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.”