Navigating employment laws unique to each market can make it challenging for businesses to expand globally when hiring talent from overseas. When considering country-specific employment laws and payroll regulations, companies must also take into account 13th-month pay, a common type of compensation offered to international employees in addition to base salary.
In some countries, providing 13th-month pay is a common practice, while in others, it is required by law. As a result, companies looking to expand globally must carefully consider the impact of 13th-month pay on their plans and prepare accordingly.
If you're considering hiring talent overseas, it's important to understand the origins of 13th-month pay, which countries require, where it's customary to offer it, and other frequently asked questions. To learn more, please refer to our comprehensive guide.
What is the 13th Month Pay?
The 13th-month pay is an extra month's salary paid to employees within the financial year, on top of their annual base salary. It's either a legal requirement or a customary practice in different countries, making it an important factor for businesses expanding globally and hiring employees in various parts of the world.
The Origins of the 13th Month Pay Cycle
Providing a 13th-month pay as an additional payment is a common practice in many of the top markets. However, its roots can be traced back to the Philippines. In 1975, a presidential decree was issued in the Philippines, making the 13th-month payment a mandatory addition to the employee's payroll. This law remains in effect today.
Initially, the decree only applied to employees with salaries less than PHP 1,000. However, in 1986, the Philippines government expanded the 13th-month payment to all employees by removing the salary cap.
Currently, several countries in Asia, Europe, and Latin America also require their local employees to receive the 13th-month payment from their employers. For this reason, overseas employers who hire talent must include the 13th-month payment as part of their global payroll processes.
13th-Month Pay vs. Bonus Pay
The 13th-month pay is not a bonus payment, although it is commonly referred to as such. Bonus payments are related to employee performance or tenure and are not regulated by law. Conversely, 13th-month pay is considered a statutory benefit in many countries, meaning that employers must offer it to eligible employees regardless of their job performance or tenure.
Is the 13th-Month Pay mandatory?
Yes，employers are obligated to provide 13th-month pay to employees in countries where it is legally mandated, but there may be differences in the regulations governing its computation and distribution to local employees.
Although 13th-month pay isn't mandatory in all countries, it's a common practice in others. Discretionary 13th-month payments, which may be contingent on factors such as performance or tenure, are not guaranteed. Nevertheless, employees in these countries anticipate receiving 13th-month pay in addition to their base salary.
Who is eligible for 13th-Month Pay?
Employees in countries where the 13th month pay is mandated by law are eligible for this additional payment. If an employee works for less than twelve months in a year, the amount is usually prorated based on the number of months worked.
However, there are exceptions and certain types of talent are exempt from receiving 13th-month pay. Freelancers, contractors, and zero-hour workers are typically excluded. Additionally, private servants, civil servants, commission- or project-based employees, and workers who receive a comparable bonus may also be exempt.
Which countries offer 13 months of pay?
Read on to find out which countries require employers to provide 13th-month pay and where it's customary for employers to offer this additional payment.
In Asia, only three countries legally require 13th-month pay, while it's a common practice in 10 other countries' regions.
Mandated:
- India
- Indonesia
- Philippines
Customary:
In Europe, three countries legally mandate 13th-month payments, while five countries require it depending on the industry. This is a common practice in eight countries.
Mandated:
- Greece
- Portugal
- Spain
Mandatory for Certain Industries:
- Austria
- Belgium
- Cyprus
- France
- Germany
Customary:
- Armenia
- Croatia
- Italy
- Finland
- Luxembourg
- The Netherlands
- Slovakia
- Switzerland
In Latin America and South America, 13th-month pay is common, with 17 countries legally requiring this extra payment. It's also a common practice in Chile, although it's not required by law.
Mandated:
- Argentina
- Bolivia
- Brazil
- Colombia
- Costa Rica
- Dominican Republic
- Ecuador
- El Salvador
- Guatemala
- Honduras
- Mexico
- Nicaragua
- Panama
- Paraguay
- Peru
- Uruguay
- Venezuela
Customary:
- Chile
In Africa, it's less common for employees to receive their 13th-month pay, and only three countries legally require it:
Mandated:
- Angola
- Nigeria
- South Africa
How to Calculate the 13th-Month Pay
The most common way to calculate the 13th-month pay is to divide an employee's base annual salary by 12. However, the calculation method varies from country to country.
In the Philippines, the 13th month pay is equivalent to one-twelfth of an employee's base salary. For instance, if an employee earns PHP 60,000 annually, they will receive PHP 5,000 as their 13th-month pay.
The calculation of the 13th-month pay does not include any bonuses. Employers must be aware of payroll compliance in each target market for 13th-month pay to avoid legal risks and penalties.
Other common calculation methods around the world include dividing the employee's total salary by 13 months, awarding bonuses based on the highest-paying month, or calculating the average bonus amount based on the employee's most recent three-month salary. However, some countries have unique ways of computing 13th-month pay, such as basing the bonus on the highest month's salary from the previous six months in Argentina.
Prorated 13th-Month Pay
Prorated 13th-month pay is a partial payment for employees who worked less than 12 months in the calendar year.
The calculation method for prorated 13th-month pay typically involves multiplying an employee's monthly base pay by the number of months worked in the calendar year and then dividing that amount by 12. The calculation can be expressed as:
(Employee's base monthly salary multiplied by the number of months worked in the year)/12.
For instance, if an employee earns a base salary of PHP 5,000 per month and worked for only six months in the year, their 13th-month payment would be PHP 2,500.
When to Issue 13th-Month Payments.
The regulations for distributing 13th-month pay vary by country. In most countries, employers are required or recommended to provide it in December and commonly refer to it as a "Christmas bonus". Singapore and China suggest that employers give 13th-month pay to their employees before the Chinese New Year.
If a country does not set a specific pay date for the 13th month, the employer is responsible for determining when to provide it and must document that issuance date in the employment contract.
Ensure Compliant Compensation with an Experienced Partner.
Ensuring compliance with country-specific 13th-month payment regulations can be challenging for employers, especially given the complexities of local employment and payroll laws. Noncompliance with these regulations may result in risks, penalties, and legal issues.
To minimize these risks and streamline the process of navigating complex employment and payroll laws, businesses can partner with a global expert like ChaadHR. ChaadHR, through our Employer of Record (EoR) solution, helps businesses hire and pay talent in over 160 countries.
ChaadHR enables businesses to provide accurate and timely payments to international talent through a single platform, receive payroll and legal support from local experts, and comply with all country-specific payroll regulations.
Contact ChaadHR today to learn more about how our solutions can streamline the hiring and payment process for global teams while adhering to local regulations.
