I. Introduction

Retirement pay is a statutory monetary benefit granted to qualified employees upon reaching retirement age, unless the employer provides a more favorable retirement plan, collective bargaining agreement, employment contract, company policy, or established practice.

A recurring question in Philippine labor practice is whether the period of probationary employment should be included in computing retirement pay. The short answer is: yes, the probationary employment period should generally be counted as part of the employee’s length of service, provided the employment relationship was continuous and the employee eventually became qualified for retirement pay.

The law speaks of “years of service,” not merely years of regular employment. Thus, where an employee began as probationary, was later regularized, and continuously served the employer until retirement, the reckoning point for retirement pay is ordinarily the employee’s original date of hiring, not the date of regularization.

II. Governing Law on Retirement Pay

The principal law on retirement pay in the private sector is Article 302 of the Labor Code, formerly Article 287, as amended by Republic Act No. 7641, also known as the Retirement Pay Law.

Under the law, in the absence of a retirement plan or agreement providing superior benefits, an employee may retire upon reaching the optional retirement age of sixty (60) years, provided the employee has rendered at least five (5) years of service. Compulsory retirement generally occurs at sixty-five (65) years of age.

The statutory retirement pay is at least:

one-half month salary for every year of service, a fraction of at least six months being considered as one whole year.

For purposes of the Retirement Pay Law, “one-half month salary” is not limited to 15 days. It is generally understood to include:

15 days salary;
1/12 of the 13th month pay, equivalent to 2.5 days; and
cash equivalent of not more than 5 days of service incentive leave.

Thus, the usual statutory minimum retirement pay is commonly expressed as:

22.5 days’ pay for every year of service.

This is only the statutory minimum. If the company retirement plan, CBA, employment contract, or company policy gives a higher benefit, the more favorable benefit prevails.

III. Who Is Covered by the Statutory Retirement Pay Law?

The Retirement Pay Law generally covers employees in the private sector, regardless of position, designation, or method of wage payment, provided they meet the statutory requirements.

However, the law excludes certain employees or situations, including:

Government employees, who are covered by separate retirement systems such as GSIS laws;
Employees of retail, service, and agricultural establishments or operations regularly employing not more than ten employees, as provided under the statutory exclusion;
Employees covered by a superior retirement plan, to the extent that the plan provides equal or better benefits;
Workers whose retirement is governed by special laws or special rules, such as certain underground mine workers or other specifically regulated categories.

The existence of a company retirement plan does not automatically remove the employee from statutory protection. The plan must be at least as favorable as the statutory minimum. If it is less favorable, the employer must pay the deficiency.

IV. The Legal Issue: Does Probationary Employment Count?

A. General Rule

The period of probationary employment should be included in computing retirement pay if the employee’s service was continuous.

The reason is simple: during probationary employment, there is already an employer-employee relationship. The employee is already rendering service to the employer. The employee is paid wages, follows company rules, performs assigned work, and is subject to the employer’s control.

The law requires at least five years of service. It does not say five years of regular service.

Therefore, when an employee starts as probationary on January 1, becomes regular on July 1, and eventually retires many years later, the proper reckoning date is generally January 1, not July 1.

B. Why Regularization Date Is Not the Usual Reckoning Point

The date of regularization determines when the employee acquired regular status. It does not erase the fact that the employee already rendered actual service during the probationary period.

Probationary employment is still employment. It is not a pre-employment stage, internship, volunteer period, or training period outside the employment relationship. Unless the supposed probationary period was not truly employment, it forms part of the employee’s total service.

C. Probationary Employment Distinguished from Pre-Employment Training

The answer may be different if the period before regularization was not actually employment. For example, if the worker was merely an applicant undergoing a purely pre-employment process, or a trainee without an employer-employee relationship, that period may not count.

The controlling test is not the label used by the employer. The controlling question is whether an employer-employee relationship existed.

Relevant indicators include:

Selection and engagement by the employer;
Payment of wages;
Power of dismissal;
Power of control over the means and methods of work.

If these elements were present, the period is likely employment and should be counted.

V. Basic Formula for Retirement Pay

The statutory formula is:

Retirement Pay = Daily Rate × 22.5 days × Years of Service

Another way to express it is:

Retirement Pay = One-half month salary × Years of Service

For daily-paid employees, the daily wage is usually the basis.

For monthly-paid employees, the daily rate is often derived from the employee’s monthly salary, depending on the applicable company practice, wage structure, or accepted labor standards computation. In many practical computations, monthly salary is converted to a daily equivalent before multiplying by 22.5 days and the employee’s years of service.

The statutory components are:

Component	Equivalent
15 days salary	15 days
1/12 of 13th month pay	2.5 days
Service incentive leave equivalent	Up to 5 days
Total statutory minimum	22.5 days

VI. Counting Years of Service

The law provides that a fraction of at least six months is considered one whole year.

