10 things you should know about 13th month

 

Excited to receive your 13th-month pay? I am too. But on the HR and Payroll side, it can be a headache to compute and prepare. That’s why your employer some times releases your 13th-month as early as the 15th or 30th of November to comply with the payout deadline.

Here’s everything you need to know about your 13th-month pay:

1. It is a monetary benefit mandated by law.

The 13th month pay is defined as a monetary benefit based of an employee’s basic salary. This monetary benefit is a core general labor standard, with the Department of Labor and Employment (DOLE) as the agency responsible to oversee any compromises in fulfilling the mandated payout.

2. Your 13th month pay is different from your Christmas bonus.

The 13th month pay is considered a bonus mandated by law, while the Christmas bonus is a separate benefit or payout and it depends on your employer whether they’ll dole it out or not. Companies in the Philippines usually give out Christmas bonus due to team or company-wide performance or revenue-sharing.

Unlike the 13th month pay, your Christmas bonus could come in other forms. It could be cash, gift certificate, a Christmas basket, canned goods, extra leaves that could be convertible to cash if unused, or anything of value.

3. Your 13th month pay should be given to you no later than December 24 of every year.

While the law does not stop employers from giving out 13th month pay early, the law requires employers to give the mandatory benefit at least before Christmas day. According to Presidential Decree 851, the main reason why the 13th month was established as a mandatory benefit is for the Philippine labor force to “properly celebrate” the yuletide season and the New Year, and have the opportunity to invest or save.

The great thing about the Philippine Labor Code is that it provides protection from employers who do not comply with the 13th month pay provision. Aside from releasing the 13th month pay, employers are also required to submit a report of compliance to any DOLE branch on or before January 15 the succeeding year. Should your employer fail to pay your 13th month pay, you may file a money claim case with any DOLE branch.

4. Your 13th month pay may not be equivalent to your monthly basic salary.

According to the law, your basic salary should only be earnings or primary payment paid to an employee for services rendered. On the other hand, basic salary does not include:

  • cash equivalent of unused vacation and sick leave credits;
  • cost-of-living-allowances (COLA) granted pursuant to President Decree No. 525 or Letter of Instructions no. 174;
  • overtime;
  • premium;
  • night differential, and
  • holiday pay.

Your 13th month pay should be not less than 1/12 of the total basic salary you earned within the calendar year. This means your 13th month pay is monthly basic compensation computed pro-rata according to the number of months (or days) you have worked in your company.

Example:
Juan earns a basic salary at Php15,000 per month at company ABC. He has been working for 10 months in the company. As such, Juan stands to receive:

(Php15,000 X 10 months) / 12= Php12,500.00

If Juan has any absences or lates during the month, the pay equivalent of those should be deducted from basic salary first before determining the 13th month pay.

5. You may not be able to receive your 13th month pay.

According to the law, the following are not allowed to receive 13th month pay:

(b) Employers already paying their employees 13th month pay or more in a calendar year or its equivalent at the time of this issuance;
(c) Persons in the personal service of another in relation to such workers; and
(d) Employers who are paid on purely commission, boundary, or task basis, and those who are paid a fixed amount for performing a specific work, irrespective of the time consumed in the performance thereof, except where the workers are paid on piece-rate basis in which case the employer shall grant the required 13th month pay to such workers.

Labor Secretary Silvestre Bello III noted in an interview a rank-and-file employee nonetheless should still receive 13th month pay regardless of the way how his or her wages are paid or the nature of his or her employment as long as they have worked for at least one month. This is also stressed in the DOLE handbook.

6. You can actually view how much you stand to redeem your 13th month pay on your payslip.

Depending on how the payment has been set up, the 13th month redeemable is taken from 1/12th of your monthly basic pay worked. The figure from the previous month is them added to next month’s redeemable, and the next month and so on.

For this example, the employer used base pay to calculate an employee’s 13th month pay redeemable:

First Payslip PH 13th Month Pay

On the second payslip, the redeemable is then added to the computed redeemable for the second month, as shown here:

second slip PH 13th month pay

Should your employer use the gross pay to determine your 13th month pay, the gross pay will include allowances and payments payable to gross and then will be divided by 12. This is actually great, because your employer will be giving you a portion of the benefits or any multiplier on top of your basic pay for your 13th month pay.

Your payslip will also show when you should expect your 13th month pay. In this case, the employee from this example will receive the full 13th month on December 15.

7. Maternity leave benefit are not included in the computation of 13th month pay.

Maternity leave benefit is a benefit employed women claim as a member of SSS (Social Security Service). Even if you receive money during your maternity leave, you technically have not rendered work and earned your keep during your maternity leave. As such, Payroll will not consider the number of days on maternity leave as a factor to compute your 13th month pay.

