13ᵗʰ-Month Pay Eligibility for Employees of Small Businesses in the Philippines
A comprehensive legal guide as of 6 July 2025
1. Why this topic matters
The 13ᵗʰ-month pay is a statutorily-mandated monetary benefit designed to help employees meet year-end expenses and share in the fruits of enterprise. For small- and micro-enterprise owners it is also one of the most closely watched compliance issues, carrying both criminal and administrative penalties when ignored.
2. Primary legal bases
| Instrument | Key provisions |
|---|---|
| Presidential Decree No. 851 (Dec. 16 1975) | Created the 13ᵗʰ-month pay; required payment to all rank-and-file employees who have worked at least one (1) month in a calendar year. |
| Revised Guidelines on the Implementation of PD 851 (DOLE Memorandum Orders No. 28-A & 28-B - 1976) | Defined “basic salary,” computation rules, and reporting requirements. |
| Labor Code of the Philippines, Art. 94(2) | Recognizes 13ᵗʰ-month pay as a labor standard. |
| RA 10361 (Domestic Workers Act/Kasambahay Law, 2013) | Brought domestic workers—previously exempt—into coverage. |
| RA 10963 (TRAIN Law, 2017) | Raised the income-tax-exempt ceiling for 13ᵗʰ-month pay and other benefits to ₱90,000 per employee per year. |
| Annual DOLE Labor Advisories (e.g., LA No. 28-23; LA No. 23-24) | Reiterate deadlines (on or before 24 December), computation, and reporting. |
No statute or regulation exempts micro, small, or medium enterprises (MSMEs) from PD 851. Any employer “doing business in the Philippines,” regardless of capital, assets, or workforce size, must pay.
3. Who is entitled?
Rank-and-file employees—i.e., not managerial—in the private sector who have worked at least one (1) month in the calendar year, regardless of:
- Employer size (even a single-proprietor sari-sari store with one helper);
- Employment status (regular, probationary, project-based, seasonal, fixed-term, casual, part-time);
- Method of wage payment (monthly-paid, daily-paid, piece-rate, “no-work-no-pay” schedules).
Domestic workers (kasambahay) and workers paid by results (e.g., pakyawan) after RA 10361 and later DOLE rules.
Resigned, retired, or terminated employees are still entitled pro-rated 13ᵗʰ-month pay, to be released with their final pay.
Managerial employees may be excluded only if they genuinely fall under Labor Code Article 82’s definition and if they receive a benefit at least equal to 1/12 of their annual basic salary.
4. Defining “small business”—and why it does not affect liability
| Classification | Governing law | Assets / revenue thresholds (2025)** | Effect on 13ᵗʰ-month pay |
|---|---|---|---|
| Micro | RA 9501 (Magna Carta for MSMEs) | ≤ ₱3 million assets | None – still required |
| Small | RA 9501 | ₱3 M < assets ≤ ₱15 M | None |
| Barangay Micro Business Enterprise (BMBE) | RA 9178 | ≤ ₱3 M assets, barangay-registered | None |
**Most-recent DTI/PSA thresholds; check yearly for updates.
PD 851 never linked the duty to pay with business size.** The only size-related exemption in the original 1975 text (assets ≤ ₱1 million) was administratively superseded by later DOLE circulars and by 40 years of consistent practice treating the benefit as universal.
5. Legitimate exemptions (rare and temporary)
Under the Revised Guidelines, an employer—large or small—may seek year-specific exemption from the DOLE Secretary on one of two grounds:
| Ground | Documentary requirements | Practical notes for MSMEs |
|---|---|---|
| (a) Distressed employer | Audited financial statements showing accumulated losses and/or negative retained earnings in the current + immediately preceding year; SEC/DTI registration; workforce list. | Approval rate is historically low; loss this year alone usually insufficient. |
| (b) Establishments already paying equivalent or better benefit | CBA provisions, company policies, proof of disbursements. | Most small firms do not have CBAs; voluntary “Christmas bonus” can offset liability only if it equals or exceeds statutory computation. |
No blanket exemption exists for start-ups or first-year businesses. Applications must be filed each year, and a prior grant does not guarantee renewal.
6. Computation
Formula:
$$ \text{13ᵗʰ-Month Pay} = \frac{\text{Total Basic Salary Earned During Calendar Year}}{12} $$
Basic salary includes regular “wage” for work performed excluding – overtime, unused leave conversions, “13ᵗʰ-month differentials,” emergency allowances, cost-of-living allowances (COLA), cash gifts, profit sharing, or any benefit not integrated into the regular pay.
