Introduction

In Philippine labor law, the manner in which an employee is paid — whether through a fixed monthly salary or a daily rate — is not merely an administrative choice. It fundamentally affects the computation and entitlement to almost all statutory monetary benefits, minimum wage compliance, social security contributions, tax withholding, and even the application of the “no work, no pay” principle.

The distinction has been shaped by decades of Department of Labor and Employment (DOLE) issuances and Supreme Court jurisprudence, particularly on whether certain benefits are deemed “already integrated” into the fixed monthly pay or must be paid separately.

This article exhaustively discusses every legal aspect of the two systems in the Philippine context.

Legal Basis and Classification

The Labor Code (Presidential Decree No. 442, as amended) does not explicitly require either system. Articles 83–96 (Normal Hours of Work) and Articles 97–127 (Wages) simply require that wages be paid at least twice a month, in legal tender, and not below the statutory minimum.

The distinction arises from interpretation and practice:

Fixed monthly salary employees are those whose contract states a fixed amount “per month” and who receive the same amount every payroll period regardless of the number of working days in that month (except for proportionate deductions for unauthorized absences or tardiness).
Daily-rate employees are paid only for actual days rendered, strictly following the “no work, no pay” principle except where the law mandates payment even without work (regular holidays, service incentive leave, etc.).

Key Supreme Court Doctrines Establishing the Distinction

Chartered Bank Employees Association v. Ople (G.R. No. L-44717, August 28, 1985)
The Supreme Court first ruled that employees paid a fixed monthly salary are NOT entitled to separate holiday pay for unworked regular holidays because their monthly compensation is uniformly paid “regardless of the number of working days therein.”
Insular Bank of Asia and America Employees’ Union v. Inciong (G.R. No. L-52415, October 23, 1984)
Reaffirmed that monthly-paid employees are presumed paid for unworked regular holidays.
Wellington Investment and Manufacturing Corp. v. Trajano (G.R. No. 114698, July 3, 1995)
Explicitly held: “Employees with fixed monthly salaries are not entitled to holiday pay on regular holidays that fall on their scheduled rest day or on a day when no work is scheduled.”
Jose Rizal College v. NLRC (G.R. No. 65482, December 1, 1987)
Monthly-paid teachers paid on a 12-month basis are not entitled to holiday pay during semestral/Christmas breaks because the salary is already for the entire year.

These rulings remain good law and are consistently applied by DOLE and the NLRC.

Effect on Each Statutory Monetary Benefit

1. Regular Holiday Pay (11 or 12 holidays per year)

Fixed monthly salary: NO additional pay for unworked regular holidays. Already integrated into the monthly salary.
Daily rate: Entitled to 100% holiday pay even if no work is done (provided present or on paid leave the day before/after), plus 200% if worked.

Result: Daily-rate employees earn more in months with many holidays.

2. Special Non-Working Days (usually 3–5 per year)

Both systems follow “no work, no additional pay” principle (30% premium if worked, 50% if on rest day). However:

Fixed monthly: Employee still receives full monthly salary even if the special day is unworked.
Daily rate: No pay if no work.

Result: Monthly-paid effectively get paid for special days; daily-paid do not.

3. Service Incentive Leave (5 days per year)

Both entitled.

Cash conversion:

Fixed monthly: (Monthly salary ÷ applicable divisor) × 5
Daily rate: Daily rate × 5

4. 13th Month Pay (Presidential Decree No. 851)

Both entitled to 1/12 of total basic salary earned in the calendar year.

Fixed monthly: Simply total monthly salaries paid ÷ 12
Daily rate: Total wages actually received in the year ÷ 12 (includes holiday pay, SIL pay, premiums)

Result: Daily-rate employees often receive higher 13th month pay because of holiday/premium pay inclusions.

5. Overtime Pay, Night Shift Differential, Rest Day Premium, Holiday Premium

Both entitled if rank-and-file.

Computation differs because the basic rate divisor differs:

Commonly accepted divisors for monthly-paid employees (DOLE Handbook on Workers’ Statutory Monetary Benefits, latest edition):

Purpose	Recommended Divisor	Rationale
Overtime on ordinary day	261 (5-day week)	Approx. actual working days in a year
	313 (6-day week)
Overtime + night shift + holiday	365	Includes rest days and holidays
When company pays rest day premium	393.5 or 394.4	365 + average holiday premium + SIL cost
Absence/tardiness deduction (common)	30 (calendar days)	Simplest and most employee-favorable

There is no single mandatory divisor. The Supreme Court has accepted 251, 262, 286, 300, 360, and 365 in different cases depending on company practice and what the salary includes.

6. Separation Pay (Art. 298–299 Labor Code, RA 11210 benefits)

Authorized causes: at least 1 month salary or ½ month per year of service, whichever higher.

Illegal dismissal: backwages + separation in lieu of reinstatement (1 month per year).

