13th month pay: What it is and how to calculate it

As your business expands, or your workforce grows internationally, HR and payroll processes become increasingly complicated.

Complying with international labour law, as well as with cultural expectations, is key to maintaining your company’s reputation, improving employee retention, and avoiding hefty legal fees and financial penalties.

13^th month pay is one such concept of which you must be aware in order to stay globally compliant. In this article, we’ll explain what a thirteenth and fourteenth salary is, where 13^th month pay is mandatory or customary, and how to calculate it.

To make the global payroll process smoother and be sure of your enterprise’s compliance with all local and international employment laws, including 13^th salary, consider working with a trusted global business solutions provider like Mauve.

What is 13^th month pay?

The Philippines was the first country to enshrine a 13^th month pay package in law, back in 1975, as a sort of mandatory Christmas bonus. 13^th month salaries are additional compensation which companies pay their employees once a year, either according to government mandate or national custom. Each 13^th month pay is calculated per employee, typically equating to a full month’s pay if the worker is paid monthly, or 1/12 of an individual’s yearly salary.

13^th and 14^th (and in some countries 15^th!) month pay is usually tax-free, and while it may often fall on or around Christmas, it is distinct from a Christmas bonus which is often added on top. 13^th month pay is particularly prevalent in Latin America, though is becoming more so elsewhere in the world, including in Asia, Africa, and Europe.

A 13^th month salary may be included as part of a worker’s legal rights - akin to the legal minimum wage in different countries - in which case you would have to comply with the law or face potentially severe consequences. Alternatively, thirteenth salaries may be culturally, not legally, enforced – in which case, failure to provide them may damage your reputation and employee retention.

13^th month pay computation - the calculation of how much each individual overseas employee is due - depends also on the laws and customs of the country in question. A little later in this article, we’ll explain how the most common forms of 13^th month pay computation work.

Is it mandatory to pay employees a 13^th month wage?

Only in countries where 13^th month pay is enshrined in law is it mandatory to provide your employees with this additional compensation. However, if you were to neglect paying your overseas employees a 13^th month salary in countries where it is customary to do so, you risk losing those employees and damaging your organisation’s reputation.

In which countries is 13^th month pay the status quo?

Today, 13^th month pay is either compulsory or expected in nearly 50 countries around the globe. Below is a complete list of countries which enforce a 13^th month pay model, either legally or culturally.

Countries in which paying employees a 13^th salary is the law

• Angola
  • Angola makes both 13^th and 14^th salaries mandatory, one paid as a vacation bonus in summer, and the other as a Christmas bonus in December.
• Argentina
  • Argentina makes 13^th month pay a legal requirement of all businesses, though it is to be paid in two instalments: one on or before 30^th June, the other on or before 18^th
• Belgium
  • Both 13^th and 14^th month pays are mandatory in Belgium. The thirteenth salary is paid on Christmas at 100% of a month’s pay, whilst the fourteenth salary comes in June to help out with holidays, and is equivalent to 92%.
• Bolivia
  • 13^th month pay is mandatory in Bolivia, with a 14^th paid if the country’s GDP tips 4.5% that year, and a 15^th if the employer turns a significant profit.
• Brazil
  • Brazil makes it mandatory to pay all employees both a 13^th and 14^th month bonus.
• Colombia
  • Colombia’s 13^th month salary is paid in two equal instalments, as in Argentina.
• Costa Rica
• Dominican Republic
• Ecuador
  • In Ecuador, it is a legal requirement to pay your employees a 13^th month pay in December, and a 14^th month pay in March or April.
• El Salvador
• Greece
  • 13^th and 14^th month pays are compulsory for private sector employers to pay their employees: at Christmas and in Easter.
• Guatemala
  • Paying employees in Guatemala both a 13^th month and 14^th month salary is legally necessary.
• Honduras
  • Honduras, like Guatemala, makes it obligatory to pay employees a 13^th month pay and 14^th month pay.
• India
• Indonesia
• Mexico
• Panama
  • 13^th month pay in Panama is split over three equal instalments, one in April, one in August, and the last in December.
• Paraguay
• Peru
  • Peru also legally mandates the payment by employers of both thirteenth and fourteenth salaries, one in July and the other in December.
• Philippines
• Portugal
  • With one of the lower minimum wages in Europe, Portugal makes up for it with both a 13^th and 14^th month salary paid mandatorily in June and December.
• Nicaragua
• Spain
• Uruguay
  • 13^th month pay in Uruguay is paid over two equal instalments, in June and at year-end.
• Venezuela

