Mandatory cash benefit required under Presidential Decree 851, equal to 1/12 of the employee's basic annual salary, paid on or before December 24 each year.
The 13th Month Pay is a mandatory benefit that every employer in the Philippines must provide to rank-and-file employees who have worked for at least one month during the calendar year. It was mandated by Presidential Decree 851 in 1975 and applies regardless of the nature of employment (regular, probationary, or project-based) as long as the employee works in the private sector.
The formula: 13th Month Pay = Total basic salary earned for the year ÷ 12. If an employee was hired mid-year or resigned before December, they receive a prorated amount based on actual months worked. Importantly, 13th month pay is computed on basic salary only — overtime, allowances, and bonuses are excluded from the computation base.
In practice: Luz Santos earns ₱18,000 basic salary per month at Masipag Call Center. She worked the full year (January to December). Her 13th month pay = ₱18,000 × 12 ÷ 12 = ₱18,000, paid on or before December 24.
If Luz was hired on July 1, her 13th month pay = ₱18,000 × 6 months ÷ 12 = ₱9,000.
Why it matters: The first ₱90,000 of 13th month pay (and other bonuses) is tax-exempt under the TRAIN Law. Amounts above ₱90,000 are subject to withholding tax. Employers must properly classify 13th month pay in payroll to apply the exemption correctly. Failure to pay 13th month pay — or paying it late — exposes the employer to DOLE complaints and potential penalties.
Government employees, domestic helpers (kasambahay), and those paid purely on commission (without a fixed basic salary component) have different or no entitlement to PD 851 13th month pay. Kasambahay workers are covered by a separate law (RA 10361).