Key Takeaway: Ensuring Compliance in Employee Separation Benefits

National Transmission Corporation v. Commission on Audit, G.R. No. 232199, December 01, 2020

Imagine receiving a substantial sum as separation benefits, only to be asked to return it years later. This scenario unfolded in a landmark Philippine Supreme Court case that scrutinized the legality of separation benefits and the liability of those involved in their disbursement. The case not only sheds light on the intricacies of employee separation under the Electric Power Industry Reform Act (EPIRA) but also underscores the importance of adhering to legal standards in corporate governance and employee compensation.

The National Transmission Corporation (TRANSCO) found itself in legal hot water after paying excessive separation benefits to an employee, Sabdullah T. Macapodi, following the privatization of its assets. The central legal question was whether the payment of these benefits, which exceeded the statutory limit, was lawful and who should bear the responsibility for the overpayment.

Legal Context: Navigating the EPIRA and Separation Benefits

The Electric Power Industry Reform Act of 2001 (EPIRA) was enacted to overhaul the Philippine electric power industry, paving the way for privatization and restructuring. Under Section 63 of EPIRA, employees affected by the industry’s reorganization are entitled to separation benefits calculated as one and one-half month’s salary for every year of service. This provision aims to ensure fair compensation for those displaced by industry reforms.

Key to understanding this case is the concept of “ultra vires,” which refers to actions taken beyond the scope of legal authority. In the context of corporate governance, the board of directors or any authorized officer must act within the bounds set by law and company policy. For instance, if a company policy dictates a specific formula for calculating separation benefits, any deviation from this formula without proper authorization could be deemed ultra vires and thus, illegal.

Another crucial principle is the prohibition against unjust enrichment, which states that no one should benefit at the expense of another without legal justification. This principle was central to the Supreme Court’s decision in determining who should return the disallowed benefits.

Consider a hypothetical scenario where a company decides to offer additional multipliers to the separation benefits formula to incentivize early retirement. If this decision is not backed by a board resolution and violates statutory limits, the company could face similar legal challenges as TRANSCO did.

Case Breakdown: The Journey from Disbursement to Disallowance

The case began when TRANSCO, in preparation for privatization, implemented an Early Leavers Program to facilitate the separation of its employees. The Board of Directors issued a resolution aligning with EPIRA’s separation pay formula. However, a subsequent circular from the President and CEO introduced an additional multiplier, leading to Macapodi receiving benefits calculated at a higher rate than permitted.

Upon audit, the Commission on Audit (COA) issued a Notice of Disallowance (ND) for the excess amount of P883,341.63, arguing that the payment violated EPIRA. TRANSCO appealed the decision, but the COA upheld the disallowance, modifying the liability to exclude Macapodi as a passive recipient.

The Supreme Court’s decision affirmed the COA’s ruling but modified the liability. The Court held that:

“The overpayment of Macapodi’s separation benefits to the extent of P883,341.63 is illegal because it violated Sections 63 and 12(c) of the EPIRA.”

Macapodi was found liable to return the excess benefits based on the principle of unjust enrichment. The Court reasoned:

“To be sure, a government instrumentality’s disbursement of salaries that contravenes the law is a payment through error or mistake. A person who receives such erroneous payment has the quasi-contractual obligation to return it because no one shall be unjustly enriched at the expense of another, especially if public funds are at stake.”

However, the Court absolved the verifying and certifying officers, Susana H. Singson and Jose Mari M. Ilagan, who acted in good faith based on the directives of their superiors. The Board of Directors was also exonerated, as the illegal multiplier was introduced by the President and CEO’s circular, not a board resolution.

Practical Implications: Navigating Future Separations and Liabilities

This ruling has significant implications for companies and government entities involved in employee separations. It emphasizes the need for strict adherence to statutory guidelines and the importance of proper authorization for any deviations from established policies.

For businesses, this case serves as a reminder to review and ensure compliance with legal frameworks governing employee benefits. It also highlights the potential personal liability of officers who authorize or certify payments without proper legal basis.

Key Lessons:

• Ensure that all employee benefit calculations strictly adhere to statutory limits and company policies.
• Obtain proper authorization, such as a board resolution, for any changes to benefit formulas.
• Understand the personal liability that may arise from unauthorized disbursements and act diligently to prevent such occurrences.

Frequently Asked Questions

What are separation benefits under the EPIRA?

Separation benefits under the EPIRA are calculated as one and one-half month’s salary for every year of service for employees affected by the industry’s reorganization.

Can a company add multipliers to the EPIRA separation benefits formula?

A company can only add multipliers if they are authorized by a board resolution and do not exceed statutory limits.

Who is liable for disallowed separation benefits?

Those who receive disallowed benefits, as well as any approving or certifying officers shown to have acted in bad faith or gross negligence, may be liable to return the disallowed amounts.

What is the principle of unjust enrichment?

Unjust enrichment is a legal principle that prevents one party from benefiting at the expense of another without legal justification.

How can a company ensure compliance with legal standards in employee separations?

Companies should regularly review their policies, ensure all changes are properly authorized, and maintain strict adherence to statutory guidelines.

ASG Law specializes in corporate governance and employment law. Contact us or email hello@asglawpartners.com to schedule a consultation.