Retirement Pay for Private Sector Employees

Employees are a company’s greatest asset because they take care of our business and also, our customers. As business owners, it is important that we are engaged and acquainted with our employees, especially those who have been with us from the moment our businesses were established. As they continue to show loyalty and support to our company, we as employers should give them rightful credit and acknowledgement through a retirement plan or simply, a retirement pay.

Employees are entitled to a retirement pay benefit (based on the regulations of the Department of Labor and Employment) once they reach these specific criteria:

  1. The employee must be in the retirement age of 60 to 65 years old. When an employee is 60 to 64 years old, retirement is optional whether to retire or continue working. When an employee is 65 years old, retirement will be compulsory and obligatory.
  2. The employee must work for the company for at least 5 years.

This benefit applies to all employees except:

  1. Government employees;
  2. Employees of retail, service, and agricultural establishments/operations regularly employing not more than ten (10) employees. 

In an absence of a retirement plan, you can refer to RA 7641, An Act that Provides Retirement Pay to Qualified Private Employees in the Absence of any Retirement Plan:

Republic Act No. 7641

December 9, 1992


Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

Section 1. Article 287 of Presidential Decree No. 442, as amended, otherwise known as the Labor Code of the Philippines, is hereby amended to read as follows:

“Art. 287. Retirement. – 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 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.

“Retail, service and agricultural establishments or operations employing not more than (10) employees or workers are exempted from the coverage of this provision.

“Violation of this provision is hereby declared unlawful and subject to the penal provisions provided under Article 288 of this Code.”

Section 2. Nothing in this Act shall deprive any employee of benefits to which he may be entitled under existing laws or company policies or practices.

Section 3. This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation, whichever comes earlier.

Approved: December 9, 1992.

The minimum retirement pay shall be equivalent to 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. 

For the purpose of computing retirement pay, “one-half month salary” shall include all of the following:

  1. Fifteen (15) days salary based on the latest salary rate;
  2. Cash equivalent of five (5) days of service incentive leave;
  3. One-twelfth (1/12) of the thirteenth-month pay. (1/12 x 365/12 = .083 x 30.41 = 2.5)

Thus, “one-half month salary” is equivalent to 22.5 days (Capitol Wireless, Inc. v. Honorable Secretary Ma. Nieves R. Confesor, G. R. No. 117174, November 13, 1996). The COLA shall not be included in the computation of retirement pay.

Minimum Retirement Pay = Daily Rate x 22.5 days x number of years in service

Other benefits may be included in the computation of the retirement pay upon agreement of the employer and the employee or if provided in the Collective Bargaining Agreement (CBA). The retirement pay also requires the employee’s present salary for the computation. The employee’s salary during his/her starting days does not contribute or mean anything for the computation, in short, the basis will be the employee’s current salary.

On the other hand, for the number of years in service, it is important that the employee has been employed with the company for at least five (5) years and if not he/she is not entitled for the retirement pay (unless something is established in the collective bargaining agreement). 

The law states that the retirement pay is equivalent to at least 1/2-month salary for every year of service, a fraction of at least 6 months being considered as one whole year. This suggests that you round up or round down based on the months of service of an employee. For example, a retiring employee was employed for 15 years and 5 months, the years of service will be rounded down to 15 years of service. If the employee lasted for 16 years and 6 months, the years of service will be rounded up to 17 years of service.

What happens if there is a retirement plan that is provided in the collective bargaining agreement or any applicable contract?

  • Any employee may retire or be retired by his or her employer upon reaching the retirement age established in the collective bargaining agreement (CBA) or other applicable agreement/contract and shall receive the retirement benefit granted therein; provided, however, that such retirement benefit shall not be less than the retirement pay required under RA 7641, and provided further that if such retirement benefit under the agreement is lesser, the employer shall pay the difference. Where both the employer and the employee contribute to a retirement fund pursuant to the applicable agreement, the employer’s total contributions and the accrued interest thereof should not be less than the total retirement benefit to which the employee would have been entitled had there been no such retirement benefits’ fund. If such total portion from the employer is lesser, the employer shall pay the deficiency.

What is the coverage from income tax for the retirement pay?

  • Exempted from taxation are the retirement benefits received under RA 7641 (now Article 302 herein) and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes herein, the term ‘reasonable private benefit plan’ means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

It is admirable to be able to stick with a company for a long period of time, which is why it is important to show appreciation to our tenured employees by allowing them to enjoy the fruits of their labor for their loyalty with our company. To make sure that you are providing the right amount of retirement pay, our accountants are always available to assist you in your needs.

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