Human resource management is crucial to running a smooth-sailing business organization. Integral to the system is determining employee remuneration packages. Ideally, yours prove competitive enough. That’s to attract the best talents and, more importantly, encourage them to stay for the long haul.
If a competitive edge is what you seek compensation-wise, it pays to look beyond the usual contents of a salary contract. Consider 13th and/or 14th month pay, for starters.
The 13th and/or 14th month pay is given to employees for the invaluable work they contribute to an organization. In some places, they are called 13th or 14th salary or holiday pay. These bonuses are a way for business owners and managers to show appreciation for their workforce. They communicate that you’re willing to go out of your way to improve employee experience and satisfaction.
What is it for?
If you do business in the United States, you probably haven’t heard about the 13th and 14th month pay. After all, they do not factor into the country’s statutory benefits for employees. So, you might get confused as to the motivation behind this additional compensation.
In the Philippines, which is considered the origin of the additional pay concept, the 13th month pay was established as a law to bridge the gap between the increasingly high cost of living and the country’s almost stagnant minimum wage. The principle was to make up for inflation, which devalues the Philippine peso, by adding another month’s worth of salary to employees’ yearly earnings.
Some generous companies even provide bonuses amounting to an 18th month pay, depending on business revenue standing and individual employee performance.
On top of compliance, another reason behind these bonuses is to keep an organization’s competitive edge regarding human resource management. It’s no news that money motivates people. And employees who feel like they are taken care of by their employers, as evident in their paychecks, are more likely to stay loyal.
In the era of The Great Resignation, the subject of employee compensation and benefits has never been more relevant. Employers who do not want to incur the high costs of frequent turnover must show their existing employees why they should not be looking for greener pastures.
Is it mandatory?
Some countries legally mandate the provision of 13th and/or 14th month pay. Others leave it to the discretion of employers. Here are examples of countries that execute the 13th and/or 14th month pay, whether for compliance or customary reasons.
• Legal Mandate
• Costa Rica
• Dominican Republic
• El Salvador
• Saudi Arabia
• South Africa
• Hong Kong
• United Arab Emirates (UAE)*
* These countries implement both the 13th and 14th month pay.
Countries differ on when and how they pay the 13th and/or 14th month pay. For example, in the Philippines, where it’s legally mandated, the 13th month pay must be given before Christmas Day. Meanwhile, non-Catholic or Christian states like China and Hong Kong save these bonuses for the month of the Lunar New Year.
You must note that culture and customs inform how the 13th and/or 14th month pay is distributed. The details of allocation are outlined in employment contracts. Failure to deliver to contract stipulations, especially in countries where these bonuses are legal requirements, may result in severe penalties.
Who qualifies for compensation?
All workers labeled as employees are eligible to receive the 13th and/or 14th month pay. Those include paid tenured employees, new hires, paid interns, and documented foreign employees.
Even employees who haven’t spent more than a year with a company should receive these bonuses. The same goes for employees who leave the company before the month in which these bonuses are released. The 13th and/or 14th month pay will be prorated in both instances.
Here is a list of working categories ineligible for the bonuses.
• Workers paid on a task basis
This category covers freelancers, such as graphic designers paid for every completed project or rideshare drivers paid per client serviced.
• Workers paid on a commission basis
This category covers workers whose compensation relies on reached quotas. These include sales agents, insurance agents, and real estate brokers.
• Personal service workers
This category applies to independent contractors providing specific services such as accounting, caregiving, gardening, and other skill-specific jobs.
• Civil servants
Employees in the public sector belong to this group.
• Managerial staff
This category covers those in high-ranking and policy-making roles in an organization.
How is the 13th and/or 14th month pay calculated?
Countries differ on how the 13th and/or 14th month pay is computed. Here’s the most common mathematics applied:
Computing the 13th and/or 14th month pay is straightforward for employees who have spent an entire calendar year within an organization. The bonus excludes other benefits on top of the base salary, such as night differentials, allowances, commissions, and other monetary perks.