This means:

Less than six months beyond the last full year is generally disregarded.
Six months or more beyond the last full year is counted as one additional year.

Example

Employee A was hired as probationary on January 1, 2000. He was regularized on July 1, 2000. He retired on September 1, 2025.

The period of service should generally be reckoned from January 1, 2000.

From January 1, 2000 to January 1, 2025 = 25 years. From January 1, 2025 to September 1, 2025 = 8 months.

Because the remaining fraction is at least six months, it is counted as one whole year.

Thus, Employee A has 26 years of service for retirement pay purposes.

The employer should not compute from July 1, 2000 merely because that was the date of regularization.

VII. Sample Computation Including Probationary Period

Assume:

Date hired as probationary: January 1, 2000
Date regularized: July 1, 2000
Date retired: September 1, 2025
Monthly salary at retirement: ₱30,000
Daily rate used: ₱1,000
Total creditable service: 26 years

Formula:

₱1,000 × 22.5 days × 26 years = ₱585,000

Thus, the statutory retirement pay is:

₱585,000

If the employer used the regularization date, the computation might produce a lower number. That would generally be improper if the employee’s probationary service was continuous and formed part of the same employment relationship.

VIII. When Probationary Service May Not Be Counted

Although the general rule favors inclusion, there are situations where the probationary period may be excluded or disputed.

1. The employee did not pass probation and was validly terminated

If the employee was validly terminated during probation and never became qualified for retirement, there is no retirement pay issue because the employee did not retire.

Retirement pay is not a separation pay substitute for every termination. It is payable when the employee meets the legal or contractual conditions for retirement.

2. There was a break in service

If the employee was hired, separated, and later rehired, the issue becomes more complex.

The probationary period in the first employment may not automatically count toward the later employment if there was a genuine break, final settlement, resignation, termination, or new employment contract.

However, if the supposed break was merely technical, simulated, or imposed to defeat labor rights, the entire period may still be treated as continuous service.

3. The first period was not employment

A purely pre-employment applicant screening, school practicum, unpaid observation period, or non-employment training period may not count if no employer-employee relationship existed.

However, employers cannot avoid retirement liability merely by calling an employee a “trainee,” “apprentice,” “contractual,” “casual,” or “probationary” if the legal elements of employment are present.

4. The retirement plan validly defines creditable service differently, but not below the statutory minimum

A company retirement plan may define creditable service. However, it cannot reduce benefits below the statutory minimum for employees covered by the Retirement Pay Law.

If the plan excludes probationary service and the resulting benefit is lower than the statutory retirement pay computed from actual years of service, the employer may be required to pay the difference.

IX. Retirement Pay Under Company Policies, CBAs, and Retirement Plans

Employers may establish retirement plans by:

Collective bargaining agreement;
Employment contract;
Company policy;
Employee handbook;
Board-approved retirement plan;
Long-standing company practice.

If such plan gives a benefit superior to the Labor Code minimum, it governs.

Examples of more favorable provisions include:

One month salary per year of service;
Inclusion of allowances in the salary base;
Earlier optional retirement age;
Lower service requirement;
Counting fractions of service more generously;
Full crediting of probationary, casual, project, or prior service.

However, if the plan gives less than the statutory minimum, the law prevails.

X. Important Distinction: Eligibility Versus Computation

There are two separate questions:

Is the employee eligible to retire?
How much is the employee entitled to receive?

For statutory retirement, eligibility generally requires:

Reaching the applicable retirement age; and
Rendering at least five years of service.

Once eligibility is established, computation is based on years of service.

The probationary period may be relevant to both.

For example, an employee hired on January 1, 2021 and regularized on July 1, 2021 reaches age 60 on March 1, 2026. If probationary service is counted, the employee has more than five years of service by March 1, 2026. If the employer incorrectly counts only from regularization, the employer may claim that the employee has not yet completed five years. That would usually be questionable because the employee’s service began on the hiring date, not the regularization date.

XI. What Salary Is Used in Computing Retirement Pay?

The salary base is generally the employee’s salary at the time of retirement, unless a more favorable plan provides otherwise.

As a rule, the statutory minimum is based on salary, not all forms of compensation.

However, disputes may arise over whether certain regular allowances, commissions, or benefits should be included. The answer depends on the nature of the payment and the language of the retirement plan or policy.

A company plan may provide that retirement pay is based on:

Basic monthly salary only;
Basic salary plus regular allowances;
Gross monthly compensation;
Average salary over a defined period;
A fixed formula.

If the plan is more favorable than the statutory minimum, its formula generally applies. But if the formula results in less than the statutory floor, the employer must comply with the law.

