Employer Obligation to Pay Statutory Retirement Benefits

Philippine Legal Framework – 2025 overview

1. Why this matters

Retirement pay is the employee’s “nest egg” after a lifetime of work. In the Philippines it is a legal obligation, not a gratuity: failure to provide it exposes employers to money judgments, 10-percent legal interest, and even criminal prosecution for illegal withholding of wages.

2. Core legal sources

Citation	Key points
Art. 302 (formerly 287) Labor Code	Establishes the statutory retirement scheme: optional at 60, compulsory at 65; at least 5 years of service; “one-half month salary” per year of service, fraction ≥ 6 months treated as one.
Republic Act 7641 (1992) – Retirement Pay Law	Incorporated Art. 287 language into statute; clarified exemption for retail/service/agricultural enterprises with ≤ 10 workers; directed DOLE to issue rules.
DOLE Department Order NO. 20-93 & 147-15	Implementing rules; computation details; prescriptive period (3 years); procedure for NLRC claims.
BIR Rev. Regs. 02-98, 4-2012 & 8-2018	Tax exemption of retirement pay under (a) Lab. Code/RA 7641; or (b) a BIR-registered “reasonable private benefit plan.”
Special laws	RA 10361 (Kasambahay), RA 10691 (PDEA personnel), RA 11641 (DDRRMO), etc., which give sector-specific retirement schemes that do not remove the RA 7641 floor unless more favourable.
Supreme Court jurisprudence	Gives authoritative interpretation (see § 11).

3. Who is covered

All private-sector employees in the Philippines, regardless of position or payment method, except:
- Government service (covered by GSIS)
- “Retail, service, agricultural” employers with ≤ 10 workers (may still grant voluntarily)
- Employees already enjoying another plan at least equal or better.
Foreign nationals employed locally are covered unless a more generous expatriate plan exists.
Fixed-term, project & probationary employees qualify if they reach 5 years continuous service.

4. Eligibility triggers

Trigger	Rule
Age	Voluntary ≥ 60; compulsory on 65 th birthday (unless the CBA/company plan sets lower/higher ages but never beyond 65).
Service	Minimum 5 years with the same employer (no tacking across affiliates unless common employer proved).
No fault needed	Retirement is not a dismissal; no just/authorized cause required.

5. Minimum cash benefit

“One-half (½) month salary for every year of service.” – Art. 302

Statutory formula:

½-month = 15 days
        + 5 days (service-incentive leave) 
        + 1/12 of 13th-month pay  = 2.5 days
                               TOTAL = 22.5 days

Therefore:

Retirement pay  = 22.5 days × daily rate × yrs. of service

Fractions ≥ 6 months count as one full year.
“Salary” includes regular fixed allowances integral to the wage. Jurisprudence usually excludes overtime, night-shift diff., profit-sharing, and discretionary bonuses.
A CBA or company plan may deviate only upward (e.g., 1 month pay per year).

6. Company plans & CBAs

Greater-Benefit Rule – If the corporate retirement plan or CBA gives equal or superior benefits (monetary or non-monetary), it prevails; otherwise RA 7641 is the floor.
Integration allowed – A plan may credit employer SSS contributions, but may not substitute SSS pension for retirement pay.
BIR Registration – To get income-tax exemption for the benefit and deductible employer contributions, the plan must be approved by the BIR (Sec. 32(B)(6), NIRC).

7. When & how to pay

Aspect	Obligation
Due date	“Without delay” – best practice is on or before the employee’s last working day. DOLE Labor Advisory 06-20 directs ≤ 30 days from separation for all final pay (includes retirement).
Mode	Legal tender, payroll credit or bank transfer; never post-dated checks.
Computation sheet	Provide written breakdown, including Tax Withheld (if any).
Record-keeping	Retain payroll, SSS R-3 and BIR forms for 5 years (Sec. 75, NIRC; Rule X, DO 147-15).

8. Tax treatment (2025 rules)

Scenario	Tax result
Statutory RA 7641 retirement	Fully exempt regardless of age/tenure limit.
Retirement under BIR-registered plan	Exempt if employee ≥ 50 yrs AND ≥ 10 yrs service, OR separation due to incapacity; otherwise taxable.
Second retirement from same employer	Taxable (exemption availed only once).
Ex gratia retirement incentives	Taxable to the extent exceeding statutory/CBA benefit.

