Understanding 13th Month Pay Compliance

Businesses hiring in Southeast Asia must navigate a range of region-specific regulations, with the 13th-month pay as a critical requirement in some countries. For companies expanding into Indonesia, Vietnam, and the Philippines, understanding the rules surrounding 13th-month pay can help ensure compliance and maintain employee satisfaction. This article explores the specific regulations in each country and the role of Employer of Record (EOR) services in simplifying compliance.

The 13th-month pay is an established practice across Southeast Asia, providing employees with an extra month’s wage as a year-end benefit. This bonus, required by law in countries like the Philippines and Indonesia, is integral to fair employee compensation in the region. Its significance goes beyond mere compliance; for workers, it is often a vital financial cushion during the holiday season, while for employers, meeting this requirement helps maintain a positive relationship with their workforce.

In addition, understanding these local labour requirements allows companies to be more effective in managing workforce expectations, which is crucial for sustaining a competitive edge in employee retention across these markets.

13th Month Pay Requirements by Country

Indonesia

In Indonesia, the 13th month pay—locally termed “Tunjangan Hari Raya” (THR)—is a compulsory benefit that helps employees prepare for religious holidays.

Eligibility: All employees with a company for at least one month are entitled to THR, including those on fixed-term contracts.
Calculation: The amount typically equals one month’s basic salary. However, employees who have served for less than a year receive a prorated sum.
Payment Timing: THR payments must occur at least seven days before the religious holiday.

Failure to comply with THR obligations can result in penalties for employers, making timely and accurate disbursement a legal necessity.

Read here for more information on Indonesia’s Payroll Rules and Regulation.

Vietnam

Vietnamese labour laws do not legally enforce a 13th-month pay; however, employers commonly offer it as an end-of-year incentive. In a competitive labour market, employers observe this payment as an unspoken standard when retaining talent.

Eligibility: As it is voluntary, eligibility varies and largely depends on the company’s policies.
Calculation and Timing: When provided, the bonus is typically one month’s salary and is often distributed just before the Vietnamese Lunar New Year (Tet), an essential cultural period.

Despite its unofficial nature, the 13th month’s pay is valued by employees, and companies often feel compelled to adopt this practice to align with industry norms.

Philippines

In the Philippines, the 13th month of pay is strictly mandated by law, entrenching it as a core element of employee compensation. Enforced by the Labour Code, this provision seeks to enhance employees’ financial well-being, particularly during the festive season.

Eligibility: All rank-and-file employees who have worked at least one month in a calendar year are entitled to the 13th month’s pay, regardless of their employment status.
Calculation: 1/12 of an employee’s total basic salary earned within the year.
Payment Timing: Employers must release the 13th month’s pay by December 24. However, they can provide it in instalments, provided the total is paid by this deadline.
Non-compliance with this requirement attracts administrative sanctions, underscoring businesses’ importance in adhering to these stipulations.

The Role of an Employer of Record (EOR)

As businesses grow globally, compliance with local labour laws, such as the 13th-month pay, becomes formidable. An Employer of Record (EOR) can be a crucial partner in ensuring compliance with these intricate regional requirements for companies without local offices or dedicated HR teams in each country.

An EOR handles payroll and employee benefits, managing the complete compliance process for international businesses. Here’s how an EOR can assist with 13th-month pay compliance:

Precision in Calculations: By staying current with local regulations, an EOR ensures accurate calculation of the 13th month’s pay, reducing the risk of errors that could lead to legal penalties.
Timely Payments: With dedicated payroll systems, EORs manage disbursements on time, aligning with regulatory deadlines in each country.
Adapting to Policy Changes: EOR providers continuously monitor changes in labour laws, ensuring companies remain compliant as regulations evolve.

For international employers, partnering with an EOR allows them to focus on their core operations without the complexities of navigating local employment laws. The result is a compliant, efficient, and supportive structure for employees, enhancing workforce morale and legal security.

Compliance with 13th-month pay regulations is essential for businesses hiring in Indonesia, Vietnam, and the Philippines. The complexities of international employment laws make an Employer of Record invaluable, ensuring companies meet these requirements seamlessly. For a dependable approach to global hiring and compliance, explore High Five’s EOR services to see how they can support your business’s growth.