Know your SME Law: The 13th-month pay

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Almost everyone knows that Filipino workers, with some exceptions, are entitled to a 13th month pay.  What is less known is that this monetary benefit is not provided by a legislative act but rather by a presidential decree, PD No. 851 dated December 16 1975, as amended by Memorandum Order No. 28 dated August 13, 1986.

PD 851 was issued by President Ferdinand Marcos during the tumultuous Martial Law years.  The amending MO 28 was proclaimed by President Cory Aquino after the peaceful people power revolution sent the Marcos family fleeing the country in February, 1986.

As issued by President Marcos, only employees receiving a basic salary of not more than P1,000 a month were entitled to 13th month pay. 

President Aquino’s order removed the ceiling of P1,000, thus expanding the coverage of the law to include all rank and file employees regardless of amount of salary they receive. 

Who are entitled?

This is what the law principally provides, verbatim:

All rank-and-file employees, regardless of their designation or employment status, and irrespective of the method by which their wages are paid, who have worked at least one month during the calendar year are entitled to 13th month pay.

Managerial employees are excluded from the coverage of the law.

According to the Labor Code, a managerial employee is one who is vested with powers of prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall discharge, assign or discipline employees, or to effectively recommend such managerial actions.

All employees not falling within this definition are considered rank-and-file employees.

How much are workers entitled to in 13th month pay?

The 13th month pay shall be in the amount not less than 1/12 of the total basic salary earned by the employee within the calendar year.

Only basic salary is included in the computation of 13th month pay. Allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary, such as the cash equivalent of unused vacation and sick leave credits, overtime, premium, night differential and holiday pay, and cost-of-living allowances, shall be excluded from the computation.

However, these salary-related benefits should be included as part of the basic salary in the computation of the 13th month pay if by individual or collective agreement, company practice or policy, the same are treated as part of the basic salary of the employees.

When to pay the 13th month benefit

The required 13th month pay shall be paid not later than December 24 of each year. An employer, however, may give to his employees one half of the required 13th month pay before the opening of the regular school year and the other half on before the 24th of December of every year. The frequency of payment of this monetary benefit may be the subject of agreement between the employer and the recognized/collective bargaining agent of the employees.

Who are excluded from the benefit?

The following are not entitled to the 13th month pay:

  • Managerial employees
  • Those covered under the civil service law (Note: Under Budget Circular No. 2010-1 issued on April 28, 2010, government officials and employees are entitled to a year-end bonus equivalent to one month of pay and a cash gift of P5,000.)
  • Those already receiving 13th month pay or its equivalent. Christmas bonus, mid-year bonus, cash bonuses and other payments amounting to not less than 1/12 of the basic salary are treated as equivalent of 13th month pay
  • Household helpers and persons in the personal service of another  (Update:  Republic Act 10361 or the Batas Kasambahay Law of 2012 mandates employers to pay their domestic helpers or kasambahay a 13th month benefit, as provided by law).
  • Those paid on purely commission, boundary, or task basis, and those who are paid fixed amount for performing specific work except those paid on a piece-rate basis.

What are special cases?

Commission employees. Employees paid on a purely commission basis are not entitled to 13th month pay. They are expressly excluded from the coverage of PD 851. However, employees paid on partly commission basis, i.e., those guaranteed with a fixed wage aside from the commission, are entitled to 13th month pay.

In the computation of the basic salary of employees paid partly on commission basis, two types of commission are distinguished:

  1. Commission as an incentives or encouragement to ensure productivity, i.e., productivity bonus; and
  2. Commission as a direct remuneration for service rendered.

Commission that take the form of an incentives or encouragement to ensure productivity, e.g., productivity bonus, does not form part of the basic salary. As such, it may be excluded from the computation of 13th month pay. Only the fixed or guaranteed wage is required to be included in the computation.

Basic salary = Fixed wage (commission is excluded)

On the other hand, commission that takes the form of a direct remuneration for services rendered should be included in the computation of the basic salary. That is, it should be added to the guaranteed wage of the employee in computing his “basic salary”.

Basic salary = Fixed wage + Commission

Employees with multiple employers. Employees with multiple employers are entitled to 13th month pay from all their private employers.

Thus, if an employee works in two or more private firms, he is entitled to the pay from both or all of them. If he is a government employee, but works part time in a private enterprise, he is entitled to 13th month pay from the private enterprise.

Private school teachers. Private school teachers are entitled to 13th month pay regardless of the numbers of months they work in a year, provided it is at least one month.

Resigned or separated employees. Employees who resigned or were separated during the calendar year shall be entitled to 13th month pay in proportion to the length of time he worked during the year, provided it is at least one month.

The payment may be demanded by the employee upon the cessation of employment.

Is it taxable?

The 13th month pay is not taxable as long as the total pay does not exceed Php 30,000. In excess of P30,000, only the differential amount (the amount in excess of the ceiling)  is taxed.


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