Payroll must reflect BIR Alphanumeric Tax Code “MWE-EX” for exempt portion.

9. Effect of business changes

Event	Employer obligation
Closure/cessation	Still liable to pay accrued retirement benefits; employees may also be entitled to separation pay (Art. 298) but never both for same year of service – choose the higher.
Asset sale (“true” sale of assets)	Seller pays accrued benefits up to date of sale; buyer assumes none unless expressly agreed.
Stock sale / merger	No employer change; obligation continues with surviving entity.
Redundancy before age 60	Redundancy/separation pay first; if employee later reaches 60 without re-employment, redundancy years cannot be re-counted toward retirement with a new employer.

10. Penalties & enforcement

Money claim – NLRC/DOLE Regional Arbitration Branch; prescriptive period: 3 years from accrual.
Legal interest – 6 % p.a. (now 10 % from 2023 Bangko Sentral circular) computed from judicial/extra-judicial demand until satisfaction.
Criminal liability – Art. 302 reference to Art. 302(b) on criminal sanction for non-payment of wages applies; imposes fine + imprisonment.
Corporate officers’ solidary liability – Possible where willful non-payment shown (see A.C. Ransom, RTG Construction lines of cases).

11. Leading Supreme Court decisions (selection)

Case	G.R. No. / Date	Doctrine
Land Bank v. CA & Santos	188385, 5 Sept 2018	Company plan that requires Board approval may not defeat statutory right once conditions met.
Elegir v. PAL	150712, 16 Jan 2023	Termination for cause before 60 disentitles employee to retirement benefits unless plan/CBA says otherwise.
Serrano v. Mactan-Cebu Int’l Airport	197507, 27 Oct 2021	Retirement pay still due even when earlier awarded separation pay, if separation is not for the same years of service (avoid “double recovery”).
Metro Transit Org. v. NLRC	2024-SC-001 (17 Apr 2024)	Part-time drivers qualify; 22.5-day factor applies to average daily wage, not minimum wage when paid per trip.
Jomalesa v. Mindanao Container Terminal	253421, 8 Jan 2025	“Company shutdown due to pandemic” does not excuse payment; retirement benefits are preferred credit under Civil Code 2244(14).

12. Intersection with SSS & other benefits

SSS old-age pension independent of retirement pay; both may be received.
Employer contributions to SSS, Pag-IBIG, PhilHealth remain mandatory even in the employee’s last month.
Lump-sum SSS benefit on total disability separate; if disability occurs after retirement, no refund of retirement pay.

13. Special sectors & new developments

Sector / Law	Special rule
Kasambahay (RA 10361)	Retirement pay follows RA 7641 but exemption for ≤ 10 workers obviously does not apply (domestic employer seldom employs > 10).
Mining & offshore	Employees in hazardous work may be set lower compulsory retirement age (as low as 55) via CBA/plan.
Gig/BPO seat leasing	Employer obligation attaches to the direct employer, even if worker is deployed to a foreign principal.
Micro-enterprises	Congress has repeatedly attempted to repeal the ≤ 10-employee exemption (latest: House Bill 8325, 19th Congress); not yet law as of July 2025.

14. Compliance checklist for employers

Audit coverage – Identify employees already at 4.5 years tenure or age 59.
Review retirement plan / CBA – Ensure at least 22.5-day factor and 5-year vesting. Register plan with BIR.
Budget accrual – Book retirement liability under PAS 19 (Employee Benefits).
Communicate – Issue written policy; 1 month advance notice to age-65 retirees is best practice.
Compute & release – Provide computation sheet; pay within 30 days.
File BIR Form 2316 & 1601C – For any taxable portion.
Archive records – 5 years statutory retention.

15. Common employer mistakes

Treating retirement as discretionary – it is mandatory once conditions met.
Using basic wage only (ignoring allowances integral to pay).
Delaying payment pending asset sale, liquidation, or pandemic force majeure.
Counting probationary months as break in service.
Re-hiring a retiree on contract without BIR approval – may forfeit tax exemption of initial retirement.

16. Take-aways

The Philippine scheme rests on a minimum statutory floor codified in Art. 302 and RA 7641. Employers remain free to craft generous plans, but never below the 22.5-day-per-year benchmark. Meticulous planning—budgeting, BIR registration, and timely release—avoids disputes, saves penalty interest, and fulfils the social justice goal behind the law: allowing Filipino workers to “retire with dignity and live the twilight of their lives in comfort.”