8. Your 13th month pay is not subject to tax, except for some people.

Republic Act 10653 states that gross benefits not more than Php82,000 received by employees and officials of both public and private companies or entities will not be subject to tax. If you’re a web developer or someone in a managerial or director position in your company, this provision might not apply to you.

9. Resigned or terminated employees can still get their 13th month pay.

The Philippine Labor Code is pro-employee, and has provisions that cover those who resigned voluntarily or whose services has been terminated any time before the 13 month payment. Computation for the benefit is still the same, but it will be in proportion to the number of days a resigned employee has rendered.

10. You may want to check with Payroll about upcoming tax deficits.

Yes, this is a thing. You may have heard of tax refund, but you might also incur a tax payable if the tax withheld is less than the tax due on your annual gross compensation income. This is possible because of adjustments to your withholding tax. Payroll will usually have an updated Withholding Tax Tables on hand from the Bureau of Internal Revenue and could help you determine if there is a tax deficit ahead of the end of year computation.

Any tax deficiency will usually be deducted on the first or second pay of the succeeding year. The employer is required by law to give a tax refund or secure the deficit not later than January 25. If you already have plans for your 13th month, it’s best to check first if you have a tax deficit to avoid getting a significant deduction on the month where you’re probably broke because of the holiday celebration.

Final Thoughts

Your 13th-month pay may be a great addition to your income. To be able to maximize your expected receivable, avoid coming in late or not coming in to work. If you have to be absent for work, take advantage of your company’s leave credits or emergency leave policy to ensure you have a perfect attendance. It’s also great to pay attention to other aspects of your payslip, like your withholding tax, to anticipate any tax deficits and use your 13th month pay to cover this deductions in your first or second paycheck of the succeeding year.

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When building PayrollHero we knew the complexity of Philippines’ payroll intimately. Our co-founders Mike and Steve were running a BPO in the Philippines at the time and were experiencing the pains of running payroll first hand.

They asked their network of business owners who operated businesses in the Philippines how they dealt with payroll. It turned out that they experienced the same problems!

Mike and Steve knew there had to be a better solution. So, having a background in building successful software companies, they decided to build an internal tool to solve the problems they were experiencing.

A few months later, the same people they’d reached out to before started asking how they had solved their payroll problems. Our founders showed the new tool to their friends and the reactions were overwhelming positive. Thus PayrollHero was born.

So we built PayrollHero from the ground up to deal with the complexities of DOLE, and it’s unique rules. We understand that different businesses have different approaches to generating payroll, and our software has a level of customizability that is rivalled by no other to deal with this.

“Not every business needs complex payroll software … our new plan provides a very simple solution at a very affordable price.”

But, we also realize that not every business needs complex payroll software. So we have spent a considerable amount of time creating a simplified version of our application.

The new plan is ideally suited for

  • If you require your employees to clock in/out for work
  • The attendance of your employees directly effects their payroll
  • You follow DOLE for managerial and rank and file employees
  • Currently waste time transcoding biometric data or manual time cards for payroll processing
  • You would like a centralized database for tracking employee’s personal information

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HR/Payroll Or A Business Owner? Here’s A Guide To Prepare For SSS Contribution Hike

The 1.5% SSS contribution hike to 12.5% on employee’s monthly salary is expected to be implemented in January 2018. The move to increase the contribution was largely credited to President Rodrigo Duterte approving the two-stage monthly pension increase of Php2,000 to retirees. Since March, each SSS pensioner gets an additional Php1,000 on top of their previous monthly receivable from the agency. To cover the additional pensioner money, Duterte also approved the plan to increase member contribution rate of 11 percent by adjusting the yearly by 1.5 percent until it reaches 17 percent by 2020.

While this is a great thing for paying SSS members, the move is just one of the many financial and payroll adjustments needed to be done correctly by entrepreneurs and HR staff.

Employer’s Share

The current SSS contribution, which is 11 percent of the employee’s salary, is being shared by the employer (7.37 percent) and employee (3.63 percent). The SSS usually releases an updated contribution table to avoid confusion and overpayment/underpayment.

sss contribution table 2017

SSS Current 2017 Employee-Employer Share Table from SSSguides.com.

Early this year, SSS Chairman Amado Valdez clarified in an interview that while the current setup suggests a 70:30 employer-employee share, it does not mean that the same rate will be used in the upcoming increases.

