Retirement Pay Under the Labor Code Sample Computation
Retirement has been defined as a withdrawal from office, public station, business, occupation, or public duty. [Brion vs. South Philippine Union Mission Of The Seventh Day Adventist Church, G.R. No. 135136 May 19, 1999]
It is the result of a bilateral act of the parties, a voluntary agreement between the employer and the employee whereby the latter, after reaching a certain age, agrees and/or consents to sever his employment with the former. [Soberano vs. Secretary of Labor, 99 SCRA 558 (1980)]
In this connection, the modern socio-economic climate has fostered the practice of setting up pension and retirement plans for private employees, initially through their voluntary adoption by employers, and lately, established by legislation. [Brion vs. South Philippine Union Mission Of The Seventh Day Adventist Church, G.R. No. 135136 May 19, 1999]
Pension schemes, while initially humanitarian in nature, now concomitantly serve to secure loyalty and efficiency on the part of employees, and to increase continuity of service and decrease the labor turnover, by giving to the employees some assurance of security as they approach and reach the age at which earning ability and earnings are materially impaired or at an end. [Brion vs. South Philippine Union Mission Of The Seventh Day Adventist Church, G.R. No. 135136 May 19, 1999]
Article 302 of the Labor Code, as amended, provides that any employee may be retired upon reaching the retirement age established in the collective bargaining agreement or other applicable employment contract.
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 employee’s retirement benefits under any collective bargaining 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 (1) whole year.
An underground or surface mining employee upon reaching the age of fifty (50) years or more, but not beyond sixty (60) years which is hereby declared the compulsory retirement age for both underground and surface mine workers, who has served at least five (5) years as underground or surface mine worker may retire and shall be entitled to all the retirement benefits provided for in this Article.
Under R.A. 10757, surface mine workers shall only include mill plant workers, electrical, mechanical and tailings pond personnel.
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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.
One-half (1/2) month salary means 22.5 days. According to the Supreme Court, this is computed as 15 days plus 2.5 days representing one-twelfth (1/12) of the 13th month pay and the remaining 5 days for service incentive leave. [Elegir vs. Philippine Airlines, Inc., G.R. NO. 181995, July 16, 2012]
Exempted from the coverage are retail, service and agricultural establishments or operations employing not more than ten (10) employees or workers.
Violation of retirement law is declared unlawful and subject to the penal provisions provided under Article 302 of the Labor Code.
Under the IRR, for the purpose of determining the minimum retirement pay due an employee, the term one-half month salary shall include all of the following:
- Fifteen (15) days salary of the employee based on his latest salary rate. As used herein, the term salary includes all remunerations paid by an employer to his employees for services rendered during normal working days and hours, whether such payments are fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, and includes the fair and reasonable value, as determined by the Secretary of Labor and Employment, of food, lodging, or other facilities customarily furnished by the employer to his employees. The term does not include cost of living allowances, profit-sharing payments and other monetary benefits which are not considered as part of or integrated into the regular salary of the employees;
- The cash equivalent of five (5) days of service incentive leave;
- One-twelfth of the 13th month pay due the employee; and
- All other benefits that the employer and employee may agree upon that should be included in the computation of the employee’s retirement pay.
For instance, X is an employee in NCR with a monthly salary of PhP20,000.00. He has been with the company for ten (10) years. His work is from Monday to Saturday or 6 days per week. His company does not have a retirement plan.
Upon reaching the age of 60, he filed an application for optional retirement with the company which was approved. Hence, what applies is the formula provided in Art. 302 of the Labor Code.
In computing for X’s retirement pay the 15 days, 5-day SIL, and the 13th month pay shall be determined.
Since the retirement benefits are computed on per day basis, it is important to calculate the daily equivalent of X’s monthly salary of PhP20,000.00. To do this, the company’s factor should be obtained.
Considering that X’s work is 6 days a week, Sunday is excluded from his workweek. There are 52 Sundays in a year. Thus, 365 days minus 52 Sundays is 313 days. This is the factor that should be used.
Hence, PhP20,000.00 per month x 12 months per year = PhP240,000.00 per year. Then, divide the sum by 313 to get the daily rate equivalent. Thus, PhP240,000.00 per year / 313 days per year PhP766.77 per day.
Now, X’s 15 days salary is PhP766.77 x 15 = PhP11,501.55
As to X’s 5 days SIL, PhP766.77 x 5 = PhP3,833.85
As to X’s 1/12 of the 13th month, it is 2.5 days. This is derived by dividing 1 by 12, which is .08333333. Then multiplying this by 30 days being the equivalent of 13th month in one year which is 2.5 days. Thus, 2.5 days x PhP766.77 = PhP1,916.925.
Adding them up, PhP11,501.55 + PhP3,833.85 + PhP1,916.925 = PhP17,252.325. Then multiplying them by 10 years, PhP172,523.25.
The above calculation is made to understand the mechanics behind the 22.5 days mentioned in the law. The shorter way is to just multiply 22.5 x 766.77 x 10 years = PhP172,523.25.
While the shortcut computation is easier to do, the breakdown is important to comprehend the inclusions in 22.5 days and to better explain the calculation to the employee.
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