Special Payroll Payments (13th,14th, 15th, 16th month payments)
It is amazing how fast 2019 is slowly disappearing beyond the horizon. We have passed another mid-year and have now started our final bi-annual processing. For most employers, the cost of processing payrolls in some countries such as France, Hong Kong, Philippines, Singapore, Brazil, Italy and many more are expensive and laborious. With the demands rested on International Payroll Professionals; months in and out, the 12 monthly payrolls and obligations do not stop there. There are two additional payroll processing plus third-party’s requirements fellow payrollers must action in addition to their standard 12 months processing each year – and that is, the 13th or 14th-month salaries.
What is a 13th or 14th Month Payment, Salary or Bonus?
Most international payroll operations and processes are guided under the ‘’Collective Agreement’’ (also known as a ‘’collective bargaining agreement’’ or a ‘’collective labour agreement’’ or CAB/CLB). Thus the 13th, 14th-month salaries are paid under the agreeable terms of the CAB/CLB contract of employment.
These payments are equivalent to one full monthly salary and usually paid in May or June, or in November or December, typically around Christmas. Traditionally in some (not all) countries, it is known as a Christmas bonus. The notion in Spanish colonies is that this additional payment acts as a safeguard and extra cash in family’s pockets when it is needed the most (for example, during the holidays seasons)
Do take note that in some countries, 13th and 14th months’ salary is not the same as Christmas bonus. Be mindful when using the terms bonus and payment interchangeably because in most cases it confuses the processors and the Head Quarters management accounting departments. We advise all processors to read the CAB/CLB to understand the employer’s obligations under these payments due and avoid hefty penalties.
Before delving further into the 13th and 14th payments, let me elaborate on the CAB documentation for those who might not have had the privilege to read a copy.
What is a Collective Agreement?
The document is a written contract negotiated through collective bargaining for employees by one or more trade unions with the supervision of a company that regulates the terms and conditions of employees at work. The agreement outlined and agreed upon on behalf of all workers represented by the union. The agreement characteristically contains wages, hours, benefits, rules or working conditions that the Union reciprocally agreed. Also, in some cases, safeguarding against individuals and their circumstances – such as pregnancy, health issues and or carers.
You must note that CAB/CLB is a client and country-specific data – not a one fits all article that you might mastered in one engagement and replicated in other employment. Yes, most CAB/CLB materials may adopt significant similarities. However, as in the UK or elsewhere in the world, we know that all employment contracts are not the same even though there may be a standard operating procedure or statutory requirements.
What countries decree by statute these payments?
To name but few, countries such as France, Hong Kong, Singapore, Philippines, Brazil, and Italy all paid out either 13th or 14th-month payrolls. These are complex payments as they might have some stipulations attached to the conditions such as safe-guarded on personal Pensions, Maternity, Paternity, Sickness, Insurances, and others. Thus, the processor is not only managing a 1/12th or 1/13th or 1/14th of payments – they must consider many factors and stipulations under the CAB.
A question a stakeholder might have on these special payments are – what is the impact on the overall salary package?
1. Is the employer paying gross salary made up of 12 recurring payrolls plus one or two extra months?
a. Example #1, an annual salary of €40,000 (paid for from January to December). If the employee is paid under the 13th-month scheme, would he/she get an extra one month’s full wage in December?
i. which equates to €40,000 divided by 12 months = €3,333.33 base pay per month.
ii. Plus, the addition of €3,333.33.
iii. A total of €6,666.66 gross paycheque in December.
iv. Meaning the employee will receive two sets of gross basic pay in December.
v. An annual total of 40,000 + 3,333.33 =€43,333.33?
b. Moreover, if it is a 14th payments cycle, would the employer be paying out two sets of base pay, which is €3,333.33?
i. That is (€3,333.33) which is 1/12th of his/her base salary in May or June and then the other instalment of (€3,333.33) in November or December?
ii. Another instalment of (€3,333.33) paid in November or December?
iii. Meaning, a total of €6,666.66 gross paycheque in May or June (as per company’s disbursement agreement).
iv. Plus, another €6,666.66 gross paycheque in November or December (as applicable).
