Retirement Benefit Computation
Retirement benefit entitles the employee to receive such benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements.
Under Article 302 [formerly Article 287] any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract.
(Note: Labor Code was renumbered pursuant to RA 10151 and DOLE D.O. 01, Series of 2015)
Get a copy of the Labor Code of the Philippines 2018 Edition by Atty. Villanueva
In case of retirement, the employee shall be entitled to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements: Provided, however, That an employees retirement benefits under any collective bargaining agreement and other agreements shall not be less than those provided herein.
In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.
Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves.
Under said provision, the retirement age is primarily determined by the existing agreement or employment contract. Absent such an agreement, the retirement age shall be fixed by law.
The above-cited law mandates that the compulsory retirement age is at 65 years, while the minimum age for optional retirement is set at 60 years.
Moreover, the Labor Code, as amended, applies only to a situation where:
- there is no CBA or other applicable employment contract providing for retirement benefits for an employee; or
- there is a collective bargaining agreement or other applicable employment contract providing for retirement benefits for an employee, but it is below the requirement set by law. (Obusan vs. PNB, G.R. No. 181178, July 26, 2010)
The rationale for the first situation is to prevent the absurd situation where an employee, deserving to receive retirement benefits, is denied them through the nefarious scheme of employers to deprive employees of the benefits due them under existing labor laws. The rationale for the second situation is to prevent private contracts from derogating from the public law.
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Retirement plans allowing employers to retire employees who have not yet reached the compulsory retirement age of 65 years are not per se repugnant to the constitutional guaranty of security of tenure. By its express language, the Labor Code permits employers and employees to fix the applicable retirement age at 60 years or below, provided that the employees retirement benefits under any CBA and other agreements shall not be less than those provided therein.
However, company retirement plans must not only comply with the standards set by existing labor laws, but they should also be accepted by the employees to be commensurate to their faithful service to the employer within the requisite period. (See Universal Robina Sugar Milling Corporation (URSUMCO) v. Caballeda, G.R. No. 156644, July 28, 2008, 560 SCRA 115; Oxales v. United Laboratories, Inc., supra note 21; Jaculbe v. Silliman University, supra note 19; Philippine Airlines, Inc. v. Airline Pilots Association of the Philippines, 424 Phil. 356 (2002); Capili v. National Labor Relations Commission, 273 Phil. 576 (1997); Pantranco North Express, Inc. v. NLRC, 328 Phil. 470 (1996).)
How to compute retirement under the Labor Code:
Employee X was hired on April 13, 1988. He was 32 years old at that time
On April 13, 2018 he decided to retire. He is 62 years old. The company has no retirement plan.
The salary of X as of April 13, 2018 is PhP20,000.00 per month. Its daily equivalent is PhP766.77 using the 313 factor/divisor (PhP20,000.00 x 12 / 313)
How much should be his retirement?
Count the number of years of service:
April 13, 1988 to April 13, 1998 10 years
April 13, 1998 to April 13, 2008 10 years
April 13, 2008 to April 13, 2018 10 years
Total years of service 30 years
Age of X upon retirement: 62 years old
Formula:
22.5 days per year of service
Breakdown of 22.5 days:
- 1/2 month – 15 days
- SIL per year – 5 days
- 13th month pay per year – 2.5 days (30 days/12 months)
TOTAL 22.5 Days
22.5 days x 766.77 = PhP17,252.33
PhP17,252.33 x 30 years = PhP517,569.75
Retirement benefit of X = PhP517,569.75
Using the method used by the Supreme Court in Grace Christian High School vs. Lavandera (G.R. No. 177845, August 20, 2014) employing 30 days per month basis:
Monthly salary PhP20,000.00 / 30 days = PhP666.67
Daily rate PhP666.67 x 22.5 days = PhP15,000.08
1/2 month salary PhP15,000.08
PhP15,000.08 x 30 years = PhP450,002.40
Total amount of retirement Benefits = PhP450,002.40
What is the difference between the 313 days and 30 days? The 313 days presupposes that the employee is paid for all days of the year except Sundays. Thus, 365 days – 52 Sundays = 313 days.
While the 30 days approach assumes that the employee works for all days of the month and probably all months of the year. This will result in higher divisor if computed annually. A higher divisor results in lower quotient which explains why using the 30 days yields only PhP PhP450,002.40 while the 313 days results in PhP517,569.75.
Learn how to compute employee compensation and benefits
Guide on Employee Compensation and Benefits Volume 1
Guide on Employee Compensation and Benefits Volume 2
Who determines which factor/divisor to use? The employer. When? It depends on its practice and policy. However, the employer should be consistent to avoid circumvention or derogation of the provisions of the law.
Is this taxable? This will be discussed in succeeding post
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