A Comprehensive Legal Guide under Philippine Labor Law
In the Philippines, the 13th-month pay is a mandatory statutory benefit under Presidential Decree No. 851. While the law is straightforward in its intent—to provide additional financial relief to employees during the holiday season—disputes often arise regarding which specific pay components should be included or excluded from the computation.
Under the law, the 13th-month pay must be at least one-twelfth (1/12) of the total basic salary earned by an employee within a calendar year.
I. Items Included in the "Basic Salary"
For purposes of computing 13th-month pay, "basic salary" includes all remunerations or earnings paid by an employer to an employee for services rendered. However, this is strictly interpreted to mean the base pay for hours worked.
1. Total Basic Wages Earned
This refers to the employee’s hourly, daily, or monthly rate multiplied by the actual time worked. If an employee was on a "leave with pay" status (e.g., used their Vacation Leave or Sick Leave credits), the payments received for those leaves are included in the computation because they are considered part of the basic salary.
2. Salary Increases or Adjustments
Any retroactive salary increases or adjustments granted during the calendar year are integrated into the total basic salary.
3. Commissions
The Supreme Court has clarified (notably in Philippine Duplicators, Inc. vs. NLRC) that if commissions are considered part of the employee's basic wage—meaning they are not discretionary and are directly tied to the effort of the employee in the discharge of their duties—they should be included in the 13th-month pay computation.
II. Items Excluded from the Computation
The Department of Labor and Employment (DOLE) and the Rules Implementing P.D. No. 851 provide a specific list of exclusions. These items are generally considered "allowances" or "monetary benefits" that are not integrated into the base wage.
1. Overtime Pay
Payments for work performed beyond the standard eight hours a day are excluded. This is the most common point of confusion; while overtime pay is "earned," it is not "basic."
2. Premium Pay
Additional compensation for work performed on rest days or special holidays is excluded.
3. Night Shift Differential
The 10% (minimum) additional compensation for work performed between 10:00 PM and 6:00 AM is not part of the basic salary.
4. Holiday Pay
Payment for regular holidays (unworked or worked) is generally excluded from the 1/12 calculation unless the employment contract or company policy specifically states otherwise.
5. Cost-of-Living Allowances (COLA)
Allowances intended to meet the rising costs of living are not considered part of the basic wage for 13th-month purposes.
6. Profit-Sharing Payments
Discretionary bonuses or payments tied to company performance rather than individual labor hours are excluded.
7. Unused Leave Credits (Cash Conversion)
When an employee converts their unused Vacation Leave (VL) or Sick Leave (SL) into cash at the end of the year, this cash-out is not included in the basic salary for the 13th-month pay calculation.
III. The Formula for Computation
The standard formula as prescribed by DOLE is:
| Month | Basic Salary Received |
|---|---|
| January | ₱ 20,000 |
| February | ₱ 20,000 |
| March | ₱ 20,000 (plus ₱5,000 Overtime) |
| ... | ... |
| Total Basic | ₱ 240,000 |
| 13th Month | ₱ 20,000 |
Note: In the example above, the ₱5,000 overtime pay in March is ignored for the final calculation.
IV. Legal Nuances and Exceptions
The "Company Practice" Rule
Under the principle of Non-Diminution of Benefits, if an employer has a long-standing practice (usually spanning several years) of including overtime, night differentials, or bonuses in the 13th-month pay computation, they cannot unilaterally stop doing so. The practice becomes a vested right of the employee.
Resignation or Termination
An employee who resigns or whose services are terminated before the time of payment is still entitled to a pro-rated 13th-month pay. This is calculated from the time they started working during the calendar year up to the time of their separation.
Frequency of Payment
While usually paid in full by December 24, an employer may pay half of the 13th-month pay before the opening of the regular school year and the other half on or before December 24.