employee does not qualify for a permanent position in the company, considering reasonable standards of which the employer has informed the employee at the time of hire; or

– For any other valid reason.

It is important to bear in mind that an employee who continues to work after the end of their probationary period is deemed to have been hired for an indefinite period. The probationary period is automatically turned into an open-ended contract.

Concerning fixed-term and open-ended contracts

Article 282, 283, and 284 of the Labor Code provides an exhaustive list of grounds for termination of employment. The causes that may lead to dismissal will be either personal causes — linked to the employee — or business-related.

Dismissals on personal grounds

Reasons specifically linked to the employee may constitute valid reasons for the termination of the contract; it includes reasons for personal fault and for non-infringing facts. 

Therefore, the following causes are personal faults – called ‘just causes’ – that may constitute grounds for dismissal:

• Serious misconduct or willful disobedience by the employee of the lawful orders of their employer or representative in connection with their work;
• Gross and habitual neglect by the employee of their duties;
• Fraud or willful breach by the employee of the trust reposed to them by their employer or duly authorized representative;
• The commission of a crime or offense by the employee against the person of their employer or any immediate member of their family or their duly authorized representatives; or
• Similar facts to those set out above.

There are also personal but non-infringing grounds for dismissal, such as for an illness suffered by the employee, when:

• The illness prevents the continuation of work, as prohibited by the law; or
• The illness prevents the continuation of work because it would be detrimental to the health of the employee, or to the health of their colleagues.

If an illness is a cause for dismissal, the employer must obtain a medical certificate issued by a competent health authority. The certificate must specify the nature and the stage of the illness preventing them from continuing their duties within the company. Moreover, the disease must not be treatable within six months following the issue of the certificate, even with medical treatment, otherwise, the employee cannot be dismissed for illness.

Dismissals on business-related grounds

The employer can also terminate an employment contract for business-related reasons – called ‘authorized causes’ – especially when the company takes steps to safeguard its business.

The Philippines law provides for several acceptable cases:

• The termination follows the implementation of labor-saving or redundancy devices when the business incurs losses and wishes to curb them;
• The termination follows the implementation of retrenchment devices when the business incurs losses and wishes to curb them;
• The termination follows the wish to prevent the closure of the establishment or undertaking, or to prevent the cessation of operation; and
• The termination is justified by the closure of the establishment or undertaking, or the cessation of operations when it does not occur because of significant financial losses or financial reverses.

However, four points are to be remembered concerning business-related grounds.

First, an exception to the invocation of business-related grounds as stated by the law: if such ground is used to circumvent other provisions on dismissal and compensation, it will be considered as fraudulent. The employer is then exposed to sanctions.

Secondly, an employer who wishes to implement labor-saving, redundancy, or retrenchment options must inform the Regional Office of the Department of Labor and Employment (DOLE) with a notice delivered at least one month before the introduction of such measures.

Thirdly, retrenchment must be justified by the employer with proof of significant actual or imminent financial losses.

Lastly, the selection of employees to be dismissed is based on objective criteria, including but not limited to less preferred status, efficiency, seniority.

Penalties and compensation for wrongful termination of labor contract

The balance will always be in favor of the employee; therefore, the burden of proof is on the employer concerning the rightful justification of the termination. An employer who fails to justify the termination of an employment contract with an authorized or a just reason will be subject to several obligations, as a part of legal action.

If the dismissal is wrongful, the employee shall be entitled to be reinstated in the company, without losing the benefit of their seniority rights and privileges.

If the employee’s reintegration does not take place, the employee shall receive separation pay, equivalent to one month’s salary for each year of service.

The employer must pay back wages, meaning wages the employee should have received, from the wrongful termination to their reintegration, had they not been dismissed.

The employee shall be too entitled to the allowances and benefits they should have received, calculated over the period between the wrongful termination and its actual reintegration, had they not been dismissed.

In the end, the employer in bad faith can be required to pay additional damages.

Step 3: Notification of the employee and labor authorities

The employee must be informed of the dismissal procedure by means of a notification from the employer. The notification procedure differs slightly depending on the grounds on which the dismissal is based. In all cases, the procedure must be followed, or the employer will be liable to pay compensation to the employee.

Concerning probationary periods

Trial periods may be terminated by the employer by the provision of a notice to the employee, delivered within a reasonable time before the intended termination date.

Concerning dismissals for the employee’s personal fault

The dismissal notification procedure for the employee’s personal fault is divided into four steps.

1. The employer shall send a written notice of dismissal to the employee. This notice must state precisely what reasons are given to justify the dismissal;
2. The employee has a right of reply at a hearing with his employer, to respond and to fight the charges and evidence brought against them;
3. The employer must then notify the employee of his final decision, after considering all the circumstances and facts, while recalling the grounds leading to dismissal; and
4. The employee is deemed to be dismissed after receiving the final decision’s notice.

Concerning dismissals for illness and business-related grounds

The dismissal notification procedure for illness or business-related grounds is divided into three steps.

The employer shall send a written notice of dismissal to the employee. This notice must state precisely what reasons are given to justify the dismissal and shall be given to the employee at least 30 days before the intended date of dismissal.

At the same time, the employer must send a copy of this notice to the DOLE Regional Office.

The employee is then deemed to be dismissed on the date specified in the notice.

Step 4: Granting a separation pay according to the type of dismissal

When the dismissal is not due to the employee’s fault, separation pay is granted to the employee to compensate for the loss of employment. The separation pay is calculated according to the reason for the dismissal and the most advantageous option for the employee.

Concerning dismissals on personal illness

An employee dismissed for illness is entitled to a separation pay of at least one month’s salary per year worked for the employer or half a months’ salary for each year of service (up to a maximum of six half a month’s salary per year). The most advantageous compensation for the employee shall be chosen.

Concerning dismissals on business-related grounds

For each business-related ground, the separation pay following the termination is equivalent to one month’s salary per year worked for the employer or half a month’s salary for each year worked (up to a maximum of six half a month’s salary per year). The highest compensation shall be given.

Concerning dismissals on employee’s fault

The employee’s fault is a barrier to compensation; he shall not be entitled to separation pay.

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