Ordinary overtime pay and most bonuses are not automatically included in computing retirement pay in the Philippines. The statutory minimum is generally based on the employee’s latest regular salary rate, plus the specific 13th-month-pay and service-incentive-leave components required by law. However, overtime, bonuses, commissions, allowances, and similar payments may affect the computation when they have been integrated into regular salary, expressly included in a retirement plan or collective bargaining agreement, or consistently treated by the employer as part of the retirement-pay base.

The Direct Answer: What Is Usually Included?

The answer depends first on whether the employee is retiring under the minimum benefit required by Republic Act No. 7641 or under a company retirement plan, employment contract, or collective bargaining agreement.

Compensation item	Included in the statutory minimum?	Important qualification
Latest regular basic salary	Yes	This is the main salary base
Overtime pay	Usually no	May be included through a broader agreement or established practice
Overtime premium	Usually no	It is additional compensation for work beyond normal hours
13th-month pay	Partly	The formula includes one-twelfth of the 13th-month pay
Performance or productivity bonus	Usually no	Often considered contingent or similar to profit sharing
Profit-sharing bonus	No, by default	Expressly excluded when not integrated into regular salary
Guaranteed contractual bonus	Possibly	Depends on the contract, plan wording, and nature of the payment
Sales commission	Sometimes	It may be salary if it is directly tied to the employee’s individual output
Supervisory or overriding commission	Usually no	Often treated as a productivity or profit-sharing benefit
Regular allowances	Possibly	Included only when integrated into regular salary or covered by a broader plan
Night differential and holiday premiums	Usually no	These are additional payments outside ordinary salary

The most important distinction is between regular salary for normal work and additional compensation earned because of special circumstances, such as working overtime, meeting a target, earning company profits, or working on holidays.

Legal Basis for Retirement Pay in the Philippines

Retirement pay for qualified private-sector employees is governed principally by Article 302 of the Labor Code, formerly Article 287, as amended by Republic Act No. 7641.

When there is no applicable retirement plan or agreement, an employee may retire at age 60 or older, but not beyond the compulsory retirement age of 65, provided the employee has served the establishment for at least five years. The minimum benefit is at least one-half month salary for every year of service. A fraction of at least six months counts as one whole year. (Lawphil)

The law defines “one-half month salary” as:

15 days of salary;
One-twelfth of the 13th-month pay; and
The cash equivalent of five days of service incentive leave.

This is why the statutory formula is commonly expressed as 22.5 days of salary for every credited year of service, rather than only 15 days. The Supreme Court has repeatedly applied the 22.5-day interpretation. (Lawphil)

The implementing rules define “salary” more narrowly

The Rules Implementing Republic Act No. 7641 state that the 15-day salary component must be based on the employee’s latest salary rate.

For this purpose, salary includes compensation for services rendered during normal working days and hours, whether the employee is paid by time, task, piece, commission, or another method. It generally does not include:

Cost-of-living allowances;
Profit-sharing payments; and
Monetary benefits that are not part of or integrated into regular salary.

The rules also permit the employer and employee to agree on broader inclusions. (Supreme Court E-Library)

Is Overtime Pay Included in Retirement Pay?

Overtime is generally excluded

Overtime pay is compensation for work performed beyond the normal eight-hour workday. It is paid in addition to the employee’s regular wage. Because the retirement rules refer to remuneration for services during normal working days and hours, overtime pay ordinarily falls outside the statutory salary base.

The same general treatment applies to:

Overtime premiums;
Rest-day premiums;
Special-day premiums;
Night-shift differential; and
Additional holiday compensation.

In Boie-Takeda Chemicals, Inc. v. De la Serna and later cases, the Supreme Court explained that overtime is additional compensation separate from regular or basic salary. It is normally excluded from the basic-salary base used for 13th-month pay. Since the statutory retirement formula includes one-twelfth of the 13th-month pay due, overtime normally does not increase that component either. (Lawphil)

When overtime may still be included

Overtime may affect retirement pay when there is evidence of a broader enforceable benefit, such as:

A retirement plan expressly defining “plan salary” or “compensation” to include overtime;
A collective bargaining agreement requiring its inclusion;
An employment contract containing a broader formula;
A written company policy that includes overtime in retirement computations; or
A deliberate and consistent company practice of including overtime when computing retirement benefits.

