This article explains the Philippine rules for retirement pay in the private sector: who is covered, when retirement is due, how to compute the minimum benefit (including the “one-half month salary” rule), what counts as continuous service, how business closure affects entitlements, and common edge cases (allowances, part-timers, daily-paid workers, tax considerations, etc.).

Scope. This discussion covers private-sector employment governed by the Labor Code and the Retirement Pay Law (R.A. 7641), as renumbered in the Labor Code (Article on Retirement). Public officers/employees under the civil service, uniformed personnel, and GOCCs covered by GSIS are outside scope.

1) Coverage and basic entitlement

Default rule (no company plan/CBA):
- Optional retirement: employee is 60–64 years old and has at least 5 years of service with the employer.
- Compulsory retirement: at 65, regardless of employer policy (subject to lawful extensions by agreement).
- Minimum benefit: at least one-half (½) month salary for every year of service, with a fraction of at least six (6) months counted as one whole year.
When there is a company retirement plan or CBA:
- The plan/CBA applies if it provides benefits at least equal to or better than the statutory minimum. If it’s less generous, the statutory minimum fills the gap.
Common exclusions/limitations (by law):
- Domestic helpers/kasambahay and employees of retail, service, and agricultural establishments with ≤10 employees are generally excluded from mandatory coverage (unless a plan/CBA grants retirement).
- Probationary, project-based, seasonal, or part-time employees are not excluded per se—coverage turns on whether they satisfy the age and service-length requirements (see continuous service rules below).

2) The “one-half month salary” rule (the 22.5-day standard)

By statute and implementing rules, “one-half month salary” is a term of art:

15 days of salary
+ 2.5 days (which represents 1/12 of the 13th-month pay)
+ 5 days of service incentive leave (SIL) if the employee is legally entitled to SIL

Total: 22.5 days per year of service for employees entitled to SIL. If an employee is not legally entitled to SIL (e.g., certain field personnel or those in excluded categories), the minimum becomes 17.5 days (15 + 2.5).

Key point: The law fixes this “days-per-year” figure. You do not add COLA or discretionary allowances to “days”; those may affect the daily rate, not the days-per-year multiplier.

3) What salary base should you use?

Use the employee’s latest salary rate at retirement.

Monthly-paid: divide the monthly salary by 30 to get the daily rate (unless a company policy/CBA uses a more favorable divisor).
Daily-paid: use the actual daily wage on the retirement date (considering the applicable workdays per week in your payroll system when annualizing).
Hourly-paid: convert to a daily rate consistent with your established schedule (hours per day), then apply the same formula.

What counts as “salary”? As a baseline, basic wage is used. Guaranteed wage-integrated items (e.g., fixed “salary-differential” that is part of basic pay) are included. Pure allowances (transport/meals that are truly discretionary or reimbursable) and COLA are generally excluded from the salary base unless the CBA/plan or long, consistent employer practice treats them as part of basic pay. When in doubt, check the text of your plan/CBA and the payroll characterization.

4) Step-by-step computation

A) Employees entitled to SIL (most rank-and-file)

Retirement Pay = Daily rate × 22.5 days × Years of service (rounding per 6-month rule)

Example (monthly-paid):

Latest monthly salary: ₱30,000 → Daily rate = ₱30,000 ÷ 30 = ₱1,000
Credited service: 12 years and 7 months → counts as 13 years
Pay = ₱1,000 × 22.5 × 13 = ₱292,500

B) Employees not entitled to SIL

Use 17.5 days instead of 22.5. Pay = Daily rate × 17.5 × Years of service (6-month rule applies)

C) Rounding service (“6-month rule”)

≥ 6 months in the last, incomplete year counts as 1 year.
< 6 months in the last, incomplete year is ignored.

