Everything You Should Know About 13th Month Pay in the Philippines

Ask any working Filipino what their favorite time of the year is, and they’ll likely say Christmas. That’s because it’s not just the season of merrymaking, but also when they receive their 13th-month pay.

This mandatory cash benefit in the Philippines was signed into law to help support employees’ financial needs during the holiday season. After all, it costs money to buy gifts and organize celebrations.

To know more about the 13th-month Pay benefit, including who it’s for, how it’s calculated, what the penalties for non-compliance are and more, continue reading this article.

The 13th-month pay is a statutory benefit employers in the private sector must provide to all rank-and-file employees. It was made into law through Presidential Decree No. 851 in 1975.

The Department of Labor and Employment (DOLE) is the governing body responsible for the overall legislation, administration, and implementation of labor and employment laws in the Philippines.

As such, DOLE is responsible for mandating the 13th-month pay benefit’s many aspects, including coverage, amount, time of payment, and more.

Every private sector employer is required by law to provide the 13th-month pay benefit. In fact, the Department of Labor and Employment (DOLE) makes no exemptions nor entertains any requests for deferment regarding this decree.

All rank-and-file employees who have rendered at least one month of service within a calendar year are eligible to receive their 13th-month pay. This applies to employees employed in a non-managerial role in the private sector, including those paid daily, weekly, and bi-monthly.

Although employers are not required by the law to provide 13th-month pay to managerial employees, some companies still choose to provide this benefit.

When it comes to when the 13th-month pay must be given, the law mandates that employers must disburse the 13th-month pay on or before December 24, and it is common practice for companies to provide this benefit starting around November. This date was chosen to help ensure employees have the financial resources to celebrate the season properly.

Failure to disburse the 13th-month pay on or before the December 24 deadline may lead to significant legal and financial repercussions for employers. In such scenarios, employees may file a complaint with the Department of Labor and Employment (DOLE) to investigate.

If the employer is found guilty of this violation, they may be subject to administrative penalties based on the severity of the case. DOLE may even require the employer to pay interest on the overdue amount.

​​Non-compliance with the requirement to distribute the 13th-month pay can also result in several legal repercussions for the employer, even criminal charges. The exact penalties depend on the details of the non-compliance and can include fines, imprisonment, or both.

In more severe cases, DOLE can recommend the suspension or cancellation of the employer’s business permits or licenses until the 13th-month pay has been fully paid.

The 13th-month pay is equivalent to 1/12th of the employee’s total basic salary earned within the calendar year.

“Basic salary” means all earnings paid by an employer to an employee. However, it does not include allowances and monetary benefits that are not part of the basic pay. These include cash benefits for unused sick or vacation leaves, overtime pay, premium pay, night shift differential, overtime pay, and more.

Please see the following for the computation:

As an example, an employee with a total basic annual salary of ₱180,000 will earn a 13th-month pay of:

₱180,000 (Annual Salary)  ÷ 12 (Months Worked) = ₱15,000 (13th-Month Pay)

However, for employees with less than 12 months of work at the time of calculation of the 13th-month pay, only the number of months they’ve been employed will be counted.

Here’s a sample computation for this scenario for someone who’s worked only half of the year:

Monthly Basic Pay x 6 months ÷ 12 = 13th-Month Pay

Using the same monthly salary as the above example, the 13th-month pay will be:

₱15,000 (Monthly Salary) x 6 (Months Employed) ÷ 12 = ₱7,500 (13th-Month Pay)

The answer to this depends on the amount an employee earns monthly. According to Republic Act 10963 (aka the TRAIN Law), any amount below the threshold of ₱90,000 is not taxable.

However, this limit covers not just the 13th-month pay, but other non taxable benefits received by an employee within the calendar year.

This means that if the total amount of the 13th-month pay and other combined cash bonuses exceeds ₱90,000, the excess amount will be subject to income tax.

For example, if an employee received a 13th-month pay of P80,000, and a separate bonus amounting to ₱40,000, (for a total amount of P120,000) the excess ₱30,000 above the ₱90,000 threshold would be subject to income tax.

All rank and file employees in the private sector are entitled to 13th-month pay. However, there are some considerations to note for the following cases:

Yes, even contractual employees, also known as independent contractors or freelancers who are hired for a timeframe or project and receive a fixed fee for their services, are entitled to 13th-month pay. The law mandates that all rank-and-file employees, regardless of employment status, are eligible to receive it.

This means that even those with fixed-term contracts, probationary contracts, project-based contracts, or any other contract-based employment are included. Simply put, as long as an employee has rendered at least a month of work in a calendar year, they are eligible for 13th-month pay.

Employees who have resigned, or have been terminated are still entitled to receive their 13th-month pay. In such scenarios, they will receive the prorated amount, which is based on the amount of months they’ve worked in the year prior to their resignation or termination.

Additionally, the 13th-month pay must be given as part of the employees final pay. This rule still applies even if an employee’s effective resignation or termination date falls after the December 24 deadline (though in practice, it’s often given on the 15th or earlier).

If employees do not receive their 13th-month pay, they can file a complaint with the Department of Labor and Employment (DOLE) or the National Labor Relations Commission (NLRC), who will then provide legal action and help recover unpaid wages.

Both governing bodies were established to protect employees’ labor rights, so it’s their duty to assist workers in receiving the mandated financial benefits they’re entitled to.

DOLE is quite strict on ensuring 13th-month pay is issued to workers. They even require companies to submit a compliance report through an online portal with a deadline of January 15th every year.

The report should include the following information:

Accurate and timely disbursal of 13th-month pay requires significant planning and financial management for any company. However, this costly business operation expense can be managed through these steps:

• Budget For It Throughout the Year: The 13th-month pay is a predictable expense in your company’s business cycle. Consider allocating a portion of the total expected payout each month to ensure sufficient funds for the 13th-month’s pay without causing financial strain. This helps distribute the financial burden evenly throughout the year, making it easier to meet the payout obligation when the time comes.
• Monitor Payroll Expenses Closely: Keep a close watch on the year’s payroll expenses to ensure accurate disbursal at the end of the year. Be aware of staff size increases and recent salary adjustments, as they all contribute to the total amount of the 13th-month pay.
• Consider Financial Tools and Services: Look into financial tools to help ensure compliance with this annual payout. For example, using a tool that can automate the payroll process that can lessen admin tasks and ensure correct computation. Additionally, consider outsourcing payroll to streamline the management of such payments.
• Communicate with Your Employees Clearly: Keep your employees informed about their 13th-month pay, so they know when to expect it. Additionally, ensure that new hires are briefed on how the 13th-month pay is calculated, so they understand the process from the start.
• Stay Updated on Legal Compliance Guidelines: Employers should stay up to date with new policies and for any related developments in labor laws and tax regulations, so they can avoid any potential violations. This can be done by using tools, or consulting with their legal teams.

Providing 13th-month pay is crucial as it boosts the morale and well-being of employees, contributing significantly to the enthusiasm of the Filipino workforce.

If you need help with your 13th-month pay disbursal, consider using Sprout’s payroll management platform. It’s easy to use and access, while reducing your payroll processing time significantly. Best of all, it ensures complete government compliance with regards to employee benefits.

Sprout also offers Payroll Professional Services (PPS). By offloading payroll tasks to certified professionals, you can focus more on growing your business while ensuring payroll accuracy and compliance. PPS not only simplifies your business processes but also supports operational accounting needs.

Schedule a consultation today, or visit our blog for more payroll-related articles and tips.