There is little employer’s feedback publically available regarding the increase, but a trade association chair indicated that the increase could make a significant impact on operational costs. Employers Confederation of the Philippines chairman emeritus Donald Dee expressed in a statement that while the association supports the intention behind the contribution increase, there should be a study conducted regarding the matter. He also said the average cost spent per employee of the association is already higher than other companies because they spend more money on other benefits and not just SSS.

Ahead of the SSS contribution hike, it is best for companies (via HR and Payroll departments) to anticipate the changes they would need to avoid over or underpayment. Here are a few things you need to prepare ahead of the changes:

1. Make sure all employees have an online account.

The SSS has an online facility where all employees, employers, and other members access contributions and membership records, perform online transactions, request for copies, and set appointments with their SSS servicing branch. This means they can check online instead of having to talk to your HR Team about these details.

It’s easy to direct incoming employees who have yet to have an SSS number to set up their online account. For employees who have forgotten login details of their online account, they can simply do a password reset or email at onlineserviceassistance@sss.gov.ph.

2. Make sure your employer online details are also updated on your SSS online account.

SSS aims to have almost every transaction done online, which is great for HR and Payroll who needed to keep tabs on pertinent employer and employee information. On the other hand, hard changes like change in business address or company type will still require you to provide supporting documents that are needed to be submitted at a physical branch.

3. You would still need to go to SSS to pay for the contributions

It would be nice to be able to pay for your employee contributions online. As of the moment, you would still have to make the payments directly at a physical branch with the following:

  • Accomplished SSS Form R-5 or also known as the Employer Contributions Payment Form
  • Accomplished SSS Form R-3 Contributions Collection List
  • Cash or Check totaling amount payable to SSS

4. You would need to be diligent in keeping employee contributions updated

The R3 form is a list of all contributions collected for employee-members. HR (with Payroll assistant), need to submit this form every month or every quarter. You would need to submit this along with the USB file or the printed version and copies of the Transmittal Certification and Employee File per month.

For some companies experiencing high attrition or is expanding its workforce at a rapid pace, it can be quite taxing to prepare an accurate R3 form. It’s easy to overlook or prepare all required documents in one go and forget to include updated information that could lead to underpaying or overpaying SSS contributions. Moreover, it can also be complex when there are changes in the company that require salary adjustments.

Here are some tips for you to make this process easier to manage:

  • Pay on or before the 10th day of the following month. As your employees have different SSS numbers, it will be easier for HR and Payroll to collect and prepare updated documents.
  • Pay SSS contributions with the SSS branch who handles your company’s records. It can be easier for HR/Payroll or business owners to pay the contributions at a nearby branch, but it would be much easier to deal with the branch that can access your records and handle application concerns or requests faster.
  • Get an HR/Payroll software who can handle repeated SSS processes. The SSS’s file generator program can be a frustrating tool to do, and some free R3 file generators online may not be reliable or safe.

An HR/Payroll software like PayrollHero can not only generate the reports you need for SSS contributions, it can also come with features like an AI assistant who can handle employee changes, requests and other things that could have an impact on contribution computations. An AI assistant can also help onboard new employees and collect the required data needed for your R3 report.

SSS R3 Form PayrollHero

Generate SSS R3 forms and automate mundane HR and payroll functions with our 30-day free trial. You can also download government forms here.

5. Inform employees about the changes in SSS policies and increases in their benefits.

HR is duty-bound to not only keep employees informed about SSS policies but also inform any effects on their payslips. While a memo or an email may suffice to inform employees, HR and Payroll will still get questions from employees about deductions on their payslips down to the last cent. Unless you have an HR or Payroll assistant to assist in addressing these type of questions, handling repeated inquiries is a waste of your time and company resources.

Final Thoughts

As the government intends to make frequent increases on SSS contributions over the next five years, you may want to invest your time and effort now to make sure your HR and Payroll teams have the right processes and systems in place to deal with these increases. Streamlining HR and Payroll tasks will ensure that SSS contributions are correct and updated with minimal effort and use of resources.

SSS Contribution Increase 2018: Why It’s Actually Good for You

In early 2017, the Social Security System (SSS) announced that it intends to increase the contribution rate for the national pension fund. According to the agency, the contribution per SSS member will pay 15 percent more than the usual amount, which is around Php15 to P240 extra every month.

At the moment, the implementation of the SSS contribution increase was postponed until 2018. If the implementation went according to plan, you would have seen the effect on your payslip last May. SSS president and chief executive officer Emmanuel F. Dooc said the agency wanted to wait for the tax reform to be implemented first so pension fund members can use the money saved on taxes to offset the contribution increase.

With the impending contribution increase, you’d probably wonder if this will have a real-life effect on your take-home pay. Here are 5 things to know about the SSS contribution increase and why it’s s actually a good thing for you.

