13th Month Pay: How is it Computed?

Time flies so fast and before you know it, the year-end is just around the corner. There's the thought of Christmas and, yes, 13th-month pay, which the law requires to be paid not later than December 24 of each year.

The law - Presidential Decree No. 851 - requires all employers to pay their rank-and-file employees, regardless of the nature of their employment and irrespective of the method by which their wages are paid, an equivalent to at least one (1) month of their wages as 13th month pay. To be entitled to 13th-month pay, these employees must have worked for at least one month during the calendar year.

The 13th-month pay of an employee is based on the "basic salary," which includes all remunerations or earnings paid by an employer to an employee for services rendered. However, 13th-month pay does not include cost-of-living allowances (COLA) granted pursuant to P.D. No. 525 or Letter of Instruction No. 174, profit-sharing payments, and all allowances and monetary benefits which are not considered or integrated as part of the regular or basic salary of the employee. Maternity benefits, like other benefits granted by the SSS, are are not included in computing the employee's 13th-month pay. Overtime pay, earnings and other remunerations are also excluded from "basic salary" in the computation of the 13th-month pay.

The phrase "earnings and other remunerations," which are deemed NOT part of the basic salary, includes payments for:

1. Sick leave
2. Vacation leave
3. Maternity leave
4. Premium for works performed on rest days and special holidays, pay for regular holidays and night differentials.

There's a catch, though. If these items, which are legally excluded from the computation of 13th month pay, are included by the employer in its previous computations and such act ripens into a "company practice," then these items can't be excluded without violating the prohibition against diminution or elimination of  benefits.

What about Christmas bonus and 14th month pay? Both the Christmas bonus and 14th month pay, which are generally categorized as bonus, are different from 13th-month pay. There's a previous post on Bonus vs. 13th Month Pay.

Read also Part 1; Part 2; Part 3; Distinguished from Bonus; 13th month pay and Salary Increase; Who are the Employees Entitled to 13th month Pay?;  PD 851 (full text); previous Guidelines; Revised Guidelines; Labor Advisory No. 2 on the Payment of 13th Month Pay]