XII. Treatment of the Service Incentive Leave Component

The Retirement Pay Law includes the cash equivalent of not more than five days of service incentive leave as part of the “one-half month salary.”

This does not necessarily mean the employee must have unused leave credits at retirement. The five-day component is part of the statutory retirement pay formula.

The statutory 22.5 days consists of 15 days salary, 2.5 days representing 1/12 of the 13th month pay, and up to 5 days service incentive leave equivalent.

XIII. Optional and Compulsory Retirement

Optional Retirement

Optional retirement generally occurs at age 60, provided the employee has rendered at least five years of service, unless a retirement plan provides a different optional retirement age or more favorable terms.

Optional retirement requires the employee’s voluntary act, unless a valid plan provides otherwise.

Compulsory Retirement

Compulsory retirement generally occurs at age 65. Upon reaching compulsory retirement age, the employment relationship may be ended by operation of the retirement policy or law, subject to payment of retirement benefits.

Company Plans with Earlier Retirement Ages

Company retirement plans sometimes provide for earlier optional or compulsory retirement. Such provisions may be valid if they are reasonable, voluntarily accepted, and not contrary to law, public policy, or labor standards.

However, forced retirement under a questionable, unclear, or uncommunicated policy may be challenged.

XIV. Retirement Pay Versus Separation Pay

Retirement pay is different from separation pay.

Retirement pay is given when an employee retires after meeting age and service requirements.

Separation pay is given in specific cases of authorized cause termination or other situations provided by law, contract, CBA, or company policy.

An employee is not always entitled to both. Entitlement depends on the cause of termination, the applicable policy, and whether the benefits are distinct or overlapping.

If an employee is terminated before retirement age, the employee may not be entitled to retirement pay unless a plan or agreement grants vested retirement benefits or early retirement benefits.

XV. Retirement Pay and Resignation

An employee who resigns before qualifying for retirement is generally not entitled to statutory retirement pay.

However, the employee may still be entitled to retirement benefits if:

The company plan grants vested benefits despite resignation;
The employee has reached optional retirement age and the resignation is effectively a retirement;
There is a CBA, contract, or established practice granting such benefit;
The employer approved an early retirement arrangement.

The terminology used in the exit document matters, but it is not controlling. If the employee actually retired and met the requirements, the benefit should not be denied merely because the document used the word “resignation.”

XVI. Retirement Pay and Dismissal for Cause

An employee dismissed for just cause before retirement may lose entitlement to retirement benefits, depending on the applicable law, plan, and circumstances.

Under the statutory retirement law, retirement pay presupposes retirement, not dismissal.

However, if the employee has already acquired vested retirement rights under a retirement plan, the plan’s forfeiture provisions must be examined. Forfeiture clauses are generally construed strictly because retirement benefits are labor benefits.

If dismissal occurs after the employee has already qualified for compulsory retirement, the situation may be legally contested, especially if the dismissal appears intended to avoid retirement liability.

XVII. Retirement Pay and Project, Seasonal, Casual, or Fixed-Term Employment

The inclusion of prior non-regular service depends on whether there was continuous employment and whether the employee eventually became entitled to retirement benefits.

The label “project,” “seasonal,” “casual,” “contractual,” or “fixed-term” is not decisive. What matters is the true nature of the employment relationship, continuity of service, and applicable retirement policy.

Where service was continuous or repeatedly renewed in a manner showing regular employment, earlier periods may be argued as creditable service.

XVIII. Burden of Proof and Documentation

In disputes over retirement pay computation, important documents include:

Employment contract;
Probationary appointment letter;
Regularization notice;
Payroll records;
SSS employment records;
BIR forms;
Company ID issuance records;
Employee handbook;
Retirement plan documents;
Collective bargaining agreement;
Payslips;
Certificate of employment;
Quitclaim or release documents;
HRIS employment records.

The employee should prove the actual start date of employment. The employer, on the other hand, should justify any exclusion of service periods, especially where company records show continuous employment.

XIX. Quitclaims and Waivers

Employers sometimes require employees to sign quitclaims upon receipt of retirement pay.

A quitclaim may be valid if it is voluntarily executed, for reasonable consideration, and with full understanding of its consequences.

However, a quitclaim may be invalid if:

The consideration is unconscionably low;
The employee was misled;
There was pressure or coercion;
The waiver defeats statutory labor standards;
The employee did not receive the legally required amount.

An employee who received retirement pay computed from the regularization date may still challenge the computation if the exclusion of probationary service resulted in underpayment.