Merely receiving overtime regularly does not automatically make it basic salary. The employee must usually show that the employer treated it as part of the salary structure or retirement-pay base—not simply that overtime appeared frequently on payslips.

Are Bonuses Included in Retirement Pay?

There is no single rule for every payment called a “bonus.” The legal result depends on the bonus’s purpose, conditions, and treatment under the employment documents.

Discretionary and performance bonuses are usually excluded

A bonus is usually excluded when it depends on:

Management discretion;
Company profits;
Individual or team performance;
Achievement of sales targets;
Productivity measurements;
Attendance conditions; or
The employer’s financial position.

These payments resemble profit sharing or fringe benefits rather than compensation for the employee’s ordinary work during normal hours.

In Rogelio Reyes v. National Labor Relations Commission, G.R. No. 160233, August 8, 2007, the Supreme Court ruled that an overriding commission received by a unit manager was not part of the retirement-pay base. The commission was similar to a profit-sharing or productivity benefit and did not arise directly from sales personally completed by the manager. The Court explained that earnings resembling fringe benefits, overtime pay, or profit sharing are generally excluded from retirement-pay computation. (Supreme Court E-Library)

A guaranteed or fixed payment may require closer examination

A payment labeled as a “bonus” may potentially be part of regular salary when it is:

Fixed and guaranteed rather than discretionary;
Paid in exchange for ordinary services;
Not dependent on profits, targets, or special performance;
Included in the employee’s salary structure;
Used to compute leave pay, salary deductions, or other wage-based benefits; or
Expressly included in the retirement plan’s definition of salary.

The name used on the payslip is not conclusive. A court or labor tribunal will examine the payment’s true nature and the conditions under which it is earned.

Thirteenth-month pay is treated differently

The statutory retirement formula expressly includes one-twelfth of the 13th-month pay due to the employee. This does not mean the employee’s entire annual 13th-month payment is added for every year of service.

Instead, the 13th-month component is one part of the 22.5-day formula:

15 days of salary;
2.5 days representing one-twelfth of the 13th-month pay; and
Five days representing the service-incentive-leave component.

An employee’s proportionate 13th-month pay for the final calendar year is also normally settled separately as part of final pay. It should not be confused with the 2.5-day component already built into the retirement-pay formula.

Company Retirement Plans Can Use a Different Salary Definition

Many employers have retirement plans that define the computation base as:

Basic monthly salary;
Latest monthly plan salary;
Monthly compensation;
Credited salary; or
Regular monthly pay.

The plan may expressly exclude overtime, bonuses, commissions, allowances, and extra compensation.

In Alberto P. Oxales v. United Laboratories, Inc., G.R. No. 152991, July 21, 2008, the company retirement plan defined basic monthly salary as excluding commissions, overtime, bonuses, and extra compensation. The Supreme Court enforced that definition because the company plan provided benefits substantially higher than the minimum required by Republic Act No. 7641. (Lawphil)

This produces an important rule:

A more generous company plan may validly exclude overtime or bonuses from its salary base if the total retirement benefit remains at least equal to the statutory minimum.

The employee cannot necessarily demand that every component of the Republic Act No. 7641 formula be inserted into a more favorable company formula. The proper comparison is generally between the total benefit under the company plan and the total statutory minimum.

If the company plan produces a lower amount, the employer must pay the deficiency. The implementing rules expressly provide that retirement benefits under a contract, plan, or collective bargaining agreement cannot be less than the statutory entitlement. (Supreme Court E-Library)

How to Compute the Statutory Minimum Retirement Pay

The standard formula is:

Minimum retirement pay = Latest daily salary rate × 22.5 × credited years of service

Step 1: Determine the latest regular salary rate

Use the salary rate in effect when the employee retires. Exclude overtime and non-integrated bonuses unless a broader agreement or practice applies.

