Philippines
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It’s that time of the year again for employers in the Philippines! The 13th Month Pay benefit is now falling due in the coming months and PH employers need to understand what the implications are for payroll computations and payroll compliance in the Philippines!
The implications of the 13th Month Pay benefit stretch far across various functions of the business. For example, the accounting, bookkeeping, HR and employee communications functions will all be involved in ensuring that the company is adhering to this specific payroll obligation.
Below, we have provided a short guide for employers in the Philippines in order to help them navigate their way through Q4 of 2022 and ensure compliance with their 13th Month Pay obligation to their employees!
Contents
What is 13th Month Pay in the Philippines?
Historically, the Government of the Philippines developed an initiative to support Filipinos and Filipino families throughout the Christmas period by making provision in law and legislation for a mandatory “13th Month Pay” benefit for employees of private companies in the Philippines.
The impact? Presidential Decree No. 851, S. 1975, entitled “Requiring All Employers to Pay their Employees a 13th-Month Pay” was a significant event for the labor laws of the Philippines and provided the basis for employees to receive an additional monetary benefit each year.
While the original legislation has been amended regularly since it was first introduced, the general and fundamental framework of that legislation remains in PH labor laws today.
So what exactly is 13th Month Pay?
In brief, the 13th Month Pay benefit in the Philippines is a statutory and mandatory benefit that employers are obliged to pay to rank-and-file employees in the Philippines on an annual basis.
To lay it out short and simple – covered employees are entitled to receive an additional compensation benefit that is equal to one-twelfth (1/12) of the employee’s salary during the same calendar year.
The 13th Month Pay benefit is just one mandatory payment that arises when computing payroll in the Philippines. For more information on other forms of payroll contributions and deductions, check out our article on the mandatory payroll deductions and contributions that employers in the Philippines need to consider.
Who is statutorily entitled to receive 13th Month Pay?
This important PH labor law benefit is applied on an extremely wide basis for employees.
All rank-and-file employees in the Philippines, who have worked for at least one month during the relevant calendar year, are statutorily entitled to be paid the 13th Month Pay benefit from their employer.
What do you mean by rank-and-file employee?
First off, it will be clear that this category of employee differs from a managerial employee. A managerial employee is generally an employee who fills a role that empowers them to implement management policies and perform functions in their own managerial capacity (e.g. lay-off, hire, transfer, suspend, assign or discipline).
Employees that do not fall within the definition of a managerial employee will, generally, fall within the category of a rank-and-file employee in the Philippines for the purposes of the 13th Month Pay benefit.
When Must the 13th Month Benefit Be Paid?
Labor law is quite clear and prescriptive when it comes to when the 13th Month Pay benefit must be administered.
In short, PH employers must disburse the 13th Month Pay benefit to all relevant employees on or before the 24th of December every year – just in time for Christmas!
It is common for PH employers to pay the 13th Month Pay benefit well in advance of 24th December in order to clear the payment as early as possible.
Sometimes, employers will actually pay the 13th Month Pay benefit in equal instalments to their employees.
While payments can be made in instalments, in order to ensure 100% compliance, the full amount of the 13th Month Pay benefit must be paid before 24 December! So remember this key date!
13th-Month Pay v Bonus
A key point to remember is that the 13th Month Pay benefit is entirely different to any bonus or any other form of compensation scheme that a Philippine employer might offer or pay to their employees.
Discretionary company bonus schemes or allowances – even if it’s a Christmas bonus or a performance bonus that falls due around Christmas (or any other time of the year) or any other category bonus will generally not be imposed under labor laws. As such, PH employers should not confuse any other other form of bonus or compensation payment with the 13th Month Pay benefit (which is a statutory requirement).
For example, a Christmas Bonus payment is not mandatory – it is a discretionary payment that employers can opt to offer to employees if they wish.
In short – the 13th Month Pay benefit stands alone as a separate mandatory compensation payment due to all covered employees and should not be paid in lieu of or to supplement an existing bonus scheme as this would not be compliant.
Taxable or Non-Taxable?
There are certain non-taxable benefits that employers can consider when computing payroll in the Philippines. One, in particular, is the income tax exemption threshold.
Employees in the Philippines are entitled to avail of an income tax exemption in respect of benefits/allowances paid up to a total value of Ninety Thousand Pesos (₱90,000.00) on an annual basis.
What does this mean exactly from the perspective of 13th Month Pay?
If, for example, the value of the 13th Month Pay benefit combined with any other allowances or benefits that the employee receives from the employer during a calendar year, does not exceed ₱90,000, then the total value of those benefits/allowances will be exempt from income tax.
However, if the value of any such benefits or allowances, including the 13th Month Pay benefit, is actually in excess of ₱90,000, the employee will still receive the exemption in relation to the ₱90,000, but the amount that is in excess of that will be subject to income tax.
It will be the employer’s obligation to ensure that the taxable value is deducted at source from their employees’ compensation. Here is some additional information on computing withholding tax on compensation in the Philippines.
Computation of the 13th-Month Pay
It is relatively straightforward to compute the 13 Month Pay benefit.
The formula below shows how the benefit should be computed:
| Total basic salary earned during the year | ||
| = | 13th Month Pay | |
| 12 months |
“Basic salary” means all remunerations paid by an employer to an employee for services rendered.
