Are Allowances Part of Separation Pay in the Philippines? Understanding Employee Rights

TLDR: This case clarifies when allowances are included in separation pay calculations in the Philippines. It emphasizes that allowances considered part of ‘wage’ are those regularly and unconditionally given as compensation for work, not those contingent on specific conditions or primarily for the employer’s benefit. Understanding this distinction is crucial for both employers and employees during retrenchment.

G.R. No. 122827, March 29, 1999

INTRODUCTION

Imagine losing your job after years of dedicated service. You expect fair compensation, including separation pay. But what if your employer excludes certain allowances you regularly received from this calculation? This was the dilemma faced by numerous employees of the Paper Industries Corporation of the Philippines (PICOP) when they were retrenched due to financial difficulties. The core question in Millares v. NLRC is whether certain allowances – specifically, staff/manager’s allowance, transportation allowance, and Bislig allowance – should be included in the computation of separation pay under Philippine labor law. This case highlights the critical distinction between what constitutes ‘wage’ and what are considered benefits or reimbursements, directly impacting employees’ financial security during job loss.

LEGAL CONTEXT: DEFINING ‘WAGE’ AND ‘FACILITIES’ UNDER THE LABOR CODE

The determination of separation pay in the Philippines is governed by the Labor Code. Article 283 (now Article 300 of the Labor Code as renumbered) outlines the employer’s obligation to provide separation pay in cases of retrenchment to prevent losses, stating it should be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. However, the crucial term here is ‘pay’. To understand ‘pay’, we turn to Article 97 (f) of the Labor Code, which defines ‘wage’.

Article 97 (f) of the Labor Code states: “Wage” means the remuneration or earnings, however designated, capable of being expressed in terms of money, whether fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, which is payable by an employer to an employee under a written or unwritten contract of employment for work done or to be done, or for services rendered or to be rendered and includes the fair and reasonable value, as determined by the Secretary of Labor, of board, lodging, or other facilities customarily furnished by the employer to the employee.

This definition is multifaceted. It encompasses not only the basic salary but also the fair value of ‘facilities’ customarily provided by the employer. The Implementing Rules of the Labor Code further clarify ‘facilities’ as articles or services for the benefit of the employee or his family but excluding tools of the trade or articles or service primarily for the benefit of the employer or necessary to the conduct of the employer’s business. Previous Supreme Court rulings, such as Santos v. NLRC and Soriano v. NLRC, held that regular allowances should be included in separation pay computations, particularly in illegal dismissal cases where separation pay substitutes reinstatement. However, the application of these precedents to retrenchment cases, and specifically to the allowances in question, remained to be clarified.

CASE BREAKDOWN: MILLARES VS. NLRC – THE ALLOWANCES IN QUESTION

In 1992, PICOP, a major paper corporation in the Philippines, faced significant financial challenges leading to a retrenchment program. One hundred sixteen employees, holding managerial positions at PICOP’s Bislig mill site, were among those terminated. These employees received separation pay based on their basic monthly salary, calculated at one month’s pay for each year of service. However, the employees argued that their separation pay should also include three types of allowances they had consistently received:

1. Staff/Manager’s Allowance: Provided to employees not housed in company facilities due to limited housing. It covered housing, water, and electricity expenses but ceased when company housing became available.
2. Transportation Allowance: Granted to key officers and managers using personal vehicles for work duties. It was conditional, requiring liquidation of expenses and discontinuation if conditions changed.
3. Bislig Allowance: Given to Division Managers and corporate officers assigned to Bislig due to the ‘hostile environment’. This allowance stopped upon transfer outside Bislig.

The employees filed a complaint for separation pay differentials, arguing these allowances were integral to their ‘wage’.

The Labor Arbiter’s Decision: Initially, the Executive Labor Arbiter sided with the employees. Applying the definition of ‘wage’ and citing Santos and Soriano, the Arbiter concluded that these allowances, being regularly received, were part of the employees’ wages and should be included in separation pay. PICOP was ordered to pay over ₱4.4 million in differentials plus attorney’s fees.