For a monthly-paid employee, the employer should identify the divisor used to convert monthly salary into a daily rate. The correct divisor may depend on whether the employee is paid for all calendar days, workdays only, or according to a divisor stated in the contract, collective bargaining agreement, payroll policy, or applicable wage rules.

Using 26 or 30 automatically, without checking the employee’s pay arrangement, can produce a disputed result.

Step 2: Count the credited years of service

Count all completed years. Then examine the remaining fraction:

Less than six months: generally disregarded;
Six months or more: counted as one whole year.

For example, 18 years and seven months is treated as 19 credited years.

Step 3: Multiply by 22.5 days

Assume:

Latest regular daily salary rate: ₱1,200
Service: 18 years and seven months
Credited service: 19 years

The computation is:

₱1,200 × 22.5 × 19 = ₱513,000

Ordinary overtime earnings and a discretionary annual performance bonus are not added to this amount.

Step 4: Compare the result with the company plan

Suppose a company plan pays 30 days of regular salary per year of service but excludes overtime and bonuses.

Using a daily rate of ₱1,200 and 19 years:

Company plan: ₱1,200 × 30 × 19 = ₱684,000

Because ₱684,000 is higher than the statutory minimum of ₱513,000, the company plan is more favorable even though it excludes overtime and bonuses.

When a Company Practice Can Change the Result

An employer may create an enforceable benefit by deliberately and consistently using a more favorable computation over time.

In Sevilla Trading Company v. Semana, G.R. No. 152456, April 28, 2004, the employer had repeatedly included certain non-basic benefits in computing 13th-month pay. The Supreme Court held that the favorable treatment had ripened into a company practice that could not simply be withdrawn. (Supreme Court E-Library)

For a retirement-pay dispute, useful evidence of a company practice may include:

Written retirement computations of similarly situated retirees;
HR memoranda describing the salary base;
Consistent retirement worksheets used over several years;
Collective bargaining history;
Payroll manuals or accounting policies;
Emails confirming that particular bonuses or allowances are included; and
Previous settlement agreements applying the broader formula.

One unusually generous computation does not necessarily establish a company practice. The evidence should show a deliberate, consistent, and repeated method rather than a one-time mistake.

How to Check an Employer’s Retirement-Pay Computation

Obtain the governing retirement documents. Ask for the complete retirement plan, trust agreement provisions relevant to benefits, collective bargaining agreement, employee handbook, employment contract, and amendments.
Find the exact definition of salary. Look for terms such as “basic salary,” “plan salary,” “monthly compensation,” “regular pay,” and “latest salary rate.”
List every item on recent payslips. Separate ordinary basic pay from overtime, holiday premiums, commissions, allowances, incentives, and bonuses.
Identify the conditions for each payment. Determine whether the payment is guaranteed or dependent on performance, profits, targets, attendance, or management approval.
Compute the Republic Act No. 7641 minimum separately. Use the latest regular daily salary rate, 22.5 days, and credited years of service.
Compute the benefit under the company plan. Follow the plan’s written formula, including its definitions and exclusions.
Compare the two totals. The employee should receive at least the higher legally enforceable amount.
Request a written breakdown. The computation should state the salary rate, divisor, years of service, rounding treatment, plan formula, deductions, and amounts already paid.

Documents That Help Prove the Correct Computation

Document	What it helps establish
Employment contract	Agreed salary and benefits
Retirement plan and amendments	Governing formula and salary definition
Collective bargaining agreement	Negotiated inclusions and grievance procedure
Employee handbook and HR memoranda	Company policies
Recent payslips	Latest salary and classification of payments
Payroll records covering 12–24 months	Regularity and conditions of bonuses or overtime
BIR Form 2316	Compensation reported for tax purposes, although not conclusive by itself
Certificate of employment or service record	Dates and length of service
Retirement notice or approval	Retirement date and basis
Employer’s computation sheet	Rate, divisor, years, and exclusions used
Bank records and payment vouchers	Amounts actually received
Prior written computations	Possible company practice
Emails with HR or management	Admissions or explanations concerning the formula

Employees should keep copies before surrendering company access, email accounts, identification cards, or payroll-portal credentials.

