Retirement Pay Calculation Formula (Philippines): A Complete Legal Guide

Key takeaway: In the absence of a superior company plan or CBA, the statutory minimum retirement benefit in the private sector is 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. In law, “½ month salary” is a defined term—it is not literally 15 days.

1) Legal Bases & Coverage

Primary statute. The Labor Code provision on retirement (currently renumbered; formerly Art. 287, now commonly cited as Article 302) as amended by Republic Act No. 7641 (The Retirement Pay Law) and its implementing rules.
Who is covered. All private-sector employees, regardless of position or wage payment method, who are not already covered by a retirement plan or a CBA providing benefits at least equal to—or better than—the law.
Who is generally outside the law’s floor:
- Government employees and those of political subdivisions/GOCCs under Civil Service rules.
- Certain personal/household workers.
- Employees already covered by a superior employer plan/CBA (they follow that plan; the law serves as a minimum floor).

If a plan/CBA exists and provides less than the statutory floor, the statutory minimum still applies.

2) Eligibility

Age: Optional retirement at 60, compulsory retirement at 65 (unless a valid plan sets an earlier compulsory age consistent with law).
Service: At least five (5) years of service with the employer/establishment.
- Service includes probationary periods and legally protected leaves.
- A fraction of six (6) months or more counts as one (1) whole year for computing the number of years to be paid.

3) The Statutory Minimum Benefit

A. The legal definition of “½ month salary”

Under the statute/IRR, “one-half month salary” is a composite number of days, not merely 15 days:

15 days, plus
1/12 of the 13th-month pay (equivalent to 2.5 days of pay if you express it as a daily value), plus
the cash equivalent of not more than five (5) days of service incentive leave (SIL), if the employee is entitled to SIL.

Hence, the standard per-year factor is:

22.5 days (15 + 2.5 + 5) if SIL applies, or
17.5 days (15 + 2.5) if SIL does not apply (e.g., certain field personnel who are not entitled to SIL).

Whether the +5 SIL days apply depends on the employee’s legal entitlement to SIL, not on whether the employee actually used or accrued SIL.

B. Core formula (minimum floor)

Let:

D = applicable daily rate (see Section 4 on how to derive it)
F = 22.5 (with SIL) or 17.5 (without SIL)
Y = years of service (with the ≥6 months rounded up to 1 year rule)

Then:

Retirement Pay (minimum) = D × F × Y

This is based on the latest salary rate at the time of retirement.

4) Determining the “Daily Rate” (D)

The law speaks in days, so you’ll need a daily equivalent of the “latest salary.”

Common, acceptable practices—choose one consistent method your company lawfully applies (documented in policy/plan/CBA and consistently used across computations):

Monthly-to-Daily using workdays
- 6-day workweek: Daily = Monthly ÷ 26
- 5-day workweek: Daily = Monthly ÷ 22
- Custom/shift arrangements: Use the policy/plan’s lawful divisor reflecting actual regular workdays.
Monthly-to-Daily using calendar days
- Daily = Monthly × 12 ÷ 365
- Often used where policies or plans expressly adopt a calendar-day basis.
Piece-rate/commission/“paid by results.”
- Use the average daily earnings over a representative period (commonly last 12 months) preceding retirement, excluding items that the rules exclude from “salary” (see below).

Consistency matters. The chosen lawful divisor should reflect the employer’s established, non-discriminatory compensation practice and plan documents.

5) What counts as “Salary” for this purpose?

Included: Basic wage/salary (regular pay for work). Excluded: Overtime pay, premium/holiday differentials, night shift differential, allowances, and other non-integral benefits—unless your registered plan/CBA says otherwise and improves on the law.

The 1/12 of 13th month and SIL cash equivalent are already baked into the 22.5/17.5-day factor. Do not add them again on top.

6) Step-by-Step Computation (Worked Examples)

Always (1) confirm SIL entitlement, (2) pick your consistent daily divisor, (3) apply the ≥6-months = 1 year rule, then (4) apply the formula.

Example 1: Monthly-paid, 5-day workweek (SIL applies)

Latest Monthly Salary = ₱30,000
Daily rate (D) = 30,000 ÷ 22 = ₱1,363.6364
Years (Y) = 12 years, 7 months → 13 years (round up)
Factor (F) = 22.5 (SIL-entitled)

Retirement Pay = D × F × Y = 1,363.6364 × 22.5 × 13 = 1,363.6364 × 292.5 = ₱398,863.64 (rounding to cents may vary by payroll policy)

Example 2: Monthly-paid, 6-day workweek (no SIL entitlement)

Latest Monthly = ₱25,000
Daily (D) = 25,000 ÷ 26 = ₱961.5385
Years (Y) = 9 years, 4 months → 9 years
Factor (F) = 17.5 (no SIL)

Retirement Pay = 961.5385 × 17.5 × 9 = 961.5385 × 157.5 = ₱151,442.31

Example 3: Commission-based (SIL applies)

Compute average daily earnings over the last 12 months (excluding overtime, etc.). Suppose D = ₱1,800.
Y = 5 years, 9 months → 6 years
F = 22.5

Retirement Pay = 1,800 × 22.5 × 6 = ₱243,000

These are minimums. If a plan/CBA yields a higher amount, the higher amount prevails.