1. The contribution increase will help extend the life of the SSS fund.

Why is this important: You are ensuring there’s enough money for SSS to pay your pension when you’re eligible to claim it.

Before we delve into this further, let’s brush up on what the SSS fund is exactly.. The SSS fund functions as a source of funding to provide social benefits, including your pension, that supports its contributing members.

In order for the account to not run out of money, the group needs to:

  • admit new members who are willing to contribute to the account, and/or
  • increase the contribution collected from existing members

As members claim their payout from the SSS fund, there’s also a possibility that the account will run out of money sooner than expected.

And we can see this from the actions taken early this year. During his campaign trail, then-presidential candidate Rodrigo Duterte promised to increase the pension receivables of over two million retirees. After winning the presidential election, Duterte approved the contribution hike, resulting in the SSS fund’s life getting shortened from 2042 to 2032. If the increase does not go through, there is a possibility people who will claim or retire after 2032 will not be able to receive their pension.

2. The fresh injection of money means more benefits for you.

Why this is important: Expanded maternity benefits and unemployment benefits.

At the moment, an SSS member can avail the following benefits:

  • Cash allowance to cover the number of days absent due to injury or sickness
  • Maternity benefit
  • Retirement benefit that would come in either a monthly pension or lump sum payment
  • Disability cash benefit that would come in either a monthly pension or lump sum payment
  • Death and funeral benefits
  • Eligibility for a salary or business loan
  • Eligibility for financial assistance or mortgage loan

Recently, the SSS has said it is considering to offer more benefits for its members once the increase is implemented. This means expanding the allowed number of leaves from 60 to 120 days (and improved cash benefits), relaxed restrictions on childbirth and miscarriage, and changes to the maximum coverage amount, among other things. Moreover, the new funds from the contribution increase and the agency’s investments could also introduce a benefit that would financially assist members who are recently unemployed. If the contribution increase pushed through back in May, the agency was confident to declare that such additional benefits would have been made available to its members in the same year.

3. The contribution increase could also mean more pension payout.

Why this is important: Who doesn’t want more money for retirement?

To understand why is this so, let’s discuss how SSS computes your pension. Under the current law, SSS computes your pension based on two things:

  • The number of contributions you made as a member, and
  • the total amount of the contributions that have been paid

The agency then computes the average of all of your contributions from the date of your coverage as a member or compute the average of your contributions in the last five years. Whichever is higher, this will be the amount the SSS will use to compute for your pension.

Some enterprising members opt to contribute the maximum rate as long as they can afford it.

However, there are at least a couple of loopholes in the SSS that allows you to pay a higher contribution amount allowed by law to increase their computed pension amount. For example, a member who earns Php15,000 a month pays Php110 for his SSS contribution monthly. He then decides to increase his contribution six years before retirement to Php1,760 a month. This then leads him to receive a lifetime monthly pension of Php9,900 a month. Unfortunately, this is not something the current proposed laws would address.

4. The increase has a minimal effect on your take-home pay.

Why is this so: Your employer shares the burden of your contribution.

SSS members who are employed only shoulder one-third of the calculated contribution, while your employer shares two-thirds of it.

Once the increase is implemented, the total contribution will climb from 11 to 12.5 percent. The implementation will also see the increase in maximum monthly salary credit from Php16,000 to Php20,000.

Insurance and banking comparison experts GoBear created a computation table. It clearly shows that employers will take the brunt of the increase. When you think about it, the contribution hike essentially forces your employer to invest more in you.

But what if you are a self-employed or voluntary member? Well, it’s not that bad as well. Considering the fact that most of us are really bad when it comes to saving or investing money on ourselves, the SSS contribution increase is simply one way to change our attitude about money.

5. The SSS plans to introduce more increases in the next five years.

This means: Expect more annual contribution increases.

SSS President and CEO Emmanuel Dooc see these annual increases as a good thing for people who are aiming to increase the pension amounts they can claim in the future. Dooc added they aim to increase the member contribution rate from 11 percent to 17 percent over a  six-year period.

Although the debate about the increases is still ongoing, let’s note the fact millennials make up a third of the Philippine population, and are expected to make up 75% of the workforce by 2030. Add that to the number of workers retiring, and you have a social services situation that could put a strain on the SSS fund. Budget Secretary Benjamin Diokno himself said earlier in an interview that an adjustment in member contribution rates will allow the fund provide better benefits, higher pension amounts, and services as cost of living and pension and benefit claims increases.

