Retirement Pay at Age 60 and the 5-Year Service Rule—Does “Contractual” Service Count? (Philippine Labor Law)

Philippine private-sector focus • Practical guide for workers, HR, and counsel • Not legal advice

The snapshot

Statutory basis. In the absence of a company retirement plan, Article 302 of the Labor Code (formerly Art. 287), as amended by R.A. 7641 (“Retirement Pay Law”), entitles an employee who reaches age 60 or more but not beyond 65 and who has served at least 5 years in the establishment to retirement pay = at least one-half (½) month salary for every year of service (a fraction of at least 6 months counts as 1 year).
Does “contractual” service count? Yes—if it was employment with the same employer/establishment. The law covers employees regardless of position, designation, or employment status (regular, probationary, casual, project/seasonal, fixed-term/“contractual”), so long as they are employees under labor standards—not independent contractors—and the service was rendered in the same establishment.
Big caveat: Service with a manpower/third-party contractor generally counts for the contractor (agency), not the principal—unless the arrangement is later adjudged labor-only contracting (in which case the principal is deemed the employer from the start), or the principal’s retirement plan/policy expressly “bridges” prior agency service.
Who’s excluded from the statute: Government employees and GOCCs with original charters; domestic workers; employees already receiving at least the statutory minimum under an employer plan/CBA; and employees of retail, service, and agricultural establishments with ≤10 employees (small-enterprise exemption). A company plan may, however, grant benefits even when the statute would not.
Computation shorthand: “½ month salary” under R.A. 7641 = 15 days + 1/12 of 13th month pay (≈2.5 days) + cash equivalent of up to 5 days service incentive leave (SIL) (if the employee is legally entitled to SIL) = 22.5 days of salary per year of service as a common baseline.

1) Legal framework and coverage

Core rule

If there is no employer retirement plan or CBA, an employee is entitled to statutory retirement pay if both are true:

Reaches 60 to 65 years old (60 = optional; 65 = compulsory), and
Has at least 5 years of service in the establishment.

If the employer has a plan/CBA, it governs so long as it is at least as beneficial as the statutory minimum. Plans may also cover people whom the statute would otherwise exclude.

Who’s covered (private sector)

All private-sector employees—rank-and-file and managerial/supervisory—regardless of status (regular, probationary, casual, fixed-term/“contractual,” project, seasonal, part-time), so long as there is an employer-employee relationship.
Exclusions by statute (common):
- National government/Local government/GOCCs with original charters
- Domestic workers (kasambahay)
- Retail, service, and agricultural establishments with 10 or fewer employees
- Employees already receiving retirement benefits at least equal to the law under an employer plan/CBA.

2) The 5-year service requirement—how to count service

A. Golden rule: “Employee” status controls

Labels (e.g., “project-based,” “seasonal,” “contractual,” “consultant”) don’t decide coverage—the facts do. If the worker performed activities necessary or desirable to the business, was subject to control as to means and methods, and was paid as an employee, the periods in which those facts existed will generally count toward the 5-year requirement.

B. What typically counts toward 5 years

Probationary service (counts).
Casual service (counts; and after 1 year with the same employer a casual employee becomes regular as to the activity, but all time still counts).
Fixed-term/“contractual” directly hired by the employer (counts; repeated term renewals can be aggregated).
Project or seasonal employment with the same employer (counts; service across successive projects/seasons may be added up).
Part-time service (counts; the “years” count the same—the pay is based on the part-time salary).
Secondment or reassignment within the same corporate employer (counts).
Suspensions or off-detail periods where employment subsists (e.g., security guards on “floating” status under Art. 301) count for the 5-year threshold; however, those days don’t increase the daily rate used in computation.

Continuity. The statute does not require the 5 years to be strictly continuous. Periods of authorized leave, weekends/holidays, and other normal breaks do not break service. Where there were actual separations (e.g., end-of-project, resignation, dismissal) and later rehiring by the same employer, many HR practices and decisions aggregate prior service, especially if the employer itself recognizes “bridging.” If there was a clean break and no bridging policy or adjudication of continuity, prior service may not be creditable—this is fact-sensitive.

