Key Takeaway: Government-Owned Corporations Must Secure Presidential Approval for Employee Benefits

Philippine Mining Development Corporation v. Commission on Audit, G.R. No. 245273, July 27, 2021

Imagine a scenario where a government-owned corporation aims to provide additional health benefits to its employees. Without the necessary approvals, these well-intentioned efforts can lead to significant legal and financial repercussions. This is precisely what happened in the case involving the Philippine Mining Development Corporation (PMDC), which sought to enhance its employees’ medical coverage but faced a disallowance from the Commission on Audit (COA). The central legal question was whether PMDC, a government-owned corporation without an original charter, needed presidential approval to grant such benefits.

PMDC, aiming to improve employee welfare, contracted with Fortune Medicare, Inc. (FortuneCare) to provide medical services. However, COA auditors disallowed the expenditure, citing a lack of presidential approval as required by Presidential Decree No. 1597 (PD 1597). This case underscores the complexities of compensation and benefits within government-owned entities and the importance of adhering to legal protocols.

Legal Context: Understanding the Framework Governing Government-Owned Corporations

Government-owned and controlled corporations (GOCCs) in the Philippines operate under a unique legal framework that distinguishes them from private corporations. According to the 1987 Constitution, GOCCs with original charters fall under the jurisdiction of the Civil Service Commission and must adhere to salary standardization laws. However, PD 1597, enacted in 1978, extends its reach to all GOCCs, whether created with or without an original charter, mandating that any additional compensation or benefits must receive presidential approval.

Key Legal Term: Government-Owned and Controlled Corporation (GOCC) – An entity organized as a stock or non-stock corporation, vested with functions relating to public needs, and owned by the government either wholly or to a significant extent.

PD 1597 specifically states in Section 5: “Allowances, honoraria and other fringe benefits which may be granted to government employees, whether payable by their respective offices or by other agencies of government, shall be subject to the approval of the President upon recommendation of the Commissioner of the Budget.” This provision is crucial as it applies to all GOCCs, including those like PMDC, which are not covered by civil service laws due to their creation under the Corporation Code.

Consider a hypothetical example: A state-owned utility company wants to provide its employees with a housing allowance. Before implementing this benefit, the company must seek approval from the President, ensuring that the expenditure aligns with national compensation policies and budgetary constraints.

Case Breakdown: The Journey of PMDC’s Disallowed Expenditure

PMDC’s journey began with a Notice of Award issued to FortuneCare on October 2, 2012, to provide medical services to its employees. However, on November 18, 2013, COA auditors issued Notice of Disallowance (ND) No. 2013-001(12), disallowing P582,617.10 of the payment, citing violations of PD 1597 and other COA regulations.

PMDC appealed the disallowance to the Corporate Government Sector (CGS) of COA, arguing that as a GOCC without an original charter, it was not subject to PD 1597. The CGS denied the appeal, affirming the need for presidential approval under PD 1597. PMDC then escalated the matter to the Commission Proper (COA-CP), which also denied the petition but modified the decision to exempt employees who received benefits in good faith from refunding the disallowed amount.

The COA-CP’s decision stated, “PMDC, regardless of its creation, still remained within the ambit of the President’s power of control since its incorporation was sanctioned by the President, while its Board of Directors are likewise appointed at the discretion of the President.”

PMDC’s final recourse was a petition for certiorari to the Supreme Court, which ultimately upheld the COA’s decision. The Court emphasized that “PD 1597 continues to be in force and covers government-owned and controlled corporations with or without original charter; thus, PMDC necessarily falls within its provisions.”

The procedural steps included:

• Issuance of the Notice of Award to FortuneCare
• COA auditors’ issuance of ND No. 2013-001(12)
• PMDC’s appeal to the CGS
• CGS’s denial of the appeal
• PMDC’s petition for review to the COA-CP
• COA-CP’s denial of the petition with modification
• PMDC’s motion for reconsideration to the COA-CP En Banc
• Denial of the motion for reconsideration
• PMDC’s petition for certiorari to the Supreme Court

Practical Implications: Navigating Compensation in Government-Owned Corporations

This ruling reaffirms the necessity for GOCCs to secure presidential approval for any additional compensation or benefits. It serves as a reminder to all government entities to meticulously review and comply with existing laws before implementing new policies.

For businesses and organizations operating as GOCCs, it is crucial to establish a robust internal process for seeking and obtaining necessary approvals. This includes consulting with legal counsel to ensure compliance with PD 1597 and other relevant regulations.

Key Lessons:

• GOCCs must obtain presidential approval for any additional employee benefits or compensation.
• Failure to comply with PD 1597 can result in disallowance of expenditures and potential liability for approving officers.
• Regularly review and update internal policies to align with current legal requirements.

Frequently Asked Questions

What is a government-owned and controlled corporation?

A government-owned and controlled corporation is an entity established by the government, either through a special law or under the general corporation law, to perform functions related to public needs.

Why does a GOCC need presidential approval for employee benefits?

Presidential Decree No. 1597 requires all GOCCs to seek presidential approval for any additional compensation or benefits to ensure alignment with national compensation policies and budgetary constraints.

What happens if a GOCC fails to get presidential approval?

Failure to obtain presidential approval can result in the disallowance of the expenditure by the Commission on Audit, requiring the return of the disallowed amounts and potential liability for the approving officers.

Can a GOCC without an original charter be exempt from PD 1597?

No, PD 1597 applies to all GOCCs, regardless of whether they have an original charter or were created under the Corporation Code.

What should a GOCC do to comply with PD 1597?

A GOCC should establish an internal process to seek and obtain presidential approval for any new benefits or compensation packages, ensuring compliance with PD 1597 and other relevant regulations.

ASG Law specializes in corporate governance and compliance for government-owned corporations. Contact us or email hello@asglawpartners.com to schedule a consultation.