7) Special Topics & Edge Cases

SIL entitlement drives the 22.5 vs. 17.5 factor. Certain categories (e.g., true field personnel with unsupervised hours and those specifically excluded by law) are not SIL-entitled; use 17.5 days.
Service length rounding. ≥ 6 months = 1 whole year; < 6 months = disregard for the Y multiplier.
Breaks in service. The statute requires at least five (5) years of service with the employer. Whether service must be strictly continuous can be influenced by plan/CBA terms and jurisprudence. Authorized leaves (e.g., maternity, SSS sickness, approved leaves) generally do not break service.
Separation vs. retirement. Retirement benefits are distinct from separation pay (e.g., redundancy, retrenchment). If both could apply, no double recovery: the employee typically receives whichever is higher, unless a superior plan says otherwise.
Dismissal for just cause. Statutory retirement presupposes retirement, not dismissal. Some plans may stipulate forfeiture upon dismissal for just cause; the statutory minimum applies upon retirement (not upon dismissal). Review the plan/CBA for forfeiture clauses; the statutory floor cannot be reduced upon retirement.
Death/Disability. The minimum retirement law does not create a separate death or disability benefit. A plan or insurance program may.
Partial cash-outs/loans. Where a registered plan exists, partial withdrawals can affect the final benefit per plan rules; the statutory floor remains the backstop if the plan benefit would otherwise fall below it.

8) Tax Treatment (High-Level)

Under a BIR-registered “reasonable private benefit plan.” Retirement benefits are generally excluded from gross income if statutory age/service requirements (commonly ≥50 years old and ≥10 years of service, availed once) and registration conditions are met.
Statutory retirement under RA 7641 (no plan). The minimum retirement benefit required by law has been treated as tax-exempt under the Tax Code and revenue issuances when statutory conditions are satisfied.
Above-minimum or non-qualifying payouts may be taxable.
Always coordinate with payroll/tax advisors for current BIR rules, withholding, and documentary requirements (e.g., BIR rulings, registration proofs).

9) Employer Procedures & Documentation

Notice & timing.
- Optional retirement: follow company policy/CBA on notice periods.
- Compulsory retirement at 65 should be administered on time.
Papers to prepare.
- Retirement application/notice & HR acceptance.
- Service record (with computation sheet showing D, F, Y).
- Proof of SIL entitlement status used in the factor.
- Payroll documents for latest salary rate and daily divisor policy.
- For plan-based retirements: plan document, board approvals, trust/actuarial papers, and BIR registration (if applicable).
Payment deadline. Pay promptly upon effectivity of retirement (good practice mirrors separation-pay timelines). Delays can draw legal interest and penalties.

10) Frequently Asked Questions

Q1: We already have a company retirement plan. Do we still follow RA 7641? A: The plan controls if it gives at least what RA 7641 guarantees. If it gives less, the statutory floor applies as a supplement.

Q2: Do allowances, OT, and differentials form part of the “½ month salary”? A: No. The law’s 22.5/17.5-day factor already incorporates only the base and the 1/12 of 13th month plus SIL cash (when applicable). Allowances and OT are excluded unless a superior plan says otherwise.

Q3: Which daily divisor is “correct”—22, 26, or 365? A: Use a lawful, consistently-applied divisor aligned with your actual work schedule or the company plan/CBA. Document the basis.

Q4: An employee has 10 years and 5 months of service. What is Y? A: 10 (since the fraction is < 6 months).

Q5: Does unused SIL get paid out on retirement separate from the 22.5-day factor? A: The 22.5 already includes the cash equivalent of up to 5 SIL days for SIL-entitled employees. Separate payout of unused SIL depends on company policy; it is not mandated by the retirement law itself.

11) Practical Checklist (for HR/Payroll)

Confirm coverage (no superior plan/CBA, or if there is one, ensure benefit ≥ statutory floor).
Verify eligibility (age ≥60 [optional] or 65 [compulsory], service ≥5 years).
Fix the daily basis (D) (choose a lawful, documented divisor or 12-month average).
Determine the factor (F) (22.5 if SIL applies, otherwise 17.5).
Count years (Y) (round ≥6 months up to 1 year).
Compute: Retirement Pay = D × F × Y.
Check taxes (plan-registered vs. statutory minimum; apply current BIR rules).
Document & pay promptly; obtain releases/quitclaims that meet legal standards (voluntary, informed, with clear consideration).

12) Quick Reference (Minimum Formula)

With SIL: Retirement Pay = (Daily Rate) × 22.5 × (Years, with ≥6 months = 1 year)
Without SIL: Retirement Pay = (Daily Rate) × 17.5 × (Years, with ≥6 months = 1 year)

Always compare with any applicable retirement plan/CBA and pay the higher amount.

Final Note

This article explains the statutory minimum and common lawful practices in the Philippines. Employers and employees should also review any company plan/CBA, current BIR rules, and recent jurisprudence that may improve or clarify the minimums.