XX. Practical Computation Checklist

To compute retirement pay properly, determine the following:

What is the employee’s original hiring date?
Was the employee first hired as probationary?
Was the employee later regularized?
Was service continuous?
Were there resignations, terminations, or rehirings?
What is the applicable retirement age?
Is there a retirement plan, CBA, contract, or company policy?
Is the plan more favorable than the statutory minimum?
What salary base should be used?
How many years of service are creditable?
Is any fraction of at least six months present?
What is the employee’s daily rate?
Does the computation include the statutory 22.5 days per year?
Has the employer already paid any amount?
Is there a deficiency?

XXI. Model Computation Table

Item	Details
Date hired as probationary	January 1, 2000
Date regularized	July 1, 2000
Date retired	September 1, 2025
Reckoning date	January 1, 2000
Full years	25
Additional months	8 months
Creditable years	26 years
Daily rate	₱1,000
Statutory factor	22.5 days
Retirement pay	₱585,000

Computation:

₱1,000 × 22.5 × 26 = ₱585,000

XXII. Common Employer Mistakes

Employers commonly make the following errors:

Computing from the date of regularization instead of the date of hiring;
Excluding probationary service despite continuous employment;
Using 15 days instead of 22.5 days per year;
Ignoring the rule that six months or more counts as one year;
Applying a company plan that is lower than the statutory minimum;
Excluding employees based only on rank, title, or salary level;
Treating retirement pay as discretionary;
Requiring a quitclaim despite underpayment;
Using outdated retirement policies;
Failing to document the computation.

XXIII. Common Employee Mistakes

Employees also commonly make mistakes, such as:

Assuming all resignations qualify for retirement pay;
Assuming retirement pay is due regardless of age or years of service;
Failing to keep proof of original hiring date;
Confusing separation pay with retirement pay;
Accepting a computation without checking the service period;
Overlooking more favorable CBA or company plan benefits;
Waiting too long before contesting an underpayment.

XXIV. Legal Effect of Company Practice

If an employer has consistently counted probationary service in retirement computations, that practice may become relevant. A benefit that has been deliberately and consistently granted over time may become a company practice that cannot be withdrawn arbitrarily.

Similarly, if the employer has long computed retirement pay from the original hiring date for other employees, it may be difficult to justify excluding probationary service for a particular employee without a lawful and reasonable basis.

XXV. Tax Treatment of Retirement Pay

Retirement benefits may be tax-exempt if the conditions under the Tax Code are met, including requirements relating to a reasonable private benefit plan, age, length of service, and the rule that the tax exemption is generally availed of only once.

If the retirement benefit does not qualify for tax exemption, it may be subject to applicable withholding tax.

The tax treatment should be separately reviewed because labor-law entitlement and tax exemption are different issues. An employee may be entitled to retirement pay under labor law, but the amount may or may not be tax-exempt depending on tax rules.

XXVI. Prescription of Money Claims

Claims for unpaid or underpaid retirement benefits are generally treated as money claims arising from employment. Under the Labor Code, money claims generally prescribe in three years from the time the cause of action accrued.

The cause of action usually accrues when the retirement benefit becomes due and the employer fails to pay the correct amount.

Because prescription can bar recovery, employees should act promptly after discovering an underpayment.

XXVII. Remedies for Underpayment or Nonpayment

An employee who is not paid retirement benefits, or who is paid less than the lawful amount, may consider:

Sending a written demand to the employer;
Requesting a detailed computation from HR;
Reviewing the retirement plan or CBA;
Filing a request for assistance through labor dispute mechanisms;
Filing a labor complaint for money claims, if necessary.

The specific forum may depend on the amount claimed, the existence of reinstatement issues, the nature of the dispute, and whether the claim falls under labor arbiter jurisdiction or other labor dispute procedures.

XXVIII. Core Rule on Probationary Service

The central rule may be stated as follows:

For purposes of retirement pay computation, probationary employment should be included in the employee’s length of service when the employee was actually employed during the probationary period, was later regularized, and rendered continuous service until retirement, unless a more favorable lawful arrangement applies.

The regularization date is not normally the starting point for retirement pay computation. It is merely the date when the employee acquired regular status. The employment relationship began earlier, on the date the employee was hired as probationary.

XXIX. Conclusion

In the Philippine setting, retirement pay is a statutory labor benefit designed to reward long service and provide financial assistance upon the end of working life. Because probationary employment is real employment, the probationary period should generally be counted in determining both eligibility and computation of retirement pay.

The proper approach is to begin with the employee’s original date of hiring, verify continuity of service, determine the applicable retirement plan or statutory minimum, include the legally required components of one-half month salary, and apply the rule that a fraction of at least six months counts as one whole year.

Employers should avoid computing retirement pay only from the date of regularization when the employee’s service was continuous from the probationary hiring date. Employees, in turn, should carefully review retirement computations and preserve records proving their actual start date.

The guiding principle is the protection of labor: retirement pay should be computed in a manner that gives full effect to the employee’s actual years of service and to the minimum benefits guaranteed by law.