v. In summary, the employee will receive two sets of gross basic pay in May or in June. Plus, two sets of payments in November or in December (as per company’s disbursement agreement).
vi. An annual total of 40,000 + 3,333.33 + 3,333.33 = €46,666.66.
c. These are round the table discussions Payroll must verify with Human Resources and Reward teams upon reading the business CAB/CLB; because in most cases, the CAB/CLB will not zoom into the context of the formation of employees’ salaries. Often the CAB/CLB will only direct employers on how many cycles of payments an employer should make to their employees. How employers go about it, is their discretion, but the rules must apply as per CAB.
2. The alternative question, is the employer paying a gross salary, which already includes these special payments?
a. Example #2, €40,000 divided by 13 months = basic pay of €3,076.52 per month.
b. Alternatively, €40,000 divided by 14th months = basic pay €2,657.74 per month.
c. Please note that these methodologies are not new in the market, and are based on employers’ competitive strategies, they can apply any one of these approaches.
d. Also, some of these methodologies are sector (industries) -specific.
Consequently, if you are an employer, and you are firmly against these local arrangements because of the additional costs, word of advice is you must comply. There is no workaround on these payments’ schemes. However, you can use one of the two methodologies above to meet the Unions objectives. All payments must be made visible on the employee’s payslips.
Also note that in some countries, the 1/12th of the 13th or 14th months salaries could be proportioned again to enable families to manage their budget all year round, for example, in Brazil. In most jurisdictions, the standard process is to proportion the 13th and 14th salaries into further two extra instalments.
Taking Brazil as my jurisdictional example, from the case of €40,000 in example #1 above, the 1/12th which equates to €3,333.33 basic pay per month is split again into two halves ((3,333.33 / 2 = 1,666.66 if paying a 13th-month salary (converted to BRL currency if paid locally)). Each portion – that is, €1,666.66 is requested to be paid as follows: – (although not all employers apply these dates, however, they do facilitate timely payments in agreement with the unions’ arrangements)
- If applicable, for the 13th months’ salary, Payroll must settle Instalment #1 of €1,666.66 between 1st of February and the 30th November.
- Pay the additional Instalment payment #2 of €1,666.66 by the 20th December.
- Traditionally businesses in Brazil will pay on the last working day before the 30th November and 20th December.
- The same logic applies to the 14th-month payments – the two extra wages are further divided to facilitate the ‘’local concepts’’.
What happens if employers don’t make these payments?
Well, if an employer is unable to leverage the cost of these special payments, the price of a court order, employee’s rage and reputational risks is hefty. Besides, employers can be penalised with a fine equal to three times the total payment due. Which is theoretically paid to the worker by a due date issued by the court or union.
Why do countries pay-out these additional costs?
The benefits for these payments in most of the outlined countries is to help attract and retain talent in the various competitive markets. These payments are recognised by governments and employees alike. So much so that in 2017, the Philippines government make it a law that all government employees will get a mid-year bonus beginning on May 15. The ‘’bonus’’ will be equivalent to one month’s basic pay which will be given on top of the 13th-month bonus government workers already receive every December.
“You have to give people a decent salary,” Budget Secretary Benjamin Diokno said. In addition to the 13th (in the month of May) and 14th months’ salary (in December) already established. Diokno promised to add a 15th month or 16th-month pay in the years to come and make it standard for all to follow.
Avoid late or delayed payments of the above benefits. Employees are permitted to ask for the first of their 13th salary instalments to be paid alongside their holidays. Employees dismissed with “reasonable cause”, forfeit any right to receive the 13th salary. However, any employee dismissed without cause is entitled to receive (amongst other benefits) whatever percentage of the 13th or 14th salary they have earned in the year of termination. This can include any overtime worked, night shift stipends, insurances/indemnities, and pending regular bonuses. In addition to the 13th, 14th, (or possibly 15th, 16th-month payments). Some jurisdiction categorises the 13th-month payment as a mid-year salary, others as an end of year payment. Would your outsourcing vendor charge you for these supplementary processes? Most likely – yes.
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