The general rule is that allowances and benefits which are not integrated as part of the basic salary such as the Cost of Living Allowance (COLA), profit-sharing payments, cash equivalent of unused vacation and sick leave credits, overtime, premium and holiday pay are excluded from the computation.
However, if such allowances or benefits are included as part of the basic or regular salary (e.g. under the employment contract), they should be included in the computation of basic salary.
In this example, Mr Jay, an employee of AAA Company, receives a monthly basic salary of P14,000.00. His earnings for the current year are as follows:
| January | no absence | ₱14,000 |
| February | 1 day leave w/ pay | ₱14,000 |
| March | no absence | ₱14,000 |
| April | on leave w/o pay | ₱0.00 |
| May | no absence | ₱14,000 |
| June | no absence | ₱14,000 |
| July | no absence | ₱14,000 |
| August | 5 days leave w/ pay | ₱14,000 |
| September | no absence | ₱14,000 |
| October | no absence | ₱14,000 |
| November | no absence | ₱14,000 |
| December | no absence | ₱14,000 |
| Total Basic Salary Earned During the Year | ₱154,000 |
Mr Jay’s 13th Month Pay is computed as:
| ₱154,000.00 | ||
| = | ₱12,833.33 is the value of the 13th Month Pay benefit to be received by Mr Jay. | |
| 12 months |
13th Month Pay for Resigned or Terminated Employees
Employees that resign or are terminated by the employer during a calendar year rom are still entitled to receive a 13th Month Pay benefit, but on a pro-rated basis. This means that employees would only receive the 13th Month Pay benefit based on the number of months the employee was actually employed during the year.
It is important for employers and their HR teams in the Philippines to ensure to consider this cost when dealing with computing payroll and final pay for a departing employee.
Taking the above example again, let’s suppose that in this case, Mr Jay started employment on 1st January but his employment ended (either resigned or was terminated) at the end of August.
His earnings for the current year would be different and so would the value of the 13th Month Pay benefit.
See below computations for Mr. Jay in this scenario:
| January | no absence | ₱14,000 |
| February | 1 day leave w/ pay | ₱14,000 |
| March | no absence | ₱14,000 |
| April | no absence | ₱14,000 |
| May | no absence | ₱14,000 |
| June | no absence | ₱14,000 |
| July | no absence | ₱14,000 |
| August | 5 days leave w/ pay | ₱14,000 |
| Total Basic Salary Earned During the Year | ₱112,000 |
Mr Jay’s 13th Month Pay benefit in these circumstances would be computed on the basis of the 8 months only (i.e. 2/3 of what he would receive if he had worked the full calendar year):
| ₱14,000 x 8 | ||
| = | ₱9,333.33 is the amount of the 13th Month Pay benefit payable to Mr Jay. | |
| 12 months |
Employers’ Report of Compliance
To ensure that employers are indeed complying with their statutory obligations to pay their employees their 13th Month Pay, employers must submit a report each year to their nearest Department of Labour and Employment, or DOLE, Regional Office confirming that they have complied with the 13th Month Pay requirement.
Employers are required to submit the Compliance Report to DOLE no later than 15 January of the following year. The report on compliance should include the following information:
- Name of establishment
- Address
- Principal product or business
- Total employment
- Total number of workers benefited
- Amount granted per employee
- Total amount of benefits granted
- Name, position and telephone number of person providing the information
Accounting and Bookkeeping for 13th-Month Payments
PH employers should be aware that the 13th Month Pay benefit would not be included in the computation of an employee’s regular wage.
This means that the 13th Month Pay benefit should not be credited as part of the employee’s regular wage when computing overtime, premium pay, fringe benefits or premium contributions to any of the three mandatory government agencies – SSS, Pag-IBIG and PhilHealth.
However, from an accounting, bookkeeping and budgeting perspective, owners and founders should consider and include the 13th Month Pay benefit value for their employees as this is a cost that will arise for each employee at some point during the year (i.e. prior to 24 December).
If it is not included in the budget or financial forecasts, a business owner will have financial considerations if they release their payroll bill is going to increase significantly in Q4 and their payroll costs for the year are much higher than anticipated!
Employers should always consider the cost of 13th Month Pay when recruiting a new employee – employers need to consider the full cost to the business when hiring an employee!
Exempted Employers
Certain employers in the Philippines are exempted from having to pay the 13th Month Pay benefit to their employees.
This is as outlined below:
- Distressed employers with prior authorization from the Secretary of Labor to be qualified for exemption;
- The government and its political subdivisions, including government-owned and controlled corporations (GOCC), except those corporations operating essentially as private subsidiaries of the Government;
- Employers who are already paying their employees 13th Month Pay or equivalent;
- Employers of persons in the personal service of another in relation to such workers; and
- Employers of those who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing specific work, except those workers who are paid on piece-rate basis, in which case the employer shall grant such workers the required 13th Month Pay.
Expert Accounting, Bookkeeping and Payroll Services in the Philippines
CloudCfo supports companies in the Philippines across the range of payroll computation and payroll tax services.
We advise on existing payroll solutions, assist with the implementation of new payroll software and design processes to ensure your payroll function is fully efficient, optimised and integrated across your business.
We can help compute the correct mandatory contributions, deductions and withholding taxes and ensure that your business is achieving full compliance when it comes to payroll.
Visit us at cloudcfo.ph or contact our Specialist Payroll Team at enquire@cloudcfo.ph to discuss how we can help your business grow here in the Philippines!