Examples for small-business settings
| Scenario | Earnings Jan-Dec 2025 | Months worked | Pay-out due |
|---|---|---|---|
| Daily-paid employee (₱610 NCR min. wage × 313 paid days) | ₱190,930 | 12 | ₱15,911 (190,930 ÷ 12) |
| Resigned after 6 months (basic salary ₱12,000/mo) | ₱72,000 | 6 | ₱6,000 (72,000 ÷ 12) |
| Piece-rate sewer (₱500 average daily piece rate × 240 prod. days) | ₱120,000 | 12 | ₱10,000 |
Tip for owner-operators: If you are also an employee drawing salary, credit yourself only as a managerial employee when legally appropriate; otherwise, you too must receive the proportionate 13ᵗʰ-month pay.
7. Manner and timing of payment
- Deadline: On or before 24 December every year.
- Installments: Employers may opt to release ½ in mid-year (often June) and the balance in December.
- Mode: Cash or legal tender; e-wallet or bank transfer is acceptable with employee consent.
- Reporting: Compliance Report on 13ᵗʰ-Month Pay must be filed electronically via the DOLE Establishment Report System not later than 15 January of the following year.
8. Taxes and deductions
- Until ₱90,000: Entirely tax-exempt (TRAIN).
- Above ₱90,000: Only the excess is subject to withholding tax.
- SSS/PhilHealth/HDMF contributions: Not deductible from 13ᵗʰ-month pay.
- Permissible offsets: Valid debts (e.g., salary loans) may be offset only with written authorization and subject to Labor Code Art. 116.
9. Penalties for non-compliance
| Violation | Consequence |
|---|---|
| Failure to pay or underpayment | Criminal: Fine up to ₱50,000 and/or imprisonment up to 3 years (PD 851 §4). |
| Administrative (DOLE inspection) | Compliance Order + double-indemnity (100 % of unpaid amount as penalty), plus legal interest (currently 6 % p.a.). |
| Failure to file compliance report | Separate DOLE citation; may escalate to inspection. |
Employees may file money claims with the DOLE Regional Office (if ≤ ₱5 million per Art. 129) or the National Labor Relations Commission (NLRC).
10. Special situations for small businesses
Business closure or cessation
- Unpaid 13ᵗʰ-month pay becomes part of separation/retirement pay obligations.
Seasonal enterprises (e.g., agri-harvesters)
- Employees still accrue entitlement for every month within the season actually worked.
Barangay Micro Business Enterprises (BMBEs)
- Exempt from income tax under RA 9178, but not from labor standards like 13ᵗʰ-month pay.
Pandemic or force majeure (COVID-19, natural disasters)
- DOLE has repeatedly clarified—through Labor Advisories (e.g., LA 28-20, LA 23-24)—that crises do not suspend PD 851. Distress exemption petitions must follow the regular process.
11. Best-practice compliance checklist for proprietors
| Task | Timing |
|---|---|
| Forecast 13ᵗʰ-month accruals in cash-flow plans | January & mid-year |
| Update payroll records monthly; tag “basic salary” vs. allowances | Ongoing |
| Reconfirm tax-exempt threshold (presently ₱90 k) | October |
| If unable to pay in full, consider staggered release (allowed; must finish by 24 Dec) | November |
| File online compliance report (DOLE ERS) | 15 Jan following year |
12. Frequently asked questions
Are employers with ≤ 10 workers exempt? No. Headcount is irrelevant.
Can a purely commission-based sales agent claim 13ᵗʰ-month pay? Yes, if their pay is not strictly “commission-only” under PD 851’s original exemption and they are considered rank-and-file. Most modern commission structures include a guaranteed wage component, triggering coverage.
Does a “Christmas bonus” fulfill the requirement? Only if its amount is ≥ computed 13ᵗʰ-month pay and it is released on or before 24 December; otherwise, any shortfall remains payable.
What if the last payday before Christmas is the 15ᵗʰ? You may pay earlier; the law sets a latest date, not the only date.
Are Directors or business partners without employment contracts entitled? No—unless they also hold an employee position drawing salary.
13. Looking ahead
Several bills filed in the 19ᵗʰ and 20ᵗʰ Congresses propose:
- Raising the tax-free cap to ₱150,000 (HB 9065, SB 2579);
- Making the mid-year 14ᵗʰ-month pay mandatory (HB 6537, SB 1704).
As of July 2025, these measures are still pending. Small businesses should monitor legislative developments and plan for potential increases in compensation costs.
14. Key take-aways
- Every private-sector employer—including micro and small enterprises—must provide 13ᵗʰ-month pay.
- The amount equals 1/12 of the employee’s annual basic salary, pro-rated for fractional service.
- Payment is due on or before 24 December with DOLE reporting by 15 January.
- Exemptions are case-by-case (distress/equivalent benefit) and rarely granted.
- Violations expose owners to fines, jail time, and administrative penalties that often exceed the cost of compliance.
Disclaimer: This article is for general information only and is not legal advice. For specific situations, consult the Department of Labor and Employment or a qualified Philippine labor law practitioner.