C. What doesn’t usually count

Service rendered as an independent contractor/consultant (no employment relationship).
Service performed while employed by a legitimate manpower/contractor, even if assigned to the same principal; it counts for the contractor, not the principal—unless:
- The arrangement is ruled labor-only contracting (principal deemed the employer from the start), or
- The principal’s plan/CBA/HR policy expressly bridges prior agency service.
Service with a different employer entity (even within a group) unless a plan/CBA bridges inter-company service or the entities are found to be a single enterprise for labor purposes.

D. Common “contractual” scenarios

Direct fixed-term → regular with the same employer Example: 2 years on successive fixed-term contracts, later regularized for 3+ more years. Result: The first 2 years count; total service ≥5 years → qualifies at age 60.
Agency-hired (legitimate contractor) → absorbed by principal Example: 3 years with Agency A assigned to Principal P, then absorbed by P for 2 years. Result: By default, 3 years count for Agency A; 2 years for P. Unless bridged, the employee has only 2 creditable years with P toward P’s 5-year rule.
Agency arrangement later found to be labor-only contracting Result: The principal is the real employer ab initio; all service counts for the principal.
Seasonal employment (e.g., milling or harvest seasons) for the same employer Result: Aggregate seasons that add up to 5 years to meet the threshold, provided the worker kept being re-engaged by the same employer.

3) Retirement ages and interaction with the 5-year rule

Optional retirement: An eligible employee may opt to retire any time from 60 to before 65, if the 5-year service requirement is met.
- If an employee at 60 has <5 data-preserve-html-node="true" years, the statute doesn’t require retirement pay (a plan might).
Mandatory retirement: An employer may compulsorily retire at 65; statutory pay is still conditioned on ≥5 years’ service.
No forced retirement below 60 under the statute (absent a more generous plan); doing so risks illegal dismissal.

4) How to compute statutory retirement pay

A. Formula (statutory floor; employer plans can be better)

Retirement Pay = (½ month salary) × (Years of Service) Where ½ month salary includes: 15 days + 1/12 of 13th month pay (≈ 2.5 days) + cash equivalent of up to 5 SIL days (if employee is entitled to SIL). A fraction of ≥6 months = 1 full year.

Notes on the components

Salary base. Use the last salary rate (basic salary). Non-integrated allowances are typically excluded unless your plan/CBA says otherwise or they are part of “basic wage.”
SIL component. Include the 5 days only if the employee is entitled to SIL under the Labor Code (e.g., not field personnel; and not already enjoying at least 5 days vacation leave with pay as a substitute).
Piece-rate/commissioned employees. Compute an equivalent daily wage (often an average over the last 12 months) and apply the same 22.5-day yardstick.
Part-time employees. Use their part-time basic rate.

B. Quick illustration

Last daily basic wage: ₱800
Years of service: 14 years and 7 months → 15 years
½ month = 22.5 days × ₱800 = ₱18,000
Retirement pay = ₱18,000 × 15 = ₱270,000

If there is a company plan/CBA with a more generous formula (e.g., “1 month per year”), use the better benefit.

5) Company retirement plans and CBAs

Employers may adopt plans that:
- Lower the optional age (e.g., 55) or enhance the formula;
- Bridge prior service (e.g., crediting agency or group-company service);
- Define “continuous service,” forfeiture rules, early/late retirement, etc.
Floor rule: A plan cannot give less than R.A. 7641’s minimum.
No “double recovery” by default. As a general rule, an employee does not receive both statutory separation pay and retirement pay for the same termination unless the plan/CBA clearly allows both. Always read the exact text of the plan/CBA.

6) Taxes (high-level)

Statutory retirement benefits under R.A. 7641 are generally income-tax-exempt if the statutory conditions are met (retirement under the law; no employer plan that’s less than the statutory minimum).
Private benefit plans approved by the BIR follow separate age/tenure conditions for tax exemption (commonly, ≥50 years old and ≥10 years of service with the employer at first retirement under that plan).
Practice tip: Tax treatment can be technical—coordinate HR + payroll + tax early to avoid withholding errors.

