13th Month Pay Questions and Answers

November is the month all these questions land in my inbox that I answer one by one. Each time, I have to do some researching of my own to validate my own understanding of how it works because I've not done HR admin work for quite a while. I decided that now may be the best time to talk about it and share some informational resources as you compute for 13th month pay both as an employer or employee. If you are paying for the first time, this post may be helpful as you don't want to start a wrong practice that you will have to change later. If you pay more than you have to now and then realize you're doing it all wrong, you will have a problem changing it back to normal due to the non-dimunition clause indicated in the law.

Please note that I am neither a lawyer nor an expert on the law, so if you find some of the information here as wrong or outdated, please let me know as I would gladly change it if there is a good basis. Let's get started.

What is the 13th Month Pay?

The 13th Month pay by definition according to the labor code means one twelfth (1/12) of the basic salary of an employee within a calendar year. Please take note of the because it has something to do with how you compute for it. The 13th month pay is mandated under Presidential Decree No. 851 by former President Ferdinand Marcos. Some changes were made in the revised guidelines issued during the time of President Corazon Aquino. Check the links for details on this law.

What is basic salary in the context of 13th Month Payment?
Again according to the labor code, basic salary include all remunerations or earnings paid by an employer  to an employee for services rendered but may not include allowances or monetary benefits which are not considered or integrated as part of the regular or basic salary. Examples of these are cash equivalent of unused leave credits, overtime, premium, night differential and holiday pay. The only reasons why these should be included in the computation is if there is an internal arrangement or collective bargaining agreement to do so.

Who are entitled?
All rank and file employees who have worked in the company for at least a month is entitled to a prorate 13th month pay. I will show you the computation later. By law paying managerial employees 13th month pay is an employer prerogative. Government workers, house hold workers (although this may change soon as a bill is already filed in congress entitling them to it.), those 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 they are entitled.

How do we compute the 13th month pay?
The revised guideline says that "The "basic salary" of an employee for the purpose of computing the 13th month pay shall include all remunerations or earning paid by this employer for services rendered but does not include 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. 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." take note of the line I highlighted. It says all earning paid for services rendered. Does it mean absences without pay and deductions due to tardiness and undertime  should be removed from the annual basic salary paid? I believe so but this is where I see companies differ in the way they compute for 13th month pay. If you follow this computation literally, the computation should look like this:

        daily wage X number of paid days = basic salary within a calendar year
basic salary within a calendar year/ 12 = 13th month pay

and the way to compute for a prorated 13th month pay if you only work several months(let's say 3) should look like this:

basic salary paid for 3 months/ 12 = prorated 13th month pay

If this is not how you compute for prorated 13th month pay, it is likely that you will pay higher than necessary. I've been trying to find a formula for computing 13th month pay for piece-rate workers but I couldn't find any. if you know the formula, please share here.

When must it be paid?
Law says it shall be paid not later than the 24th of December of each year. An employer may also choose to divide payment by paying the first half midyear and the rest on or before the prescribed date.

Is 13th month pay taxable?
If together with other financial benefits the total do not exceed P30,000.00, then it isn't taxable. If it exceeds the said limit, the amount in excess shall be taxable.

Other Considerations
What I discussed here are the minimum requirements of the law. If you choose to be competitive and want to give more than what is required as a matter of strategy, then you should be congratulated.  Please note however that what you do as a practice becomes nature of the benefit, meaning that if you reduce it reflect the minimum requirement of the law, you may be violating this provision:

Prohibitions against reduction or elimination of benefits

Nothing herein shall be construed to authorize any employer to eliminate, or diminish in any way, supplements, or other employee benefits or favorable practice being enjoyed by the employee at the time of promulgation of this issuance.