For business owners, understanding the intricacies of employee compensation and taxation is crucial to maintain a well-functioning and compliant workforce. It ensures that their employees are fairly compensated, while also meeting their legal obligations.
One key aspect of employee compensation in the Philippines is the 13th month pay. In this article, we’ll discuss how to compute it, when it must be given and other important things that small and medium enterprises (SME) need to know.
WHAT IS 13TH MONTH PAY?The 13th month pay is an employee monetary benefit mandated by the Philippine government under Presidential Decree 851. All private employers must provide this benefit to rank-and-file employees at the end of each year, and no later than Dec. 24.
The 13th month pay should not be less than one-twelfth (1/12) of the total basic salary earned by an employee within the calendar year.
Every rank-and-file employee in the private sector has a right to receive a 13th month pay as long as they have worked in the company for at least one month within the calendar year. This benefit applies, regardless of position, designation, and employment status, and irrespective of the method by which their salary is paid. Rank-and-file employees paid on a piece-rate basis, fixed or guaranteed wage plus commission, those with multiple employers, resigned employees, terminated employees, and employees on maternity leave also receive a 13th month pay.
Meanwhile, state employees, employees in private subsidiaries of the government and those working in government-owned and -controlled corporations are excluded from this benefit. This is due to different compensation structures and bonus schemes that apply to the public sector.
Other exclusions for 13th month pay are commission-based employees, boundary- or task-based employees, freelancers, contractual workers, household helpers and persons in personal service, and other employees who are paid a fixed amount for a specific work.
DOLE ENFORCEMENTThe Labor department regional/field/provincial office with jurisdiction over the workplace monitors all employers’ compliance with the 13th month pay. More importantly, SMEs must file a compliance report with the portal at https://reports.dole.gov.ph/. The report must be made no later than Jan. 15.
The report must also contain the name of establishment, address, principal product or business, total employment, total number of workers benefited, amount granted per employee, total amount of benefits granted, and the name, position and telephone number of the person making the report.
Employers that fail to pay their employees face administrative action from the Labor department. Thus, the agency urges employers with difficulties in complying to seek assistance from it or explore other financing options.
For businesses with unpredictable cash flow, or business owners who simply want to be prepared for unexpected cash flow gaps, a revolving credit line can serve as a standby financing option. Alternatively, employers can also get a business loan from the Trade department, which offers reasonable interest rates and simpler application requirements to better help SMEs.
COMPUTING 13TH MONTH PAYTo get the amount of 13th month pay, just follow this basic formula: total basic salary earned during the year divided by 12 months.
If an employee receives the same amount of monthly basic salary (excluding allowances, overtime pay and other benefits), you can compute their total basic salary for the year with this formula: monthly basic salary time months worked.
PREPARING FOR 13TH MONTH PAYPreparing for the 13th month pay can be a significant financial undertaking. But with proper planning and strategic financial management, this can become a manageable and predictable part of operations. Here are some steps employers can take to ensure they are well-prepared.
BUDGETING THROUGHOUT THE YEAR. Anticipate and budget throughout the year by setting aside a fixed amount each month equivalent to one-twelfth of the expected 13th month payout. By doing this, businesses can avoid the financial strain of a lump sum expense at the end of the year.
MONITORING PAYROLL EXPENSES. Keeping a close eye on payroll expenses throughout the year is crucial. This includes being mindful of increases in staff numbers or salary adjustments, because these changes will affect the total 13th month pay liability.
USING FINANCIAL TOOLS AND SERVICES. Consider leveraging financial tools to ensure liquidity and readiness for this payout. A revolving credit line can provide flexible access to funds, allowing businesses to draw on credit as needed to cover short-term expenses like the 13th month pay.
EMPLOYEE COMMUNICATION. Transparent communication with employees about their 13th month pay is important. This involves informing new hires regarding the calculation of their pro-rated 13th month pay and ensuring all employees understand the payment schedule.
REGULAR FINANCIAL REVIEWS. Conducting regular financial reviews can help businesses stay on top of their financial health. These include assessing cash flow, reviewing budget allocations for employee compensation and making adjustments as needed to ensure availability of funds for the 13th month pay.
LEGAL COMPLIANCE AND UPDATES. Staying updated with any changes in legislation or guidelines regarding the 13th month pay is vital for compliance. Employers should regularly consult legal resources or financial advisors to keep abreast of any developments in labor laws and tax regulations.
EXEMPTIONSAccording to Section 3 of rules that enforce PD 851, paying 13th month applies to all employers except:
Distressed employers, such as those incurring substantial losses, or nonprofit institutions and organizations whose income has consistently declined by more than 40% of their normal income for the last two years;
The government, its political subdivisions and government-owned and -controlled corporations, except for private subsidiaries;
Employers of household helpers and persons in personal service;
Employers of people paid on commission, boundary or task basis and people paid a fixed amount for performing a specific work;
Employees of people who are not eligible to receive the benefit.
Understanding and correctly computing the 13th month pay is essential for SMEs in the Philippines. By adhering to the guidelines and being aware of taxation implications, employers can ensure compliance and foster a positive work environment. Moreover, by exploring various financial resources like a revolving credit line, businesses can maintain the financial health necessary to meet these obligations, contributing to a thriving and equitable economic environment.
This article reflects the opinion of the author and does not reflect the official stand of the Management Association of the Philippines.
Benedict S. Carandang is NextGen vice chairman of the MAP ICT Committee and vice-president for external relations of First Circle. This article was co-written with Jess Jacutan, First Circle’s content marketing lead.