In the Philippine labor landscape, the right to retirement benefits is a statutory mandate aimed at providing a financial cushion for employees who have reached the twilight of their working lives. However, a common point of confusion for both employers and employees involves the "Rule of Ten"—the specific exemption for small establishments.
Under the Labor Code of the Philippines, as amended by Republic Act No. 7641 (The Retirement Pay Law), the rules for companies with fewer than ten employees are distinct and often misunderstood.
The General Rule: RA 7641
By default, all employees in the private sector, regardless of their position or the method by which their wages are paid, are entitled to retirement pay upon reaching the age of 60 years (optional) or 65 years (compulsory), provided they have served the establishment for at least five (5) years.
The minimum retirement pay is equivalent to one-half (1/2) month salary for every year of service, where a fraction of at least six (6) months is considered as one whole year.
The "Retail, Service, and Agricultural" Exemption
The law provides a specific exemption for small-scale employers. Article 302 (formerly 287) of the Labor Code states that the mandate to pay retirement benefits does not apply to:
"Retail, service and agricultural establishments operating within the Philippines regularly employing not more than ten (10) employees."
1. Defining "Retail" and "Service"
- Retail Establishment: One principally engaged in the sale of goods to end-users for personal or household consumption.
- Service Establishment: One principally engaged in the sale of services to individuals for their own or household use (e.g., small repair shops, barber shops, or local laundries).
2. The "Regularly Employing" Criteria
The exemption is based on the number of employees regularly employed. If a company fluctuates between 8 and 12 employees depending on the season, the Department of Labor and Employment (DOLE) generally looks at the "regular" or "usual" workforce size. If the headcount is consistently ten or more, the exemption is lost.
Key Legal Implications for Small Companies
If a company qualifies for the exemption (i.e., it is a retail/service/agricultural firm with 1-9 employees), the following legal realities apply:
- No Statutory Obligation: The employer is not legally required by RA 7641 to pay retirement benefits upon the employee's separation due to age.
- Contractual Overrides: Even if the law does not require it, an employer is bound to pay retirement benefits if such a provision exists in the Employment Contract or a Collective Bargaining Agreement (CBA).
- Company Practice: If an employer with five employees has a long-standing "established practice" of giving retirement pay to departing seniors, this may be deemed a "voluntary employer policy" that cannot be unilaterally withdrawn under the principle of non-diminution of benefits.
Calculation Components (For Non-Exempt Entities)
For companies that do reach the ten-employee threshold, the "one-half month salary" is specifically defined by the law to include more than just the basic monthly pay. It consists of:
- 15 days salary based on the latest salary rate.
- 5 days of Service Incentive Leave (SIL).
- 1/12 of the 13th-month pay.
Effectively, this totals approximately 22.5 days of salary per year of service.
Jurisprudence and Compliance
The Philippine Supreme Court has consistently held that the burden of proof rests on the employer to show that they qualify for the exemption. If an employer claims they have fewer than ten employees to avoid paying retirement benefits, they must present payrolls, SSS records, and other documentary evidence to prove the size of their workforce.
Summary Table
| Feature | Companies with <10 data-preserve-html-node="true" Employees (Retail/Service) | Companies with 10+ Employees |
|---|---|---|
| Legal Mandate | Exempt under RA 7641 | Mandatory under RA 7641 |
| Minimum Service | N/A (unless per contract) | 5 Years |
| Retirement Age | N/A (unless per contract) | 60 (Optional) / 65 (Compulsory) |
| Minimum Pay | (unless per contract/practice) | ~22.5 days per year of service |
While the exemption provides relief for micro-enterprises, it is highly recommended that small business owners clearly outline retirement expectations in their employment contracts to prevent future litigation and ensure transparency with their workforce.