What is Retirement Pay?
The answer to “What is Retirement pay?” is that it is an amount given to an employee upon his retirement.
Retirement Pay Philippines is paid under certain conditions:
- The employee has served at least 5 years
- The employee is 60 or more but not older than 65 years old
- Retail, service and agricultural establishments or operations employing not more than ten (10) employees
- Government employees do not enjoy this benefit
What is this based on?
The Retirement Pay Law is based on Article 287 of the Labor Code of the Philippines.
Retirement Pay Law is further elaborated on in the DOLE Manual and is a compulsory benefit that must be paid upon retirement.
What is the DOLE Retirement Pay Computation?
The DOLE Retirement Pay Computation is one half month retirement pay for every year of service.
DOLE bases this on the same Art 287 mentioned above.
Retirement Pay Philippines has the following characteristics:
- A fraction of a year over 6 months is considered a year for the purposes of the Retirement Pay Formula.
- One half month’s salary includes 15 days salary based on the latest salary rate, 5 days of Service Incentive Leave, and 2.5 days of 13th month pay. This comes to 22.5 days to be used in the Retirement Pay Formula.
- COLA is not included in Retirement Pay Philippines.
- The employee has reached retirement age as specified in a company policy or CBA agreement. If there is no company policy or CBA agreement then the Retirement Pay Law controls.
- Retirement Pay shouldn’t be less than the Retirement Pay Law.
Let’s do an example:
Cathy has been employed for 6 years and 2 months in ABC company.
Cathy is 65 and is retiring.
Cathy’s basic pay is Php 20,000 and a sales commission of Php 2,500.
Her DOLE Retirement Pay Computation is:
- 15 days salary or Php 10,000
- 5 days of Service Inventive Leave of Php 3,333
- 5 days of 13 month pay or Php 1,667
- 6 years is used because 2 months is less than the 6 months.
- Sales Commission is not included [R. 160233, Aug 8, 2007]
So, the DOLE Retirement Pay Computation would be:
Php 10,000 + Php 3,333 + Php 1,667 = Php 15,000
Php 15,000 * 6 years = Php 90,000
According to the Retirement Pay formula as found in the Retirement Pay Law, Cathy would receive Php 90,000.
Note also that there is no Income Tax for Employees who are retired under Art 287 of the Labor Code.
(There can be no tax for employees retired under Company Retirement Plans as well, but there are a few other factors that need to be considered.)
What happens when there is a Company Retirement Plan?
A Company Retirement Plan would replace the law and must be equal to or more than the law.
In G.R. No. 181995 July 16, 2012, a pilot was retired by PAL.
The CBA PAL Company Retirement Plan was used because its benefits were more than the Retirement Pay Law.
What happens when there is a Company Retirement Plan that is lower than the Retirement Pay Law?
In that case, the Retirement Pay Law is followed.
In GR 177845 Aug 2014, the Supreme Court held that the Grace Christian High School’s Retirement Plan was insufficient since it only paid 15 days vs the 22.5 days required by law.
The Retirement Pay Formula was directed to use 22.5 days as per the law for the teacher in that case.
Another note on Company Retirement Plans –
Furthermore, the employee must have expressly and freely agreed to the Corporate Retirement Plan.
The employee should also have been informed of the Company Retirement Plan and its provisions.
An employee who does not agree retirement and who is not informed of the Corporate Retirement Plan would be treated as illegal dismissal as per G.R. 205813.
Lastly remember – there may be some tax on a Corporate Retirement Plan. Check our section on Retirement Pay Philippines: Is it taxed? (Link to internal section) for details.
Who is applicable under the Retirement Law for Private Employees Philippines?
Most employees are eligible under the Retirement Law for Private Employees Philippines.
Are probationary employees in included in the Retirement Law for Private Employees Philippines?
No, probationary employees are not entitled to Retirement Pay.
Probationary employees do not fulfill the minimum 5 years length of service under the Retirement Pay Law.
So, Probationary employees are not eligible for Retirement Pay Philippines.
Are part time employees included in the Retirement Law for Private Employees Philippines?
Yes, part time employees are included.
In G.R. 190809, Bernardo was a part time teacher in De La Salle Araneta Arellano.
He was retired as the school was implementing the retirement age. He had worked in the school for 27 years.
The Supreme Court judged that the Retirement Law for Private Employees Philippines covered part time employees.
The court noted that RA 7641 applies to “…all the employees in the private sector regardless of their position, designation or status and irrespective of the method by which their wages are paid, except to those specifically exempted…”
So, part time employees may avail of Retirement Pay Philippines.
As per DOLE, there are special considerations for other different types of employees.
- For licensed PHILRACOM Racehorse Jockeys, the Retirement age is 55 years providing he has served at least 5 years and has paid additional premium to the SSS.
- For mine employees, Retirement age is 55 with compulsory Retirement at 60 providing he has served at least 5 years at the company.
- For workers paid by results, their Retirement Pay Formula will be calculated by getting their average daily pay for the last 12 months.
Is there Retirement Pay for Government Employees Philippines?
No, Art 287 is not applicable for Retirement Pay for Government Employees Philippines.
This GSIS section covers Retirement Pay for Government Employees Philippines.
Retirement Pay Philippines: Is it taxed?
Retirement Pay Philippines is not taxed if under Art 287 and under certain conditions for the Corporate Retirement Plan.
SEC. 32 (b) of the Tax Code of the Philippines deals with this specifically under Exclusions from Gross Income.
Retirement Pay Tax Exemptions under Art 287 are clear cut.
Retirement Pay Tax Exemptions under a Corporate Retirement Plan have a few other considerations. It shall not be taxed when:
- The employee has served at least 10 years.
- The employee is not less than 50.
- The employee has not previously availed of this tax benefit before.
If the employee previously availed of the Retirement Pay Tax Exemption, then the Retirement Pay will be taxed. You should receive the full amount as calculated in the Retirement Pay Formula.