Final Thoughts

The SSS contribution increase ensures the long-term viability of the fund, provide more benefits and increase the pension amount you will receive upon retirement. Even if the increase will be implemented, the proposed collection amount will not really have an effect on your take-home pay, more so when the tax reform will take effect. Moreover, the increase is simply stage one of the SSS’s plans to revitalize the fund and improve the benefits and services it offers to members.

Are you still not convinced why there’s a need to increase the contributions? If you are willing to take on a high-risk, high-return investment like stocks, mutual funds, real estate, and even in a business you don’t understand, why not bet on a sure thing instead? The SSS fund is a government-backed fund that’s mandated by law to support you for a lifetime.

At the end of the day, it might be better to put a little more of your hard-earned money on a secured investment.

Philippines: Minimum Wage Increase

The Philippine government have recently announced a change to the daily minimum wage rates in the National Capital Region. The minimum wage rate for non-agriculture employers will be ₱512.00. This is an increase of ₱21. No change was made to the cost of living adjustment.

Minimum wage increase for the National Capital Region effective October 5th, 2017

For more information about this update you can check out the wage order at the department of labor and employment website. – http://www.nwpc.dole.gov.ph/pages/ncr/cmwr.html

Updated: Leave Management

We’re all about automation here at PayrollHero, so we’ve added some new features that will help you automate your leave policies. These will be available immediately for all existing and new Leave Management customers.

Require Advance Notice for Leave Requests

Companies need to plan their workforce and resources carefully. This can some times be a careful balancing act, especially if your employees are requesting time off.

To combat this some companies have policies that stipulate the amount of notice required for a leave request. This helps to ensure they have the right coverage when they need it most.

To that end, we’ve added a new feature to our leave management that allows you to set the notice required. This can be set on a per leave basis. Maybe your policy isn’t as clear cut as “you must provide 10 days notice.” That’s fine, with our system you can add tiers to your notice period.

Delay the start of leave accruals

It’s not uncommon to reward leaves to employees after they have served a certain period of time at your company. This maybe their probationary period, or perhaps the territory you operate in has laws that stipulate what this should be. Our Leave Management System now allows you to choose when you would like your leave balances to begin accruing for your employees.

Prorate the first month of leaves accrued

You may award employees a certain amount of leaves for each month of service they have provided to your company. In fact this is an extremely common practice globally. However, employees don’t always start on the first day of the month.

Now our leave accrual system will automatically calculate the correct amount of leaves to award in the first month. This is based on the standard leave accrual amount divided by the number of days in the month multiplied by the number of days worked. We round this to the nearest 0.25.

Allow leaves to expire

Another common practice is to expire leaves that were not consumed by the employee.To help with this we’ve added a new feature that allows you to add an expiration date to your leave types. This can also be configured individually on each leave type.

If you have any questions or you’d like to learn more just click the chat button at the bottom right of the page or contact us at support@payrollhero.com

Introducing Overtime and Official Business Requests

Today we’re launching two new features to our customers. Now your employees will be able to make overtime and official business requests, all powered by our new A.I. assistant Lucy.

Click image to enlarge

Lucy and our new features are available to all our existing customers completely free of charge. 

To get these features sign up for Lucy and have your employees start talking to her. If you are not using Lucy already you can join our open beta by contacting support@payrolllhero.com or filling in the questionnaire below.

 

Understanding Thirteenth Month

Thirteenth Month is a mandatory benefit that all employers in the Philippines need to provide to their rank and file employees who have been employed at their company for longer than one month. I put rank and file in bold as it’s fairly common practice to pay it to all employees, but that’s not mandated by the government. However, it has become traditional for employers to pay the benefit to all employees.

The Labor Code in the Philippines stipulates two distinct employee types. Managerial or Rank and File. The DOLE handbook says:

The Labor Code, as amended, distinguishes a rank-and-file employee from a managerial employee. A managerial employee is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, layoff, 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.

The above distinction shall be used as guide for the purpose of determining who are rank-and-file employees entitled to the thirteenth month pay.

It’s a pretty easy definition to digest. Anyone who makes managerial decisions or has the managerial powers described would be considered a managerial employee. Anyone who doesn’t is rank and file.

There’s three components to thirteenth month you should be aware of.

  1. How much to pay
  2. When to pay it out.
  3. Over what period to calculate

In this article I’ll explain a bit about all three, and some ways you could consider approaching your thirteenth month calculations.

How much you should pay
The name does hint at what you should be paying. Your thirteenth month pay is roughly equivalent to your normal monthly take home. However, it’s not exactly the same. It’s also important to be careful if just paying out one month is your current formula. There is one scenario where this would mean you’re not compliant with the rules of 13th month, I’ll go into this below.

