Handling transnational human resource requirements can leave you clueless and overwhelmed if you manage a company operating across multiple countries. Every jurisdiction has its expected inclusions, laws, and regulations. So, it would help if you familiarize yourself with them bit by bit, starting with the 13th-month pay.
The 13th-month pay is a bonus that some employers offer their employees to reward them for their hard work. Besides the 13th-month pay, employers may convert paid leaves to additional salary or transfer leftover leaves to the following year.
This extra compensation is usually paid during December, but some employers may give it at a different time. They can provide it anywhere between a month early to after the New Year.
If you’d like to know more about the 13th-month pay, this article will guide you on everything you need to know about it.
Who is Entitled to a 13th-Month Pay?
In the U.S., employees are entitled to a 13th-month pay if they work for the same employer for a whole year.
Employers can decide if they want to give this bonus to their employees or not. Some companies only provide bonuses if they make a certain amount of profit during the year, while others base the decision on the employee’s performance or length of service.
If an employee receives a bonus, they are usually required to work up until January 1st before they receive it. Meanwhile, some companies will provide bonuses earlier than this date and allow their employees to take them immediately after receiving them.
How to Calculate 13th-Month Pay?
Calculating an employee’s 13th-month pay varies highly. Sometimes there will be specific regulations that involve a particular solution to calculate it, but it doesn’t necessarily apply to each industry, so there’s no standard formula.
Generally speaking, the formula for computing the 13th month’s pay is treating it like an additional month’s salary.
First, you calculate it by multiplying the employee’s basic monthly salary by the number of months they worked. Next, divide that figure by 12; the result is the employee’s 13th-month pay.
22,000 x 6 = 132,000
132,000 ÷ 12 = 11,000 (13th month)
25,000 x 12 = 300,000
300,000 ÷ 12 = 25,000 (13th month)
In other circumstances, tax and premiums may be involved. You would have to look at how much you would have paid in taxes if your employee had worked full-time for a full year (12 months). You can do this by taking their total net income and subtracting any deductions or credits they received during that period (health insurance premiums).
Always remember that calculating an employee’s 13th-month salary varies from country to country and employer to employer.
Depending on the company, the amount an employee gets from their 13th-month pay can change. Some locations will have different policies, calculations, and even a few deductions from tax.
If your organization doesn’t hand out 13th-month salaries, other bonuses like extra vacation leaves with allowances, extra sick leaves, or insurance premiums are great alternatives for 13th-month pay.
13th-Month Pay in Different Countries
The 13th-month pay is considered a “year-end bonus” for employees and highly depends on the employer and the country. It’s a common tradition in countries like China, Japan, and Korea.
For example, employees in China can receive their 13th-month pay during Christmas or before the Chinese New Year. Chinese employers hand employees their bonus in a red envelope, another longtime tradition in the country.
Another example is how some Japanese employers give out the 13th-month pay in June as a summer bonus or in December as a winter bonus. Other companies will hand out a 14th-month pay, depending on how successful the business has been in the past year.
The 13th-month pay is usually seen as a way to reward workers who have stayed with their current employer for a year or more—especially if they’ve been extra hardworking or loyal to the company. It is also a way to keep employees from leaving their job at the end of the year and finding work elsewhere.
In countries such as the U.S., Australia, Canada, and Great Britain, there are no laws requiring employers to give out 13th-month pay to employees working for most of the year.
It is up to each employer whether they want to offer this compensation option, but some companies do so to reward employees for their hard work and loyalty. Most workers receive two to four weeks’ worth of extra salary as an end-of-year bonus.
The 13th-month pay differs from any Christmas bonus that an employee can receive. Some people may consider the two to be the same, so it is a common misconception for many employees. For countries with no mandates, it is important to identify the two, so employees know what they’re getting exactly.
Kinds of 13th-Month Pay
Now that it is established that 13th-month pay varies between employers and countries, you must understand the kinds of 13th-month pay employees can receive. The next section discusses three types.
1. Mandatory pay
Mandatory pay is the amount of money an employer must give employees as part of their annual salary, whether or not they have worked for the entire year.
The mandatory amount varies from country to country, but it is typically around one month’s worth of wages. Sometimes, it can be more than one month’s worth of salary. Countries with mandatory pay include the Philippines, India, Indonesia, and Spain.
2. Customary pay
Unlike mandatory pay, customary pay is where the employee agrees upon a contract or through industry/collective agreements about the exact terms of their 13th-month pay.
It is not a legal requirement for employers, but it can significantly impact a business’ retention since employees expect decent benefits and salaries. Countries with customary pay include Taiwan, Vietnam, Finland, and Croatia.
3. Discretionary pay
Discretionary pay is a type of compensation determined by the employer and can be adjusted based on the needs of the business.
In the U.S., discretionary pay is often used when calculating the 13th-month pay. It allows employers to increase or decrease an employee’s annual salary, depending on their performance during the previous year. Therefore, the 13th-month pay amount changes every year as well.
What Can Employees Do With Their 13th-Month Pay?
When employees get their 13th-month salary, they usually spend their hard-earned money on a couple of expenditures. Here’s a list of things employees can do with it.
1. Christmas shopping
The 13th-month pay usually comes around December, when people start preparing for Christmas. They can buy presents for their loved ones. They may not have much time between the 13th-month payday and Christmas day, so giving them their bonus earlier is best.
2. Going on vacation
Employees can go on vacation using their 13th-month pay to finance the trip. What better way to treat themselves than with a break?
After many months of work, they may want to put their feet up and relax. Coupled with a few days of paid time off, they can comfortably spend the holiday season in pure leisure.
3. Getting insurance
Buying insurance is a great option if they want to spend their 13th-month salary productively. It would be best if your employees used their bonuses on insurance because they’ll be able to protect themselves from financial loss in case of an accident or illness.
The important thing here is that these incidents are typically unexpected, meaning that if your employees aren’t prepared for emergencies, it can cost them a big portion of their salary. As an employer, you want to ensure that your employees are stable and prepared for unforeseen events, allowing them to continue working productively.
Using the 13th-month pay for investments is an excellent way to grow money. Many people aim to be financially stable when they get older, so investing in a business can help immensely. However, investing doesn’t mean it has to be about money.
Your employees can invest in themselves to improve at their job or learn a new skill. Online courses and tools are a worthwhile investment that can benefit them long-term, or they can apply for classes involving sports, arts, or even cooking.
5. Paying off debts
Debts are never fun to deal with, and getting rid of them will ease the burden on employees. These obligations can easily increase if ignored, so using the 13th-month pay to clear any of them will make life much easier.
If all the debts are cleared, that’s the time when they can use their money on other expenditures.
Understanding the 13th-Month Salary
The 13th-month pay varies between employers and locations. Some have mandatory policies, while others don’t. However, that doesn’t mean employees won’t receive any extra income.
You must consider the benefits your business can provide to ensure employee retention doesn’t decrease. It can lead to a negative impact on your image and might deter potential employees from applying to your company.
As mentioned, it is still possible for businesses that are hiring in the U.S. to hand out unexpected perks, so it is still something employees can look forward to.
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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.