5) Continuous service: what counts toward the 5-year minimum and years of service

General approach: The law requires “at least five (5) years of service.” In practice:

Counted as service: Periods when the employee remains employed even if not working, including paid leaves, maternity/paternity leave, service-connected sickness/injury leave, company-approved unpaid leaves, temporary suspension of work without severing employment (e.g., bona fide temporary lay-off where the relationship subsists).
Not counted / resets service: Resignation, termination, or end of fixed-term/project that severs the employment relationship. If rehired later, the clock restarts, unless a CBA/plan or written agreement provides for bridging of prior service.
Seasonal/project workers: Each completed season/project typically does not stitch into “continuous” employment unless the employer recognizes bridging by policy or CBA, or the facts show regular seasonal status with recognized continuity.
Secondments/assignment changes within the same employer group: If one legal employer continuously pays and controls the employee, service is typically continuous. Transfers to a different legal entity break continuity unless the plan/CBA or a specific assumption agreement bridges service.

Tip for HR: Write a bridging-of-service clause (e.g., in mergers, spin-offs, or group transfers) if the intent is to credit prior service for retirement.

6) Business closure & its interaction with retirement/separation pay

A) Closure as an authorized cause (Labor Code): If the company closes or ceases operations not due to serious losses, employees are generally entitled to separation pay (typical baseline: one-month pay or one-half month pay per year of service, whichever is higher, subject to the exact authorized cause invoked).

B) Can an employee get both separation pay and retirement pay?

Default rule of non-duplication: In the absence of a special grant, an employee gets either retirement pay or separation pay—whichever is higher—not both. This avoids a double recovery for the same termination.
Exception: If a CBA/company plan or policy explicitly provides both, the employee may receive both, according to its terms.
Practical approach: Compute both the statutory retirement pay and the authorized-cause separation pay, then pay the higher (or both if your plan/CBA clearly says so).

C) Closure due to serious business losses: The law may excuse separation pay in genuine, duly proven serious losses. However, if an employee is already eligible for retirement under a separate retirement plan/CBA that doesn’t condition benefits on ongoing viability, the plan may still require payment (subject to plan terms and the employer’s financial defenses). Evaluate plan text carefully.

7) Special topics & edge cases

7.1. Allowances, bonuses, commissions

Included in the base only if they are guaranteed and wage-integrated (e.g., a fixed monthly commission that is part of salary).
Excluded if truly discretionary, contingent, or reimbursable (e.g., per-diem, travel reimbursement).
13th-month factor (2.5 days) is already embedded in the 22.5/17.5-day formula—do not add a second 13th-month on top.

7.2. Part-time and daily-paid workers

Coverage depends on age + 5-year service threshold.
Compute from their actual daily rate, then apply 22.5 or 17.5 days per credited year.

7.3. Absences and suspensions

Authorized leaves (paid or approved) do not break continuous service.
Suspensions:
- Preventive suspension pending investigation usually does not sever employment; if it ends in dismissal, service ends at dismissal.
- Penalty suspension (time-bound) does not break the employment tie, though no pay accrues during suspension.

7.4. Death before retirement

The statute does not create a “retirement-on-death” benefit. Company plans often do. Otherwise, standard final pay (earned wages, prorated 13th month, SIL conversion, etc.) is due to heirs; separation pay isn’t typically triggered by death.

7.5. Merger, acquisition, spin-off

Retirement liability depends on who remains the legal employer on paper. If employees are transferred to a new legal entity, bridge service in writing if you intend to recognize prior tenure for retirement.

8) Tax treatment (quick guide)

Always check the latest BIR rules and your plan’s approval status.

Retirement under a BIR-approved private retirement plan may be income tax-exempt if the employee meets age/service conditions (classically, at least 50 years old and at least 10 years of service with the same employer) and the benefit is availed of only once.
Statutory retirement under R.A. 7641 (no private plan) is widely treated as tax-exempt when paid pursuant to the law’s age/service conditions (typically 60–65 with ≥5 years with the employer).
Separation pay due to authorized causes (e.g., closure, redundancy, retrenchment) is generally tax-exempt.
Excess benefits (amounts above the exempt ceiling or not meeting the exemption requirements) may be subject to withholding tax.
Local taxes/fees: Retirement/separation benefits are not subject to SSS, PhilHealth, or Pag-IBIG contributions; check if the company’s plan triggers withholding on non-exempt components.