What to Do If Overtime or Bonuses Were Wrongly Excluded

1. Send a written request for recomputation

State the disputed items clearly and attach a comparison of:

The employer’s computation;
The statutory minimum; and
The amount under the applicable retirement plan or agreement.

Ask the employer to identify the exact provision authorizing each exclusion.

2. Use the grievance procedure when a CBA applies

When the disagreement concerns the interpretation or implementation of a collective bargaining agreement or company personnel policy, the dispute may need to pass through the CBA’s grievance machinery and, if unresolved, voluntary arbitration.

Voluntary arbitrators have original and exclusive jurisdiction over unresolved grievances involving CBA interpretation or enforcement of company personnel policies. Filing directly with the wrong forum can cause delay. (Lawphil)

3. File a Request for Assistance under SEnA

For most individual labor disputes, the employee may file a Request for Assistance under the Department of Labor and Employment’s Single Entry Approach, or SEnA.

SEnA generally provides a mandatory conciliation-mediation period of up to 30 calendar days. Its purpose is to allow the parties to exchange computations, documents, and settlement proposals before formal litigation. A settlement reached through SEnA is binding and immediately enforceable. (Department of Labor and Employment NCR)

4. File the appropriate labor case if no settlement is reached

If SEnA does not resolve the matter, the dispute may be endorsed to the appropriate office, commonly the National Labor Relations Commission Regional Arbitration Branch for an individual retirement-pay money claim.

A complaint should clearly state:

Date of hiring;
Date and legal basis of retirement;
Latest salary rate;
Credited years of service;
Retirement formula used by the employer;
Disputed overtime, bonus, commission, or allowance;
Statutory minimum computation; and
Amount allegedly underpaid.

5. Do not ignore the three-year prescriptive period

Money claims arising from employment must generally be filed within three years from the time the cause of action accrued under Article 306 of the Labor Code. For an underpaid retirement benefit, accrual commonly relates to the date the benefit became due and the employer failed or refused to pay the correct amount.

Internal discussions with HR should not be allowed to continue indefinitely while the prescriptive period is running. (Lawphil)

Common Mistakes and Practical Problems

Treating all recurring payments as basic salary

A payment can appear every month without becoming basic salary. Regular overtime may simply mean that the employee frequently worked beyond normal hours. A recurring productivity incentive may still depend on performance conditions.

Looking only at the payslip label

Employers sometimes use labels such as “allowance,” “incentive,” or “bonus” for payments that may actually form part of the compensation structure. Conversely, calling something “monthly bonus” does not automatically make it salary. The payment’s purpose and conditions are more important than its label.

Comparing formulas instead of total benefits

A company plan paying one month per year of service may be more favorable than the 22.5-day statutory benefit, even if it excludes the separate 13th-month and leave components from its stated formula.

The correct comparison is usually the total amount payable under each scheme.

Using an unexplained daily-rate divisor

The retirement computation should disclose how a monthly salary was converted to a daily rate. An unexplained divisor can materially reduce the benefit, especially after decades of service.

Confusing retirement pay with final pay

Retirement pay is separate from other amounts that may be due, including:

Salary up to the last working day;
Proportionate 13th-month pay for the final year;
Reimbursable expenses;
Earned commissions already due;
Convertible leave credits under company policy; and
Other vested contractual benefits.

Signing a quitclaim without a breakdown

A quitclaim is not automatically invalid, but a voluntarily executed and reasonable settlement can make a later claim more difficult. Before signing, the employee should have a written computation showing the basis of the retirement payment and every amount covered by the release.

Confusing employer retirement pay with SSS retirement benefits

Retirement pay under Republic Act No. 7641 is an employer obligation. An SSS pension or lump-sum retirement benefit is a separate social-security benefit based on SSS contributions and salary credits.

Receiving one does not ordinarily replace the other.

Special Situations

Employees working part-time

Part-time status does not by itself remove an employee from Republic Act No. 7641. The employee may qualify if the age, service, coverage, and other legal requirements are met. The salary basis must reflect the applicable rate and work arrangement. (Lawphil)

Government employees

Employees covered by Civil Service and GSIS rules are generally outside the private-sector retirement framework under Republic Act No. 7641. Their retirement benefits depend on the applicable government retirement law, appointment, salary record, and GSIS coverage.

