All you need to know about 13th & 14th Month Pay

We all know there are 12 months in a year irrespective of where you are on the planet but if you have ever dealt with global payroll, you must have come across 13^th or 14^th month pay. Ever wondered what are these 13^th and 14^th month?

We believe it is important for you to know the 13^th and 14^th month pay if you hire foreign employees, even though the practice may not be common in the jurisdiction that you operate in. If you don't pay employees 13^th and 14^th month pay in countries where it is a regulatory requirement, then you may be guilty of non-compliance resulting in financial penalties.

We are covering the different aspects of the 13^th and 14^th month pay to enable you to understand the intricacies and ensure compliance with the regulations as applicable to your business. 

What is the 13^th month and 14^th month pay?

Historically, during twentieth century, voluntary donation by employer to their employees without any obligation during Christmas was introduced in Europe. For instance, in Italy it was originally named 'Gratifica Natalizia' (Christmas bonus). It got further spread worldwide in US, Asia and some of the Middle East and Africa countries pertaining to increased industrial activities and pressure from worker union. Henceforth, some countries introduced an additional pay around end of the year as an economic growth allowance to compensate for the high cost of living and other countries adopted the 13^th month pay as an incentive which eventually got legalized through collective labour agreement for factory labour and was extended to different kind of works in due time.

The 13^th month's pay is an additional month's salary paid to employees at a designated time during the financial year. Some countries further pay one more additional month's salary referred to as 14^th month pay. 13^th or 14^th month pay are in the nature of bonus that is given to the employees irrespective of their performance.

For example, In Indonesia there is only 13^th month pay known as “Tunjangan Hari Raya (THR)” but in Spain, there are both 13^th and 14^th month pay known as “Pagas Extraordinaries”

Who is entitled to 13^th month and 14^th month pay?

Typically, all salaried employees on employment contracts are entitled to 13^th month and 14^th month pay, though some countries make exceptions for executive-level leaders. There can also be certain condition like minimum working requirement or working in a particular sector to be eligible for this payment. Whether the company pays employees through the employer of record (EoR) or direct payroll, it doesn't impact the 13^th and 14^th month pay.

Is 13^th and 14^th month pay mandatory?

As we do not have uniform socio-economic condition throughout the world, similarly 13^th and 14^th month pay are also not recognised uniformly. Many countries still do not mandate 13^th or 14^th month pay like USA, UK or Middle East countries like Qatar, UAE, Lebanon etc., while some countries despite not being mandated by law pay this benefit customarily like Netherland, Japan, China etc., and some countries mandate it via law like in Spain, Mauritius, Greece, India, Philippines, Thailand etc.

The 13^th month and 14^th month pay usually take one of the three forms.

• Mandatory pay: When a country mandates 13^th and 14^th month payment, then the companies not complying with rules are liable to pay a penalty. Besides the financial impact, the loss of reputation and trust in the workforce is more damaging.

• Customary pay: The companies are not legally obligated to pay but it is considered good practice to add a month's salary as a bonus with timing aligned to prominent religious holiday seasons such as Christmas in western countries.

• Discretionary pay: The extra month's pay is at the discretion of the employer.

How is 13^th and 14^th month pay calculated?

The calculation of 13^th and 14^th month’s pay also depends on country’s law, like in Spain the annual salary is generally divided by 14 to get the 13^th and 14^th months’ pay. In some countries, 13^th month pay is calculated as an additional month's salary, so you typically divide the total basic salary by 12 to work out the amount owed for the 13^th month as done in Philippines. In some countries like India, it is paid as a percentage of the salary known as statutory bonus and is applicable for employees only if their salary is below the defined threshold.

When does 13^th and 14^th month pay needs to be paid?

Usually, it is paid as onetime payment at the end of the year- sometimes referred as Christmas Bonus or yearend bonus or winter bonus or it can be paid in two or more instalments - usually one in summer and one in December or it can be prorated to 12 months as per the respective countries’ s labour law guidelines, Collective Bargaining Agreements (CBAs) or as per the arrangement between the employer and employee. The complication arises in the arrangement of the payment as we can see that it depends on various laws and agreements.

Is 13^th and 14^th month pay taxable?

Laws with respect to taxation of 13^th and 14^th month’s pay also vary from country to country and it is usually taxed along with the regular pay but not always.

Which all countries provide the 13^th and 14^th month pay?

The requirements vary across countries, with the practice less common in Africa and North America. Some countries make a legal distinction between 13^th month pay and bonus, while in most countries the terms are used interchangeably.

Here are glimpse of countries-region wise where 13^th and 14^th month pay are required either mandatorily or customarily

Asia

Europe

Middle East & Africa

South and Central America

Conclusion

If you are operating in multiple regions or being in the same region handle payroll compliance of different countries, you need to adhere to the laws as well as the customary requirement of 13^th and 14^th months’ pay. Even if it is mandatory in different countries, the way it’s calculated and how it’s taxed will probably vary, and with these complications the failure of compliance and chances of getting things wrong multiplies. It is so, always advisable to consult an expert in global payroll to clarity and guidance.