It’s also important to remember that the DOLE formula is the minimum amount you can pay. If you have a formula that pays your employees more than this, great! Looking after your employees is awesome, and having better benefits differentiates your company from others. This should ultimately help you attract the best talent.

The DOLE Formula

DOLE states that thirteenth month pay shall not be less than 1/12 of the total basic salary earned by an employee in a calendar year. Which is as simple as it sounds as long as you know what constitutes basic salary.

Basic salary is not base pay. Base pay is the monthly, hourly or salary rate that you detail in an employee’s employment terms. If you are not familiar with these terms, please read about the four components of payroll. It’s important to know what base pay is. Although they are not the same, it will be a key component of your calculation.

Let’s say you have a monthly paid employee who is contracted to earn 20,000 pesos a month. They work for your company for the entire year. That means their base pay for the year was 240,000 pesos. Even if your employee was absent during the course of the year, their base pay is still 240,000 pesos.

However, basic salary does adjust based on what you actually paid the employee. If the employee was absent one month, and you only paid them 15,000 that month their basic salary would be 235,000. You also would not include the following:

  • Benefits
  • Vacation Leave and Sick Leave paid out (these are a benefit)
  • Allowances (including COLA)
  • All Multipliers including overtime, night differential, holiday pay etc.

There is a caveat for this though. If you do include these as part of your basic salary through any agreements or company policies you should be including these in your 13th month calculations.

The Steps

  1. Figure out the basic salary for each month.
    Base pay for the month – any absences or base pay deductions = basic salary
  2. Repeat for each month
  3. Add all of the basic salaries for each month together
  4. Divide the total amount by 12

The Gross Pay Formula

As mentioned above, as long as you pay your employees the DOLE minimum you will be covered from a compliance angle. However, there are better formulas you can use for both your payroll process and your employees. The gross pay formula is probably the easiest and fairest.

Gross pay is your base pay + any additional multiplier pay – absences and any other base pay deductions. Why this is so easy is because you already calculate this every payroll. Why this is good for your employees, is that although you are deducting their absences you’d also be giving them a portion of any multiplier pay as well.

The Steps

  1. Add all of the gross pays for the year together
  2. Divide the total amount

The Base Pay Formula

If you read my post about understanding benefits and allowances you will know that I believe simplicity in your payroll processes and policies is crucial to an streamlined payroll process. So the base pay formula is my personal favourite.

As you are not deducting any absences or base pay deductions you’ll be paying better than the DOLE minimum. It’s simple because there is only one step to this calculation.

The Steps

  1. Divide the contract value of the employee’s base pay by 12.

Employee’s Most Recent Salary

I mentioned this briefly before, but some companies do just pay an additional one month’s salary to their employees. This is usually completely fine, and generally won’t cause you any problems.

If the employee earned the same amount of money each month during the year this is exactly the same as the Base Pay Formula mentioned above. If your employee received a promotion, and you pay them their most recent month’s salary you’ll be paying them more than a 1/12 of their year’s base pay.

The only time you need to be careful is if you were to give an employee a demotion or reduce their salary. Let’s say you’re employee earned 20,000 a year but in November you reduced their salary to 15,000. You then paid them 15,000 as their thirteenth month.

If that employee earned 20,000 for 11 months their base pay is at least 220,000 pesos for the year. If you divide that by 12 it would equal 18,333.33. Which means you will have underpaid your employee for their 13th month and not be compliant with what’s mandated by DOLE.

Other than that this is a perfectly acceptable way to calculate your 13th month.

The Steps

  1. Pay your employee an additional month’s pay

 

Manually calculating or using excel
If you are not using an automated payroll system like PayrollHero and use, or intend to use, one of the calculations above that require you to calculate or the track a monthly amount. I would advise doing this calculation each month. It will save you a ton of time in the long run.

If you use excel, you will probably want a separate spreadsheet or sheet to track these amounts in. It doesn’t need to be complicated, just a simple tracker like the one below

If you intend to use multiple spreadsheets, check out the =importrange formula. You could have the 13th month amounts on your main payroll calculator spreadsheet for each month, and use this formula to make them appear in your 13th month tracker.

When to pay 13th Month
When to pay dictates the period you should be calculating for. This is why we need to clarify this point first. The DOLE handbook is explicitly clear about when you need to pay it out.

“The thirteenth-month pay shall be paid not later than December 24 of every year. “

Example, if your pay period is the 1st – 15th, 16th – 31st and you pay out 15 days after the pay period ends. You would need to pay this out no later than the 16 – 30 November payroll.

Why? Because the payout date for 1 – 15 of December would be the 30th of December, which is 6 days past the deadline.