For instance, if the base monthly pay for a worker is $2,000, that’s the 13th month bonus they must receive. If an organization provides a 14th month pay, double that base pay, and so on.
For employees who haven’t rendered services for an entire year or have left the company before the release of the bonus, prorated computation is applied. For example, a worker earning $24,000 per annum will receive a 13th month pay of $333 if they have rendered only six months of service before the bonus.
$24,000 ÷ 12 x 6 = $333
Again, depending on the country’s unique legal requirements, taxes may or may not be applied to the 13th or 14th month pay. In the Philippines, for example, it’s considered a non-taxable bonus.
When is it given?
As for countries where the 13th and/or 14th month pay is legally mandated, the bonus’s release falls on the following schedules:
• India: Within eight months of the end of each financial year
• Indonesia: One week before the holiday
• Philippines: In December or two installments in May/June and November/December
• Saudi Arabia: On Eid al-Fitr
• Armenia: Before the New Year holidays
• Greece: At Christmas, Easter, and summer
• Portugal: By December 15th.
• Spain: In summer and at Christmas, or via monthly salary instead
• Argentina: In two equal installments by June 30th and December 18th
• Brazil: Paid in two equal parts, plus mandatory 14th month pay as a “holiday bonus”
• Colombia: In two equal parts, namely 1st–15th June and 1st–20th December
• Costa Rica: During the first 20 days of December
• Dominican Republic: By December 20th
• Ecuador: In parts or as a lump sum by yearend
• El Salvador: Paid as a Christmas bonus based on the length of service
• Mexico: Paid by December 20th
• Nicaragua: Paid by December 10th
• Panama: Paid in three equal parts on April, August, and December 15th
• Paraguay: Paid at the end of the year
• Peru: Paid in July and December
• Uruguay: Paid in two halves on June 30th and by the end of the year
• Venezuela: Paid at the end of the year
U.S. Labor Laws
U.S. businesses hiring overseas human resources must acquaint themselves with country-specific labor laws. That is on top of ensuring compliance with U.S. statutory labor requirements, such as the following:
• Probation period: The standard is a 90-day probationary timeline to give the company and the employee adequate time to assess job and culture fit.
• Annual leave: On average, U.S. workers receive 10 days of paid holiday leave.
• Public holidays: U.S. employers must honor public holidays, such as the following:
– New Year’s Day (January 1st)
– Martin Luther King Jr. Day (Every 3rd Monday of January)
– Memorial Day (Last Sunday in May)
– Independence Day (July 3rd)
– Labor Day (1st Monday of September)
– Veterans Day (November 11th)
– Thanksgiving (4th Thursday of November)
– Christmas Day (December 25th)
• Maternity and paternity leave: The Family and Medical Leave Act (FMLA) entitles new parents to up to 12 weeks of unpaid or job-protected leave.
• Sick leave: The FMLA entitles employees to up to 12 weeks of unpaid sick leave annually for certain medical conditions.
• Work hours: The average weekly working hours in the U.S. is 33 hours, inclusive of a half-hour lunch.
• Overtime: The Fair Labor Standards Act (FLSA) entitles employees to overtime pay for work hours rendered exceeding the threshold of 40 within a workweek.
Wrapping It Up
Although the 13th and/or 14th month pay is not a standard legal requirement in the United States, those looking to expand their workforce will surely encounter the subject once they begin hiring talents from specific countries overseas. At first, you might think it superfluous. Rest assured, however, that it’s an investment worth making.
Bonuses that recognize the value of employees improve employee experience and satisfaction. Consequently, your team becomes more motivated at work, increasing overall productivity.
The opposite scenario is seeing your workforce suffer from burnout, which may increase your company’s turnover rate. And that’s quite costly, perhaps even costlier than giving your employees what they deserve.
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Author: j peters
James Peters is a dynamic leader in the world of HR and Global Mobility. After a long career in helping businesses develop global programs and corporate expansion plans, he is now the president of Global Expansion — a company helping startups and Fortune 500 companies in need of complete and streamlined Employer of Record (EoR) solutions. In addition, James shares his expertise through business mentorship and writing.