Countries in which paying employees a 13^th salary is customary

• Austria
  • 13^th and 14^th month pays are typically included in Austrian collective bargaining agreements, with the 13^th salary paid in December, and the 14^th in May.
• Belarus
• Chile
• China
• Croatia
• Cyprus
• Finland
• France
• Germany
• Hong Kong
• Israel
• Italy
• Japan
  • It is customary in Japan to pay a 13th month salary as a summer bonus in June, and a 14^th in December for the winter.
• Luxembourg
• Malaysia
• Netherlands
• Nigeria
• Saudi Arabia
  • As Christmas is the customary time for 13^th month pay in many predominantly-Christian countries, in Saudi Arabia a 13^th salary is typically gifted to employees on Eid al-Fitr.
• Singapore
• Slovakia
• South Africa
• Switzerland
• Taiwan
• United Arab Emirates
  • Both 13^th and 14^th month pay is customary in the UAE.
• Vietnam

Is 13^th month pay taxable?

Typically, 13^th, 14^th, and 15^th month pay is not taxable. However, should the calculated amount of a 13^th month salary exceed the average monthly wage of an employee, it may be taxed as normal pay.

Are all employees eligible for 13^th month pay?

In countries where 13^th salaries are normal, it is usually the case that all employees are eligible to receive them. However, this is not always the case. In some countries, employees must work for a company for a minimum amount of time (e.g. one month) before becoming eligible, whilst in others certain types of employees – managers, public sector workers, personal service employees and freelancers – are exempt. Typically, those exempted from 13^th month pay are workers who are already likely to receive the equivalent of one full month’s salary as an annual bonus.

How to calculate 13^th month salaries for your employees

When you plan an overseas expansion – be it opening new offices, or hiring a remote team of salespeople to bring your brand to a new market – one of the more difficult processes to get right is undoubtedly global payroll. The same can be true with regards to international employee relocation. One of the key elements to successfully complying with overseas 13^th month pay laws and customs is knowing how to accurately calculate them.

13^th month pay computation should be conducted on a country-by-country basis, since different countries (and different collective bargaining agreements within them) will calculate thirteenth salaries in different ways. As a business expanding overseas or hiring workers abroad, it’s crucial you familiarise yourself with the specific calculations used by each of the countries you have a presence in.

The most common way to calculate 13^th month pay, as exemplified by the Philippines, is simply to divide the gross annual salary of each employee by 12. The resulting number is the average monthly pay, and thus the amount to pay as a thirteenth salary.

In other countries, like India for example, 13^th month pay is calculated as a percentage of annual salary. Whilst in countries like Brazil and Italy, 13^th month pay is already included in the contracted salary of each employee (where the practice applies), and thus to calculate it you need to divide your employees’ gross annual salaries by 13.

Other unique 13^th month pay computations include Argentina’s famous Aguinaldo system, through which employees receive two equal payments equivalent to 50% of the highest monthly salary they’ve received that year.

Conclusion

13^th month pay, also referred to as thirteenth salary, is an increasingly common practice in the world of business. To ensure global compliance and maintain your company’s good reputation, it’s important to be aware of 13^th month pay practices and laws within the countries you operate (or intend to operate) in.

Mauve Group offers global payroll services and assistance in HR and global business expansion to businesses of all sizes, backed as we are by decades of professional experience in the field. By working alongside a leading provider of global employment solutions like Mauve, you remove the risk and stress from paying employees overseas.

All information is correct at the time of publication.