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

7 thoughts on “Non-diminution of Benefits Rule (Labor Code)

  1. Hi! Just want to know if removing of CPA allowance is a violation to ‘Non Diminution of Benefits’. Said allowance was enjoyed by me upon regularization as stated in my placement offer. However, the allowance was later on removed to my payroll due to the following reasons: 1) I was transferred from Internal Audit to Administration Division thus, our HRMD told me that they will remove my allowance because CPA eligibility is not required in my position in the Administration (well in fact, my transfer includes duties and responsibilities coming from Internal Audit) 2) Also, HRMD told me that they are currently revising the previously issued MEMO/policies regarding the said CPA Allowance. Accordingly, revision will include that CPA Allowance will be given to those eligible employees only. However, until now( almost a year), the said revision was still in the air and not yet implemented thus, I supposed enjoying it until this moment. Is it right for me to claim those allowances back, since no revision or policies was approved and implemented?. What should I do for this? Your response would be much appreciated. Thank you! :)

    • Hi! It depends on your contract of employment. If there’s no qualification on your contract of employment regarding your CPA allowance, meaning your contract does not provide that you will be receiving your CPA allowance because of your position, duties and responsibilities and that the same may be taken away if you were assigned on different department or division, you are entitled to your CPA allowance even if there will be a change in your assignment. Also, if it was not stated on your contract that your CPA allowance or any benefits granted to you is subject to the Memorandum or rules and regulations issued by your company, you can demand payment of your CPA allowance. As I stated, the contract of employment governs your relationship. Hence, the said Memo or any company’s memo or rules must be referenced or incorporated in the contract if the company wanted the provisions in your contract to be subject to it.

  2. Hi, I am employed on a newly founded regional headquarters of our company in the Philippines and had been operation for over a year now. We have 10 VLs and 15 SLs originally which were convertible to cash at the end of the year. However, the company recently release a new policy that instead of 10, we are now allowed of only 5 days to be converted to cash. Is this a violation of ‘Non Diminution of Benefits’?

    • how long have you been enjoying the 10 VLs and 15 SLs which are convertible to cash. One of the requirements of “non-diminution” rule is that the practice has been going on for a long time. The Supreme Court held that 2 years is a long time. Hence, if in your company, the practice has been going on for 2 years, eliminating or decreasing the said benefit may be considered as violation of the rule.

  3. Hi! I would like to know if it is legal to take away earned leave credits?
    our company has a policy in which all employees hired jan2013 onwards will need to earn leave credits. it will be given every month and can be utilized the next month. that policy also states that all unused credits after our second year of employment, will be converted into cash provided that we have at least 10 days left to use but only half of it will be converted.
    all my unused credits have expired due to i was not able qualify for the cash conversion even though all those points were just earned this year.

    i have been researching and i would like to know if this is againts non-diminution of benefits?
    based on what i have read about this principle (if i understand it correctly) i thought an employee has the right to choose either to use it or convert it into cash.

    please help me understand this.
    i would really appreciate a response.


    • Hi! In accordance with the law, an employee who have been employed for one year is mandatorily entitled to 5 days Service Incentive Leave (combination of VL & SL). If the company will give more than 5 days, the rule on the said leaves will be governed by the company policy. Hence, as long as the company is not giving less than the 5 days SIL, the company policy will govern your leaves as well as your leave credits. The rule on non-diminution of benefits is applicable only if the company suddenly changed a company policy which has been implemented for a long time resulting into the elimination or decrease in the benefits presently enjoyed by the employees.

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