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13th Month Pay: The Ultimate Guide for Employers

Hiring employees overseas carries one core requirement for employers, which is compliance with the host country laws on compensation, labor rights and employment laws. While compensation may seem like the employer’s sole prerogative, some countries even mandate year end bonuses for all employees, commonly known as 13th month pay.

If you have never encountered statutory 13th month bonuses, how will you account for this expense when offering a new employee a compensation package? Will your employee expect 13th month pay even if it is not statutory, but is customarily paid in the host country? Should you include it in the employment contract?

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To help you understand 13th month pay and how to include it in your payroll we have put together this quick guide, along with a few examples from specific countries.

What is 13th Month Pay?

Simply, the 13th month pay is an additional amount of compensation, usually calculated from a single month salary. If the 13th month pay is set by statute (rather than internal company policy) then every employee is entitled to receive it.

Typically, it is paid at year end to be used for holidays, but may be paid at other times if the country has other important cultural dates. For example, in Argentina and Columbia, it is paid in two equal 50% installments in June and December.

For this reason, it is not really a “Christmas or New Year’s Bonus”, which is different and varies by amount or type of gift, and is usually optional.

How Does the 13th Month Pay Work?

13th month pay is calculated based on either a single month salary, or four weeks salary, depending on how compensation and payroll are structured. This is important for employers that are hiring overseas, because if the amount is not included in the original salary package it could be an additional, unexpected expense.

One approach to statutory bonuses is to set compensation at an annual rate, and then divide that by 13 to arrive at monthly gross salary. That way, the 13th month bonus will not be an additional employment cost, and could be included in the employment contract as a part of annual stated compensation.

Countries that Mandate 13th Month Pay

Most countries in Latin America mandate the 13th month pay, while in Europe and Africa it is customary but not required by statute. In Asia, a 13th month bonus is mandatory in Philippines, Indonesia and India, and only customary in other countries.

It should be noted that countries like Greece, Spain and several Latin countries also require a 14th month bonus.

What happens if you don’t pay the 13th month?

If the 13th month pay is mandated by statute, then every employer is obligated to comply just as with any employment-related law. This applies equally to foreign companies that are hiring overseas, whether the employees are expats or locals.

Failure to make these payments can result in penalties for employers, as well as create ill will among local employees who have come to expect a 13th month bonus. That could also happen if the bonus is only customary, but commonly made in the host country.

Case Examples of 13th Month Pay

We had a few instances where clients were hiring in a new country where the 13th month bonus was required, and they wanted to know how it would be calculated and paid out to remain in compliance.

Here is how we responded for each country involved:

Philippines and 13th month pay

The 13th month bonus is mandatory in Philippines under the labor code and by Presidential Decree 851. It is a very popular employee benefit as it allows locals to pay for the expenses of the Christmas and New Year’s holidays. It has to be paid out by December 24 or the end of the contract, whichever is sooner.

Every level of employee is entitled to 13th month pay as long as they have worked at least one month during the calendar year. It is calculated as 1/12 of the total basic salary earned during the year.

Argentina and 13th month pay

Argentina takes a different approach to the 13th month pay, and it is calculated based on 50% of the year’s highest monthly salary. It is paid out in two 50% instalments in June and December.

Hong Kong and 13th month pay

13th month pay is not mandatory in Hong Kong, but it is customary to be paid as an extra month’s salary either in December or before the Chinese New Year. It is included in the payroll for the month that it is paid out.

The Shield GEO Solution

This review of 13th month pay shows how important it is to know the exact rules and calculations for paying out this annual bonus. If you are just entering a country and hiring employees, how will you include this amount accurately in both the employment contract and payroll?

We assist our clients with just this type of issue, relying on local partners and in-country experts to include all statutory payments and contributions for both expat and local employees. Our solution is a complete international employment service that handles every part of hiring overseas including immigration, payroll and compliance with all employment laws. We make international employment simple.

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