Computation:

Fixed monthly: Latest monthly salary is used directly.
Daily rate: Latest daily rate × 30 (or 26/22.5 depending on company practice) to arrive at “one month salary.”

Daily-rate employees therefore often receive lower separation pay unless the multiplier used is generous.

7. Retirement Pay (RA 7641)

At least ½ month salary per year of service.

½ month salary = 22.5 days × daily rate

The 22.5 days consist of:

15 days (half-month basic)
5 days service incentive leave
2.5 days (5/12 of 13th month pay)

For fixed monthly employees, courts usually take the latest monthly salary and apply the 22.5/30 formula or simply award ½ latest monthly salary × years.

8. SSS, PhilHealth, Pag-IBIG Contributions and Benefits

Contributions and benefits (sickness, maternity, disability, retirement) are based on Monthly Salary Credit (MSC).

Fixed monthly: MSC is simply the monthly salary (very easy to report).
Daily rate: Employer must compute average monthly compensation (total compensation in last 6 months or semester ÷ 6). Fluctuating daily rates make the MSC lower and more complicated.

Result: Monthly-paid employees almost always have higher SSS/PhilHealth benefits and retirement pensions.

9. Tax Withholding

Monthly-paid employees enjoy smoother annualization and substitutionary filing (BIR Form 2316). Daily-rate employees often have fluctuating withholding and may need to file ITRs manually.

10. Minimum Wage Compliance

Daily minimum wages are set by Regional Tripartite Wages and Productivity Boards.

Compliance test:

Daily-rate employee: Daily rate must not be below the regional daily minimum.
Fixed monthly employee: There is no statutory monthly minimum wage. Compliance is tested by dividing the monthly salary by the actual number of working days in the particular month; the quotient must not be below the daily minimum.

However, to avoid disputes, most employers use the formula:

Minimum monthly salary = Regional daily minimum × 365 ÷ 12 ≈ daily minimum × 30.42

or use the 393.5 factor when the salary is intended to integrate all benefits.

Advantages and Disadvantages

From the Employer’s View

Fixed Monthly Salary
Advantages:

Simpler payroll administration
No separate holiday pay computation
Lower separation/retirement pay exposure
Easier SSS/PhilHealth reporting
Promotes employee retention (stable income)

Disadvantages:

Pays for non-working days (absences must be strictly monitored)
Higher exposure if many absences are tolerated

Daily Rate
Advantages:

Strict “no work, no pay” reduces cost during low season
Naturally lower separation/retirement liability

Disadvantages:

Higher holiday pay, 13th month, and premium exposure
More complex payroll and contributions
Higher turnover risk

From the Employee’s View

Fixed Monthly Salary
Advantages:

Guaranteed income every 15th and 30th
Paid even on special non-working days
Higher SSS/PhilHealth benefits
Easier loan applications (banks love payslips with fixed amount)

Disadvantages:

No extra pay for unworked regular holidays
Effective daily rate is lower than a pure daily-rate employee who receives holiday pay

Daily Rate
Advantages:

Earns extra on every regular holiday (can be substantial)
Overtime and premiums directly increase take-home pay

Disadvantages:

No pay when no work (special days, suspension of operations, force majeure)
Lower SSS retirement pension
Banks view income as “unstable”

Best Practices in Drafting Contracts

Explicitly state the structure: “Employee shall be paid a fixed monthly salary of Php ___ payable every 15th and end of month, which amount already includes compensation for regular holidays and special non-working days.”
Specify the divisor to be used for deductions, overtime, and benefit conversion: “For purposes of computing overtime pay, absences, and equivalent daily rate, the factor of 365 days shall be used.”
If using daily rate but wanting to mimic monthly stability, some employers use “guaranteed minimum days” (e.g., not below 22 days per month). This, however, risks reclassification as monthly-paid.
Avoid hybrid wording such as “monthly salary of Php ___ based on daily rate of Php ___.” Courts and DOLE will look at actual practice: if the employee receives the same amount every month, it is fixed monthly regardless of the label.

Common Violations and How DOLE/NLRC Treat Them

Paying monthly but deducting for regular holidays → illegal; double deduction.
Labeling as “daily rate” but actually paying fixed amount every 15th/end-month → treated as monthly-paid; employer liable for underpayment of holiday pay if claimed within 3 years.
Using an excessively high divisor (e.g., 365 when company has 5-day week) → may result in underpayment of overtime; employee can claim difference.

Conclusion

The choice between fixed monthly salary and daily rate is strategic rather than merely administrative. In practice, more than 90% of regular rank-and-file employees in the Philippines are paid fixed monthly because it simplifies compliance, reduces variable costs for employers, and provides income security for employees.

However, daily-rate remains advantageous for seasonal, project-based, or highly variable workloads, and gives employees higher cash flow during holiday-heavy months.

Employers must choose consciously, document the choice clearly in the contract, and apply the corresponding rules consistently. Failure to understand the distinction is one of the most common sources of labor litigation in the Philippines.