Illegal Dismissal: Computing Separation Pay and Backwages Using Gross Monthly Pay

When an employee is illegally dismissed, the law entitles them to separation pay and backwages. But how are these amounts computed? The Supreme Court's 2015 decision in Solidbank Corporation v. Lazaro provides crucial guidance: the computation must be based on the employee's gross monthly pay, which includes all allowances and benefits, not just the basic salary.

The Case of Danilo Lazaro

Danilo Lazaro was a Vice President at Solidbank Corporation who was verbally dismissed in January 1997, with the dismissal made retroactive to November 30, 1996. He had been implicated in a loan anomaly at a branch under his supervision, though the bank president had personally cleared him of any liability.

Lazaro filed a complaint for illegal dismissal. The Labor Arbiter dismissed the complaint, but the NLRC and Court of Appeals (CA) eventually ruled in his favor, awarding separation pay, backwages, and other benefits. Both parties appealed to the Supreme Court—Solidbank questioning the awards, and Lazaro arguing that his monthly pay should have been computed at P75,912.00 (including all benefits like car allowance, medicine allowance, and bonuses) rather than the P53,962.64 used by the lower courts.

The Issue: What Constitutes "Gross Monthly Pay"?

The central question was whether separation pay and backwages should be based on an employee's basic salary or their gross monthly pay—the full amount including all allowances and benefits.

The Supreme Court ruled that for illegally dismissed employees, separation pay and backwages must be computed using the gross monthly salary, inclusive of all allowances and benefits or their monetary equivalent. However, the Court emphasized that these amounts must be duly proved before they may be granted.

Since Lazaro failed to present sufficient evidence of his alleged additional benefits, the Court retained the uncontested amount of P53,962.64 as his gross monthly pay.

Key Rules on Computing Separation Pay and Backwages

The decision established several important principles:

Separation pay is computed only up to the time the employer ceased operations. Since Solidbank ceased operations in July 2000, Lazaro's separation pay was computed from his employment date (December 21, 1992) to the cessation of business (July 31, 2000)—a period of 7.64 years.

Backwages are likewise limited to the date of business cessation. Computing backwages beyond that date would be "unjust, confiscatory, and violative of the Constitution," as it would deprive the employer of property rights.

The Court also ruled that an illegally dismissed employee may be considered covered by a merger agreement even if they did not apply for it. Since an illegal dismissal is a void dismissal, Lazaro was considered employed until the merger took place in June 2000, entitling him to the merger's separation pay benefit of 150% of gross monthly pay.

Damages and Attorney's Fees

The Court deleted the awards of moral and exemplary damages and attorney's fees, ruling that these require proof of bad faith on the part of the employer. Illegal dismissal alone does not establish bad faith. Bad faith imports a "dishonest purpose or some moral obliquity and conscious doing of wrong"—a breach of a known duty through fraud or ill-will. Since there was no evidence that Lazaro's dismissal was tainted with bad faith, these awards were removed.

Practical Takeaways

• Gross monthly pay is the basis. When computing separation pay and backwages for illegal dismissal, use the employee's gross monthly pay—including all allowances, benefits, and bonuses—not just the basic salary.
• Evidence is essential. To claim additional benefits as part of gross monthly pay, the employee must present proof. Unsubstantiated claims will not be granted.
• Business cessation limits awards. Both separation pay and backwages are computed only up to the date the employer ceased operations, not beyond.
• Merger agreements may apply. An illegally dismissed employee may still be covered by a merger agreement's separation benefits, since the dismissal is void and employment is considered to continue.
• Damages need bad faith. Moral and exemplary damages and attorney's fees require proof of bad faith, not just a finding of illegal dismissal.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.