The Basics of the 13th Month Pay for Employers
Global employers are familiar with 13th month pay and 14th month pay–extra payments employers make to their employees each year. In some countries, 13th month pay, often called the 13th month or 14th month salary or bonus, is common and expected. In other countries it is mandatory.
Mandatory 13th month and 14th month pay rules make managing an already complex global payroll even more complicated. This is especially true when an employer has employees in more than one country where employees expect these extra payments, or it is required for payroll compliance.
What is 13th month pay?
The 13th month, and the rare 14th month salary, are extra payments made each year that are based on an employee's wages or salaries. They are not based on performance and, where common, are not considered discretionary.
The name “13th month salary” may lead some to believe it is paid at the end of the year, but that may not be the case. While people in the U.S. and Europe may receive Christmas bonuses, a salary bonus may be tied to other religious holidays that don’t fall at the end of the year.
In Brazil, the 13th month salary is mandatory. It is based on an employee’s December salary and is paid in two equal installments. Half must be paid between February and Nov. 30. The other half is paid by Dec. 20.
In Austria, a 13th month bonus is common, but employees often receive both a 13th month and a 14th month payment equal to one month’s salary. The bonuses, paid in the summer and at the end of the year, are commonly called holiday or Christmas bonuses.
In Indonesia, the mandatory 13th month salary is tied to religious holidays and is called the Tunjangan Hari Ray or THR (Religious Holiday Allowance).
A mandatory 13th month annual bonus is common throughout Latin America and many countries in Europe and Asia also have laws and customs requiring employers to take these bonus payments into consideration when setting compensation.
Calculating 13th month pay
Not surprisingly, laws and practices on 13th month salaries vary by country, making payroll compliance more complex.
Typically, a 13th month salary will be equal to one month’s pay, but this is not always true. It might be equal to 15 days or two weeks in some instances. The amount may also differ depending on an employee’s length of service or average pay in the months prior. In some countries with mandatory 13th month pay, the bonus isn’t required until the employer has a specific number of employees.
The most common method for calculating a 13th month salary could be dividing the annual salary by the months worked in the prior year. Usually, the equation will be the annual salary divided by 12, but if the employee’s months of service are less than one year, the number of months worked will be the number the salary is divided by.
However, it may be as simple as dividing the gross salary by 13. This method would be more cost-effective if an employer is paying a nonmandatory 13th month bonus.
A 13th month salary calculation includes leave paid during the year, such as maternity leave, paid sick and vacation leave, as well as overtime, commissions and other salary.
When employers don’t pay the 13th month salary
Failure to pay the 13th month salary can demotivate employees in some places and potentially lead to legal penalties. All companies must follow local labor laws where they operate. If a 13th month is mandatory, it must be paid.
If local law does not require a 13th month bonus, it may be customary and local employees still may expect it. Failure to understand this may lead to tension in the company and even litigation. For example, in Luxembourg, a 13th month bonus is not mandatory, but there was an instance of an upset employee who sued their employer because it didn’t pay a 13th month. The court ruled for the employee and ordered the company to pay a fine.
Bypassing the struggles of the 13th month salary
For companies with employees in several countries, it can be difficult to remain compliant with multiple local labor laws. Every country has its own regulations and customs, and failure to understand them can lead to trouble and a loss of goodwill. This is where a direct Employer of Record (EOR) can be a global employer’s greatest ally.
A direct EOR is an expert in local labor law that handles compliance with local rules and common practices. The EOR assumes the legal liability for your overseas employees in terms of labor law, taxation and payroll, including the 13th month salary if applicable, and ensures compliance in every country where you have employees.