9) Payroll checklists & documentation

For HR/Payroll before paying retirement:

Verify age and credited service (HRIS, 201 files, contracts, transfer/bridging agreements).
Determine if the employee is SIL-entitled (affects 22.5 vs 17.5 days).
Confirm latest salary rate and what counts as basic for your payroll.
If there’s business closure, compute both retirement and separation pay; apply non-duplication (or pay both if plan/CBA clearly says so).
Review plan/CBA text for better-than-law terms and duplication clauses.
Prepare computation worksheet, quitclaim and release (clear, specific consideration), certificate of employment, BIR tax documents (if any).

10) Worked examples

Example 1: Rank-and-file, monthly-paid, SIL-entitled

Latest monthly salary: ₱40,000 → Daily = 40,000 ÷ 30 = ₱1,333.33
Service: 9 years, 6 months → 10 years credited
Retirement pay = 1,333.33 × 22.5 × 10 = ₱299,999.25 (round per payroll rules)

Example 2: Daily-paid, SIL-entitled

Daily rate: ₱650
Service: 7 years, 2 months → 7 years credited
Retirement pay = 650 × 22.5 × 7 = ₱102,375

Example 3: Not SIL-entitled (field personnel)

Daily rate: ₱900
Service: 12 years, 8 months → 13 years credited
Retirement pay = 900 × 17.5 × 13 = ₱204,750

Example 4: Business closure (no serious losses), choose higher benefit

Monthly salary: ₱30,000 → Daily = ₱1,000
Service: 11 years, 10 months → 12 years
Retirement = 1,000 × 22.5 × 12 = ₱270,000
Separation (using ½ month per year as example baseline) = 1,000 × 15 × 12 = ₱180,000
Pay the higher: ₱270,000 (unless plan/CBA grants both).

11) Frequently asked nuances

Q: Does overtime/premium pay enter the base? A: No. Retirement uses basic rate unless your plan/CBA says otherwise.
Q: Employee turns 65 but has <5 data-preserve-html-node="true" years of service—what now? A: Compulsory retirement at 65 ends employment, but statutory retirement pay minimum requires ≥5 years with the employer. If there’s no qualifying service and no plan, no statutory retirement pay is due (other final pay still applies).
Q: Employee is 62 with 5+ years and the company closes. A: Compute both retirement and separation; pay whichever is more favorable, unless plan/CBA grants both.
Q: Is 13th month also paid on top of retirement pay? A: The 2.5-day factor already accounts for 1/12 of 13th month in the formula. You still pay the regular 13th month for the year pro-rated up to separation, but you do not add an extra 13th month on top of retirement benefit.
Q: Can we bridge prior service after rehire? A: Only if explicitly provided by plan/CBA or a written agreement (e.g., due to group transfer/M&A). Otherwise, service restarts.

12) Practical do’s & don’ts

Do:

Put a clear retirement policy or plan in writing (and register with BIR if seeking tax-exempt status).
Specify salary base composition (basic only vs. integrated items).
State if retirement and separation are non-duplicative or cumulative.
Maintain SIL-entitlement records and leave ledgers.

Don’t:

Use ad-hoc divisors or exclude the 2.5-day factor when computing the ½-month salary.
Assume allowances are included without a basis.
Overlook the 6-month rounding rule.
Ignore plan/CBA terms that can be more favorable than the law.

13) Quick computation templates (copy-ready)

With SIL (22.5-day factor):

Daily Rate = Latest Monthly Salary ÷ 30
Credited Years = Whole Years + (Add 1 if last fraction ≥ 6 months)
Retirement Pay = Daily Rate × 22.5 × Credited Years

Without SIL (17.5-day factor):

Daily Rate = Latest Monthly Salary ÷ 30
Credited Years = Whole Years + (Add 1 if last fraction ≥ 6 months)
Retirement Pay = Daily Rate × 17.5 × Credited Years

Separation Pay (illustrative, closure w/o losses; confirm authorized cause baseline):

Separation Pay = Daily Rate × 15 × Credited Years   (or 30 days per year, whichever is higher)

Final note

The law sets a floor, not a ceiling. Company plans and CBAs often provide better-than-law benefits, or specify that both retirement and separation are payable in special cases like closure. When implementing or auditing computations, rely on three anchors: (1) the statute/rules, (2) your plan/CBA text, and (3) the employee’s documented pay & tenure. For tax and edge-case questions, align with current BIR guidance and any BIR-approved plan conditions.