So be careful, it’s not the pay period that matters here but when your employee receives the money that’s important.

You are also allowed to pay out the 13th month twice a year. Instead of paying the value of 12 months in December you could pay the value of 6 months twice.

What period should be used for calculating?
This is probably the part that causes most companies problems. You’re supposed to pay 13th month for the previous year, and the DOLE handbook does use the term calendar year when describing the 13th month.

But how can you pay 13th month accurately for the calendar year if the year isn’t even finished? Remember we have to pay it out on the 24th of December, which in a best case scenario is at least one payroll before the end of the year. You can’t, it’s not possible.

But, most companies do pay 13th month based on the calendar year of the current year. So what this means is they guess the last part of the year. You should not guess when it comes to payroll.

So what do we do instead? We need to pay for the calendar year and it has to be out before the 24th of December. Don’t worry, the important part here is that the DOLE handbook actually says a calendar year.

So let’s say your pay period is 1st – 15th and 16th to 31st. You pay out your payroll on 7 days after the pay period ends. In this scenario you could pay out your 13th month on the 1st to 15th of December payroll as it would be received by your employees on the 22nd of December.

If this was the case, the calendar year you should be using is 16 December of the previous year to 15 December of the current year. This means you will never be guessing with your 13th month pay out.

Maybe your dates are different than the ones I mentioned above. To figure out the period you should use just apply the following:

The day after the end of the pay period you payout of the previous year to the last day of the pay period you pay out of the current year.

Separated and Resigned Employees
It is quite shocking how many employers aren’t aware that they are liable for the 13th month an employee has accrued during their employment. Regardless of whether an employee still work for you at the end of the year or not, you still need to pay their accrued 13th month.

The important word their is accrued. You should pay them 1/12 of their basic salary for that period. If you use the base pay or gross pay formulas mentioned above, these will still work with no change required.

How to payout 13th month
The last thing I have to say on 13th month is about how you pay it out. So many companies pay it out separately to the their usual payroll cycle. This is totally acceptable but an unnecessary complication.

The only thing DOLE says about paying it out is the deadline on which it is received. I’d thoroughly recommend paying it out as part of your usual payroll cycle. Doing otherwise will usually lead to more resources being spent on payroll than necessary, and more bank charges for transferring the payment. If you think about the amount of time and effort that goes into one pay cycle, by removing the off-cycle element of 13th month you will free up your team to focus on more important items.

In Closing
Thirteenth month doesn’t need to be complicated. Use a simple formula, use a reporting period that is based on facts, and pay it out on time as part of your normal payroll. If you do this, you’ll remove a lot of the headaches and stress from your payroll process, and save a ton of work around the year end.

The Four Components of Payroll

As part of the HR and Payroll 101 series I wanted to take a closer look at the individual parts of the payroll process. Generally, there are 4 components to any payroll process, and this is usually country agnostic.

If you have ever been involved in payroll generation this number probably seems quite low. You could pick up any employee’s payslip and list maybe 10 items from their payroll alone, and your not wrong. However, this is part of the problem.

Most payroll admins structure their payroll process around the tax status of the items being credited or debited, or based on the individual line items themselves. These approaches can work, but they won’t be the most efficient. They will lead to unnecessary repetition, and increased resource requirements to administer. By knowing the four components, and how your payroll items fit into each, you will be able to apply your knowledge to streamline your overall payroll process.

Gross Compensation

Gross compensation is probably the easiest to understand. It’s any item that makes up your employee’s basic compensation package.

The first item is base pay, which is just one aspect of the overall gross compensation. However, this is usually the bulk of any employees payroll. There’s generally 3 main types of gross pay:

  • Salary: Employees get paid the same fixed amount each payroll regardless of their attendance
  • Monthly: This is similar to salary. Monthly paid employees also get an amount each month but it’s not fixed. It will fluctuate based on their attendance. For example, they may receive less gross pay if they come in to work late and more if they worked overtime.
  • Hourly: Employees are paid for the exact hours they work. So if you were being paid $1 an hour and worked 100 hours you would receive $100 as your gross pay.

Other notable mentions for base pay would be daily rates and piece meal. The former being employees who get paid per day and the latter per item they complete.

Overtime is usually paid at a premium to employees. The standard practice is to pay overtime at a certain percentage of the base pay rate. E.g. 125%. So if you were paid $10 an hour and then worked overtime you would get $10 multiplied by 125% which equals $12.50.

For other multipliers, these work in the same manner as overtime but are applied in different scenarios. For example, it’s not uncommon in most countries to provide additional pay to employees if they come into work on a public holiday. 

