Illegal Dismissal: Understanding Backwages and Separation Pay in the Philippines

When an employee is illegally dismissed in the Philippines, the law provides remedies: reinstatement, backwages, and other benefits. But how are these computed, and do backwages stop once a labor arbiter orders separation pay? A 1996 Supreme Court ruling in Rasonable v. NLRC clarifies these questions, offering practical guidance for both employees and employers.

The Case of Danny Rasonable

Danny Rasonable, a bus company employee, was dismissed by Victory Liner, Inc. He filed a complaint for illegal dismissal. The Labor Arbiter ruled in his favor, awarding backwages, 13th month pay, separation pay, and attorney's fees. Both parties appealed. The NLRC increased the separation pay but deleted the attorney's fees award.

Rasonable then went to the Supreme Court, arguing he was entitled to backwages and other benefits beyond the date of the Labor Arbiter's decision—up to the finality of the judgment. The NLRC had ruled that once separation pay is awarded, the employment relationship ends, and backwages stop.

The Legal Issue

The central issue: Is an illegally dismissed employee entitled to backwages and other benefits from the date of dismissal until the finality of the decision, even when separation pay is awarded in lieu of reinstatement?

The Supreme Court's Ruling

The Supreme Court ruled in favor of Rasonable. It held that an award of separation pay does not automatically terminate employment. Until the employee actually receives the separation pay, the employer-employee relationship subsists. Therefore, the employee is entitled to backwages, 13th month pay, and other benefits from dismissal until the decision becomes final.

Backwages Under Article 279

Article 279 of the Labor Code, as amended by R.A. 6715, states that an illegally dismissed employee is entitled to reinstatement and "full backwages, inclusive of allowances, and to his other benefits or their monetary equivalent computed from the time his compensation was withheld from him up to the time of his actual reinstatement."

The Court explained that a mere order of reinstatement is different from actual restoration. Similarly, an award of separation pay without actual payment does not sever the employment relationship. The award could still be modified or delayed in execution.

Backwages and Separation Pay Can Coexist

The Court cited earlier rulings that there is no inconsistency in granting both backwages and separation pay. As explained in Lim v. NLRC, if an employee who worked only one year is sustained after three years of litigation, granting only separation pay would give him just one month's salary. It would be unjust to deny him three years of backwages for the period he could not work.

The Computation Rule

With R.A. 6715, the Court returned to the pre-Mercury Drug rule: full backwages shall be paid from dismissal until the finality of judgment if reinstatement is not ordered, less earnings the employee may have received elsewhere during that period. The computation should consider increases and other benefits, including 13th month pay, received by co-employees who were not dismissed. Separation pay is computed from the start of employment until the finality of the decision.

Practical Takeaways

• Backwages and separation pay are not mutually exclusive; an illegally dismissed employee can receive both.
• Backwages run from the date of dismissal until the decision becomes final, not just until the labor arbiter's ruling.
• Earnings from other employment during the litigation period may be deducted from backwages.
• Separation pay is computed from the start of employment until the finality of the decision.
• Attorney's fees may be awarded when an employee is forced to litigate to protect their rights.

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