Foreign employees working in the Philippines

A foreign national employed by a private Philippine employer is not ordinarily excluded from labor protection solely because of nationality. Coverage still depends on the employment relationship, retirement plan, length of service, age, and statutory exemptions.

Where the employee has already left the Philippines, a representative may need a special power of attorney. Documents signed abroad may require an apostille or appropriate consular authentication when they will be formally submitted and their authenticity must be established.

Employees retained beyond age 65

An employer and employee may agree to continue employment beyond the normal compulsory retirement age. The retirement date, payment date, and treatment of service after age 65 should be documented clearly to avoid disputes over additional credited service.

Frequently Asked Questions

Is overtime included when computing the 22.5 days?

Normally, no. The 22.5 days are applied to the latest regular salary rate. Overtime is additional compensation for work beyond normal hours and is generally excluded unless a plan, agreement, or enforceable company practice provides otherwise.

Is the entire 13th-month pay added to retirement pay?

No. The statutory formula includes one-twelfth of the 13th-month pay as part of the one-half-month salary for every year of service. This is commonly represented by 2.5 days within the 22.5-day formula.

Is a Christmas bonus included?

A discretionary Christmas bonus is generally excluded. It may be included if a retirement plan or agreement expressly covers it or if the payment has been integrated into regular salary or the retirement-pay base through an enforceable practice.

Are monthly incentives included?

It depends on how they are earned. Incentives dependent on targets, productivity, profits, or management approval are usually excluded. A fixed and guaranteed payment forming part of compensation for ordinary work may require inclusion, depending on the documents and actual payroll treatment.

Are commissions included in retirement pay?

Some commissions may be included. A sales commission directly tied to an employee’s individual sales may form part of salary. An overriding commission, productivity incentive, or profit-sharing payment may be excluded. The Supreme Court treats this as a fact-specific question.

Can a company plan exclude overtime and bonuses?

Yes. A plan may expressly exclude them, particularly where the plan provides benefits higher than the Republic Act No. 7641 minimum. The total plan benefit cannot fall below the statutory floor.

Does the five-day service-incentive-leave component apply even if I used my leave?

The five-day component forms part of the statutory 22.5-day retirement formula. It is not simply the payment of whatever unused service incentive leave remains in the employee’s current leave balance.

Does six months count as one year for retirement purposes?

Yes. After counting completed years, a remaining fraction of at least six months is treated as one whole year. A fraction below six months is generally disregarded under the statutory formula.

Is retirement pay taxable?

A qualified retirement benefit under Republic Act No. 7641 may be exempt from income and withholding tax when the statutory conditions are met. Benefits under a private retirement plan follow separate tax-qualification rules, including current Bureau of Internal Revenue requirements. The BIR has clarified that Republic Act No. 7641 and private-plan exemptions should be evaluated according to the retirement scheme actually covering the employee. (Bir Cdn)

How long do I have to claim an underpayment?

Employment money claims generally prescribe after three years from accrual. An employee should preserve written demands, computations, retirement documents, and proof of when payment was due or refused.

Key Takeaways

Ordinary overtime pay is generally not included in the statutory retirement-pay base.
Discretionary, productivity, performance, and profit-sharing bonuses are usually excluded.
The statutory formula expressly includes one-twelfth of the 13th-month pay.
The minimum retirement benefit is generally the latest daily salary rate multiplied by 22.5 days and credited years of service.
A retirement plan or CBA may provide broader inclusions—or expressly exclude overtime and bonuses—provided the total benefit is not below the statutory minimum.
Fixed bonuses, commissions, and allowances require a factual examination of how they are earned and treated.
A deliberate and consistent company practice may create a more favorable enforceable benefit.
Employees should compare the company-plan amount with the Republic Act No. 7641 minimum and keep the underlying computation and payroll records.
Most disputes begin with SEnA conciliation, while CBA or personnel-policy disputes may belong in grievance machinery and voluntary arbitration.
Retirement-pay money claims are generally subject to a three-year prescriptive period.