7) Process, proof, and timing

When does the claim accrue? Upon retirement (or upon employer refusal to pay when due).
Prescription: Money claims under the Labor Code generally prescribe in 3 years from accrual. File within this period (SEnA/DOLE or NLRC/NCMB, as applicable).
What documents help?
- Contracts/appointment letters (including fixed-term/“contractual” papers)
- Payroll records/payslips, SSS/R3 contribution records, COEs
- ID badges, gate logs, deployment orders (for agency/guard/construction)
- Plan/CBA and HR policies (bridging, definitions, formulas)

8) Edge cases and FAQs

Q: I’m 60 with 4 years and 10 months of service. Do I qualify? A: Not for the statutory minimum—your tenure is short of 5 full years. Some plans allow retirement benefits regardless of tenure; check your company plan.

Q: I worked 3 years via an agency at Company X, then 3 years directly with Company X. Can I retire at 60 with statutory pay from Company X? A: Yes—but only the 3 direct years automatically count for X unless (a) the agency arrangement was labor-only, or (b) X’s plan/HR policy bridges prior agency service. If either applies, you may reach the 5-year threshold with X.

Q: I had back-to-back 5-month contracts directly with the same employer for years. Do those periods count? A: If those contracts reflected an employment relationship with the same employer, the aggregate service typically counts toward the 5-year threshold. Labels don’t defeat employee status.

Q: I’m a seasonal worker rehired each season for 7 years by the same employer; the off-season I don’t work. Does this reach 5 years? A: Yes—the seasons worked may be aggregated to reach 5 years with the same employer; off-season months don’t add days to computation but don’t negate your accumulated service.

Q: Our company plan says only “regular” service counts. Is that valid? A: A private plan may impose plan-specific rules only if the result remains at least as beneficial as the statutory minimum. To qualify under the statute, any employment status with the same employer counts.

Q: Can I be re-hired after retirement at 60–65? A: Yes. Re-employment is usually on fixed-term basis. This is separate from your retirement benefit already earned.

Q: We’re a small retail/service/agri shop with ≤10 employees. Do we owe statutory retirement pay? A: The small-enterprise exemption applies under the statute. But an employer may voluntarily provide a plan.

9) Employer and employee checklists

For HR/Employers

Map each worker’s employment history (probationary/casual/fixed-term/project/agency) and determine who the employer was at each stage.
Decide and document any bridging policy (e.g., agency-to-direct, inter-company).
Keep a clean plan/CBA with a formula ≥ statutory and clear definitions (continuous/broken service, inclusions, forfeiture).
Coordinate tax and withholding early.

For Employees

Keep copies of contracts, payslips, SSS records, COEs, and deployment notices.
If your path included agency assignment, check who employed you at each time, and whether the principal’s plan bridges that service.
Request a written retirement benefits computation before filing the formal retirement.
If there’s a dispute, pursue SEnA (conciliation) promptly; keep the 3-year prescriptive window in mind.

10) Practical “counting contractual service” rules of thumb

If you were an employee of the company (whatever the label), your service counts.
If you were agency-deployed, it counts for the agency, not the principal—unless labor-only contracting or plan bridging applies.
Broken service can often be aggregated if you kept being rehired by the same employer; clean breaks without bridging may not be creditable.
Always compare the plan/CBA to the statute and use whichever is more beneficial.
When in doubt, document everything and get the computation in writing.

Final note

This guide summarizes the mainstream reading of R.A. 7641 and the Labor Code provisions on retirement, with emphasis on whether “contractual” service is creditable to meet the 5-year requirement. Specific outcomes hinge on facts (who the real employer was, whether a plan bridges prior service, and whether any contracting was labor-only). For contested cases or high stakes, consult Philippine labor counsel to evaluate your exact employment history, plan language, and documentation.