December can be a tricky time for businesses. Executives are preparing budgets and outlining their strategy for the following year, while many others are planning to take some time off and enjoy the holiday season with their family. There’s a lot for business leaders to consider, yet the final month of the year throws up another interesting challenge – the 13th month paycheck.
In many countries worldwide it is common and, often, legally required to pay employees a 13th month paycheck. However, this practice is unheard of in places like the US and the UK, so how can employers avoid the pitfalls of failing to provide this paycheck to their international employees?
This guide will walk you through everything you need to know about the 13th month pay and navigate the complexities around unique payroll situations.
What is the 13th month pay?
Towards the end of the year, it is mandatory to pay an extra month’s salary in some countries. This is called a 13th month bonus and is different from a Christmas bonus.
The 13th month started in the Philippines in 1975 when President Ferdinand Marcos introduced it into the labor law to help low-income families celebrate Christmas without breaking the bank. Since then other countries have adopted similar employment regulations and, in some places, it has become the custom without the need for a law.
Yet, like many employment laws, there are several ways the 13th month is handled. For example, in South America, often it is paid in two installments of 50% in June and December, while in Spain it is customary to pay a 14th month pay. These payments are in addition to a typical Christmas bonus, which is often performance-based or is sometimes in the form of a gift from the employer. The 13th month is always a monetary amount that is based on the employee’s basic salary.
How to calculate the 13th month pay
Typically, the 13th month pay equals one month or four weeks of salary, but the actual amount differs depending on the length of employment or the average pay in the prior months.
The most common approach is as follows:
Annual Basic Salary (minus unpaid absences) /12 months (or months of service if less than 1 year) = 13th-month pay
However, some employers take the annual gross salary and divide it by 13 to minimize the financial impact of a 13th month.
The 13th month salary calculation includes paid leave such as maternity leave, paid sick leave and vacation leave, but does not include any unpaid leave.
When the 13th month pay goes wrong
Failure to pay the 13th month can demotivate employees in some cultures or even lead to penalties for the employer. All companies must follow local labor law whether they are local or foreign and if a 13th month is mandatory, they must pay it.
Even if it’s not the law, it may be customary and local employees may expect it. Failure to understand this may lead to tension in the company and even litigation. For example, in Luxembourg, an employee filed a lawsuit against their employer because they failed to pay the 13th month bonus even though it’s not mandatory to do so. A local court ruled in favor of the employee and ordered the company to pay a fine.
Bypassing the struggles of the 13th month salary
For global companies with employees across several countries, it can be difficult to remain compliant with multiple local labor laws. Every country has its own regulations and customs like the 13th month salary and failure to understand them can lead to trouble and a loss of goodwill. However, these pitfalls can be avoided by partnering with a direct Employer of Record.
A direct Employer of Record is a country expert in local labor law and ensures that you remain compliant with local requirements and common practices. A direct Employer of Record assumes the legal responsibility of your overseas employees for labor law, taxation and payroll including the 13th month salary if applicable, making sure that you always will stay compliant in any country you operate in.
About Elements Global Services:
Elements Global Services is an award-winning HR technology & services company. Elements provides employment solutions in over 135 countries – covering everything from payroll, benefits, HR, local compliance to visa & mobility. Headquartered in Barcelona, Spain, Elements has a global network of offices and employees delivering innovative solutions to its growing customer base. Elements’ Direct Employer of Record model helps companies expand, onboard, manage & pay employees worldwide. Visit www.elementsgs.com, LinkedIn or Twitter for more information.