February 20, 2019

TO: UPPER MANAGMENT

RE: RETIREMENT BENEFITS (R.A 7641)

LEGAL OPINION

Republic Act No. 7641 (RA 7641), also known as the Retirement Pay Law
amendment to Article 287 of the Labor Code of the Philippines in order to
prescribe the minimum retirement benefit which companies are mandated to
pay to their eligible employees.

Accordingly, said law shall apply to all employees in the private sector,
regardless of their position, designation or status and irrespective of the
method by which their wages are paid. They shall include part-time employees,
employees of service and other job contractors and domestic helpers or persons
in the Personal service of another.

Qualification of Employees Subject To Retirement Pay

Optional Retirement. — In the absence of a retirement plan or other

applicable agreement providing for retirement benefits of employees in an
establishment, an employee may retire upon reaching the age of sixty (60)
years or more if he has served for at least five (5) years in said
establishment.

Compulsory Retirement. — Where there is no such plan or agreement

referred to in the immediately preceding sub-section, an employee shall be
retired upon reaching the age of sixty-five (65) years.

What must be noted here is that a retiring employee must satisfy the dual
condition of both minimum age (Age 60) and minimum service years (5
years) to be eligible for entitlement under RA 7641.

So what then is the benefit under the Retirement Pay Law?

Section 1, Paragraph three (3) of R.A 7641 provides:

"xxx In the absence of a retirement plan or agreement

providing for retirement benefits of employees in the
establishment, an employee upon reaching the age of sixty
(60) years or more, but not beyond sixty-five (65) years which
is hereby declared the compulsory retirement age, who has
served at least five (5) years in the said establishment, may
retire and shall be entitled to retirement pay equivalent
to at least one-half (1/2) month salary for every year of
service, a fraction of at least six (6) months being
considered as one whole year xxx’.

A brief backgrounder: the actual text of RA 7641 uses the term “one-half
month salary for every year of service.” However, one should not make the
mistake of thinking that “one-half month” means “50%” — because it does not.

The reason for this is that RA 7641 goes on to further define that “one-half
month” includes ALL of the following three components:

 15 days salary for every year of service

 cash equivalent of 5 days of service incentive leave, and
 1/12 of the 13th month pay
Computation of retirement pay

A covered employee who retires pursuant to RA 7641 shall be entitled to

retirement pay equivalent to at least one-half (1/2) month salary for every year
of service, a fraction of at least six (6) months being considered as one whole
year and cash equivalent of 5 days of service incentive leave.

The law is explicit that “one-half month salary shall mean fifteen (15) days
plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not
more than five (5) days service incentive leaves” unless the parties provide for
broader inclusions.

Now that the eligibility and benefit under RA 7641 are defined, what other
questions should one ask? One common question is, “Does RA 7641 also
requires my company to set up a formal retirement plan?”

The answer is No.

To clarify, the purpose of RA 7641 is to prescribe the minimum retirement

benefit to be paid by the company to its qualified employees. But since RA
7641 does not require a company to also set up a formal retirement plan, it
becomes clear that the obligation under RA 7641 is simply for a company to
pay the regulatory benefit when it becomes due.

Whether or not this payment will come from the company’s general funds or
from a retirement trust fund under a formal retirement plan is a decision to be
made entirely by the company.

Substitute Retirement Plan

Qualified workers shall be entitled to the retirement benefit under RA 7641 in

the absence of any individual or collective agreement, company policy or
practice. In case there is such an agreement, policy or practice providing
retirement benefit which is equal or superior to that which is provided in the
Act, said agreement, policy or practice will prevail.

Can we impose a mandatory retirement age of 60 years old in the

company?

At present, no. Our contract does not provide for such a clause.

In the case of Alfredo F. Laya, Jr. vs. Court of Appeals, et al. (G.R. No. 205813,
10 January 2018), penned by Honorable Associate Justice Lucas Bersamin, the
Honorable Supreme Court had the opportunity to rule on the invalidity of such
forced retirement in this wise, viz:

“Under the provision, the employers and employees may agree

to fix the retirement age for the latter, and to embody their
agreement in either their collective bargaining agreements
(CBAs) or their employment contracts.
Retirement plans allowing employers to retire employees who
have not yet reached the compulsory retirement age of 65
years are not per se repugnant to the constitutional guaranty
of security of tenure, provided that the retirement benefits are
not lower than those prescribed by law. xxx”

It should be noted that upon retirement of an employee, whether optional or

compulsory, his services may be continued or extended on a case to case basis
upon agreement of the employer and employee.

Prepared by: RICHARD CONRAD F. SALANGO