Non-diminution of Benefits Rule (Labor Code)

The law prescribed the benefits which an employee should receive, however, some companies give benefits more than the law provides. The question now is what happens if these companies reduced or took back the additional benefits their employees are receiving. I will try to answer this question in this opinion.

The labor laws and their implementing rules prescribe only the minimum salary[1] and benefits (13th month pay[2], service incentive leave[3] and meal and rest periods[4]) which the employer should grant to the employees. There is no requirement under the law and the rules and regulations on labor standards of the grant of 14th month pay, yearly salary increase, performance bonus and number of leaves which are above the minimum prescribed by the law. The State gives freedom to the parties (employer-employee) to reach a compromise which will serve and benefit their mutual interest. These additional benefits are either written in the employment contract or if not stated in the contract, are parts of company policies.

However, if it is specified in the contract that out of the P90,000.00 salary, the P25,000.00 shall be granted as allowances  which shall be considered as a tax shield (i.e. not forming part of the taxable portion). Hence, when the employee commences working, the employee is receiving the net of P65,000.00 (after tax) and the whole P25,000.00. If the employer will migrate the P25,000.00 into part of the taxable portion, the compensation previously being received by the employee will be reduced.

Obligations arising from contracts have the force of law between the contracting parties and should be complied with good faith.[5] The contract of employment is the primary law between the employer and the employee, which will govern the parties’ respective rights and obligations.

With regard to the other benefits, there is no law prescribing the manner or basis for the computation of salary adjustments, 14th month pay, performance bonus, retirement package and such other benefits provided by an employer to its employees over and above the minimum amounts discussed above. These benefits are considered as gratuitous, founded on the generosity of the employer, hence, the law allows the employers to prescribe its own rules on the computation. However, if the employer has been implementing a certain manner or basis for the computation of these benefits for a time, such manner or basis for computation may be considered as having ripened into a company practice, and as such, the employer cannot unilaterally revise or withdraw such manner or practice of the computation without violating the prohibition on non-diminution of benefits.

The Labor Code provides:

“Art. 100. Prohibition against elimination or diminution of benefits – Nothing in this Book shall be construed to eliminate or in any way diminish supplements, or other employee benefits being enjoyed at the time of the promulgation of this Code.”   

                In TSPIC Corp v. TSPIC Employees Union[6], the Supreme Court laid down the elements of diminution of benefits: (1) the grant or benefit is founded on a policy or has ripened into a practice over a long period; (2) the practice is consistent and deliberate; (3) the practice is not due to error in the construction or application of a doubtful or difficult question of law; and (4) the diminution or discontinuance is done unilaterally by the employer.

Jurisprudence has not laid down any rule requiring a specific number of years on what constitutes “long period”. But in a 2004 case[7] decided by the Supreme Court, it was held that two (2) years is considered as a long period of time.

In Sevilla Trading Company vs. A.V.A. Tomas E. Semana[8], for almost three (3) years, petitioner Sevilla Trading Company (“Sevilla Trading”) included the following benefits in the computation of the 13th month pay:

  1. the overtime premium for regular overtime, legal and special holidays,
  2. legal holiday pay, premium pay for special holidays
  3. night premium
  4. bereavement leave pay
  5. union leave pay
  6. maternity leave pay
  7. paternity leave pay
  8. company vacation and sick leave pay
  9. cash conversion of unused company vacation and sick leave.

This computation is beyond what is prescribed under the 13th Month Pay Law[9]. Under the same law and its implementing rules, only the basic salary, i.e. excluding what is provided as fringe benefits or allowances, of an employee is used as a basis in the determination of his 13th month pay and any compensation or remuneration which is deemed not part of the basic pay is excluded as basis in the computation of the mandatory bonus.

Sevilla Trading, upon discovery of the mistake of its payroll officer, applied the provisions of the law on 13th month pay and excluded the above-mentioned benefits from the computation. Hence, this reduced the 13th month pay received by its employees, causing the employees’ union to contest the matter. The Supreme Court ruled that the inclusion of Sevilla Trading over the years of non-basic benefits of its employees in the computation of the 13th month pay may only be construed as a voluntary act on its part and putting the blame on its personnel is inexcusable. The High Court proceeded to declare that such practice of Sevilla Trading constitutes a voluntary practice which cannot be unilaterally withdrawn by the employer without violating Art. 100 of the Labor Code.

Similarly, in the recent case of Central Azucarera De Tarlac vs. Central Azucarera De Tarlac Labor Union-NLU[10], petitioner Central Azucarera de Tarlac had been giving the 13th month pay to its employees on the basis of their basic monthly salary together with their overtime pay, night premium pay and vacation and sick leaves. However, in 2006, after almost thirty (30) years, the petitioner Company changed the basis of the computation to only the basic monthly pay. The labor union questioned the change in the computation. The High Court held that the practice of Central Azucarera de Tarlac in giving 13th-month pay based on the employees’ gross annual earnings which included the basic monthly salary, premium pay for work on rest days and special holidays, night shift differential pay and holiday pay continued for almost thirty (30) years and has ripened into a company policy or practice which cannot be unilaterally withdrawn.  

[1] Wage Order No. NCR-16

[2] Presidential Decree No. 851

[3] Book III, Chapter III of the Labor Code of the Philippines covers the employee’s benefit for Service Incentive Leaves. According to Article 95, an employee who has rendered at least one year of service is entitled to a yearly five days service incentive leave with pay.

[4] Under Article 83 of the Labor Code, the employee is provided a one-hour employee benefit for regular meals, when working on an eight (8 hour) stretch. Employees are also provided adequate rest periods in the morning and afternoon which shall be counted as hours worked.

[5] Article 1159 of the Civil Code

[6] G.R. No. 163419.  February 13, 2008

[7] Sevilla Trading vs. A.V.A Tomas E. Samana, G.R. No. 152456. April 28, 2004

[8] See note 9

[9] Presidential Decree No. 851

[10] G.R. 188949, July 26, 2010

[11] G.R. No. 163505.  August 14, 2009

[12] TSPIC Corp v. TSPIC Employees Union, G.R. No. 163419.  February 13, 2008, Globe-Mackay Cable and Radio Corp. v. NLRC, G.R. No. 74156 June 29, 1988

[13] Globe-Mackay Cable and Radio Corp. v. NLRC, see note 17

[14] TSPIC Corp v. TSPIC Employees Union, G.R. No. 163419.  February 13, 2008

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