In the Philippines the rate is 200%. So the same $10 base rate would be $20 on a regular holiday.  This is also why we call them multipliers, because you multiply the scenario percentage by the base rate.

One thing to note, some companies don’t multiple but actually do addition. In the UK where there is no government mandated rate for working overnight. It’s not uncommon for employers to pay an extra £1 or £2 for work done late at night. These would also fall into this category.

The last one, and this depends on your companies process would be leave pay. If you don’t pay these out as separate line items they will be part of the base pay and so therefore part of the gross compensation. This is far more common with monthly and salary paid employees than any other type.

Recurring Items

“The important thing to remember is these items will be credited or debited from an employee on a strict schedule. Either for an ongoing period of time or in perpetuity”

From this point on, the component descriptions I provide are not exhaustive lists. You potentially have other payroll items that you provide that will fall into one of the four components.

Recurring items are those other payments that you credit or debit to employees every payroll. This might be for a preset period of time or in perpetuity.

It’s important to clarify that the amounts of these recurring items may vary from payment to payment.

A great example of this would be the Cost of Living Allowance in the Philippines. It’s a government mandated allowance saying that all minimum wage employees should receive 15 pesos for each day worked. So the amount paid out will always fluctuate based on the amount of days worked in the pay period, but it’s always paid each pay period.

Usually all allowances are recurring items, the frequency may change (either per payroll, per quarter, per month etc.) but they are consistently deducted on the same schedule.

Loan payments are another great example and illustrate how the payment doesn’t need to be deducted forever. Usually, if you give an employee a loan, they pay it back over X pay periods until the original amount is repaid.

Subsidized benefits are a huge catch all. Companies will give their employees certain benefits where the company covers most of the cost. However, the employee needs to contribute some amount. These are consistently deducted every payroll and continue until the employee either leaves or decides they don’t want to avail of the benefit any longer.

As mentioned, this isn’t an exhaustive list. The important thing to remember is these items will be credited or debited from an employee on a strict schedule. Either for an ongoing period of time or in perpetuity.

Ad hoc Items

“These items are infrequent, and the amount always vary. They are not deducted or credited to an employee each payroll.”

Ad hoc items are those infrequent payments that you have to make on payroll. Adhoc is a latin phrase that means “for this.”   When you are doing something on ad hoc basis you are doing it for that specific case and no other.

Adjustments are a great example of an ad hoc item. Every time you do an adjustment you are making it to fix a specific error or issue. You are making the payment for this specific scenario.

Expenses would also come under this category, every expense payout is done for a particular expense or expense report. These are always handled on a case by case basis.

Sure you may have employees that submit an expense report with some frequency. You might have an employees who do a lot of driving for work and are allowed to claim their miles back on expenses. They may even submit an expense claim form every month.

However, if that same employee ended up working at head office for the entire pay period and didn’t drive any where they wouldn’t receive a mileage expense. Whereas if they received a car allowance, which is a recurring item, they would still receive the amount.

For breakages and spillages, in the food and beverage industry it’s not uncommon to charge the server if they break a plate, glass, etc. Again, these types of payments are always made for the specific incident.

Finally, Vacation Leave and Sick Pay would live here if you don’t include them in the gross pay. This might seem counterintuitive to you, but again think about the format we have established. Employees take leaves on an ad hoc basis, and when you pay their leave pay it’s done for a specific leave request.

Again, this list is not exhaustive and it’s important to note you might and probably do make these types of payments EVERY payroll. However, they usually won’t be to the same employees, and for the same amounts. Don’t get me wrong sometimes an employee might break the same glass or claim the same amount of miles so their amounts are the same, but this is because of circumstance and not because they are recurring items.

Just remember, these items are infrequent, and the amount always vary. They are not deducted or credited to an employee each payroll.

Government Deductions

Finally we have government deductions, and you know what they say; “there’s only two things in life that are certain; death and taxes.” Unless your employees are based in countries that don’t tax lower wage earners this is definitely true.

The other government deductions will vary based on your location. In the Philippines this would be Pag-IBIG, SSS, Philhealth. Singapore have charitable deductions and CPF. The UK has national insurance and Canada EI and CPP etc.

Most, if not all, governments have their own mandated deductions that employers have the responsibility to deduct. It’s vitally important to ensure you make these deductions on time and in line with your local laws.

So that’s the four components. Gross Compensation, Recurring Items, Ad Hoc Items, and Government Deductions. If you are designing your own payroll process, or trying to improve your current one categorize your payroll items into these four areas. Once done, you will be able to create processes for each component that will allow you to streamline your process.

For any questions, please ask in the comments below. Thanks!

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