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.

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.