NLRC Reversal: PICOP appealed to the National Labor Relations Commission (NLRC), which reversed the Labor Arbiter’s decision. The NLRC distinguished the cited cases as relating to illegal dismissal, not retrenchment, and deemed Estate of Kneebone v. NLRC more applicable. Kneebone held that representation and transportation allowances were not part of salary for retirement benefits. The NLRC found the allowances in Millares to be contingency-based, not part of ‘wage’.

Supreme Court Ruling: The employees elevated the case to the Supreme Court via a Petition for Certiorari. The Supreme Court upheld the NLRC’s decision, dismissing the employees’ petition. Justice Bellosillo, writing for the Second Division, reasoned that while ‘wage’ includes ‘facilities’, the allowances in question did not qualify for several reasons. The Court emphasized the conditional and contingent nature of the allowances. As the Supreme Court stated:

“The receipt of an allowance on a monthly basis does not ipso facto characterize it as regular and forming part of salary because the nature of the grant is a factor worth considering.”

The Court highlighted that the allowances were:

• Not Customarily Furnished as Part of Wage: The allowances were not a permanent and unconditional part of the compensation. The Staff/Manager’s allowance depended on housing availability, the Transportation Allowance on vehicle use and liquidation, and the Bislig Allowance on assignment location.
• Primarily for the Employer’s Benefit: The allowances, particularly transportation and Bislig allowances, were designed to ensure efficient performance in specific roles or locations, benefiting PICOP’s operations. The Court noted they were not subject to withholding tax, further indicating they were considered reimbursements or for the employer’s convenience rather than direct compensation. The court cited Revenue Audit Memo Order No. 1-87, which exempts transportation and representation expenses from taxable compensation if they are for the employer’s business and properly accounted for.
• Not ‘Fair and Reasonable Value’ of Facilities: The allowances were monetary substitutes for actual provisions (housing, transportation) or compensation for specific working conditions (Bislig’s environment), not the ‘fair and reasonable value’ of facilities as contemplated in the Labor Code’s definition of wage.

The Supreme Court distinguished the Santos and Soriano cases, explaining that those cases involved separation pay as a remedy for illegal dismissal, aiming to fully compensate the employee for lost earnings, including regular allowances. In retrenchment cases, the focus is on the basic ‘wage’, excluding contingency-based allowances primarily benefiting the employer.

Ultimately, the Supreme Court concluded that the NLRC did not commit grave abuse of discretion in excluding the allowances from the separation pay calculation.

PRACTICAL IMPLICATIONS: WHAT THIS CASE MEANS FOR EMPLOYERS AND EMPLOYEES

Millares v. NLRC provides crucial guidance on what constitutes ‘wage’ for separation pay purposes in retrenchment cases. The ruling clarifies that not all regularly received monetary benefits are automatically included in the separation pay base. The key differentiator is whether the allowance is a conditional reimbursement or a fixed, unconditional part of the employee’s compensation for services rendered.

For Employers:

• Clearly Define Allowances: Employers should clearly define the nature of allowances in employment contracts and company policies. Distinguish between fixed allowances that form part of ‘wage’ and conditional allowances or reimbursements.
• Document the Purpose of Allowances: Maintain records demonstrating the purpose of certain allowances, especially those intended as reimbursements or for the employer’s convenience. This documentation can be vital in labor disputes.
• Review Separation Pay Policies: Ensure separation pay policies align with the principles established in Millares, particularly regarding the inclusion or exclusion of different types of allowances.

For Employees:

• Understand Allowance Classifications: Employees should understand the nature of the allowances they receive. Are they fixed parts of their salary, or are they conditional and tied to specific expenses or circumstances?
• Review Employment Contracts: Carefully review employment contracts and company policies related to allowances and separation pay.
• Seek Legal Advice: If facing retrenchment and unsure about the computation of separation pay, especially regarding allowances, seek legal advice to understand your rights.

Key Lessons from Millares v. NLRC

• Conditional Allowances are Generally Excluded: Allowances contingent on specific conditions, reimbursements for expenses, or those primarily for the employer’s benefit are generally not included in separation pay calculations.
• ‘Wage’ Focus in Retrenchment: In retrenchment scenarios, the computation of separation pay primarily focuses on the basic ‘wage’ and those allowances that are demonstrably and unconditionally part of the employee’s compensation for services.
• Purpose Matters: The purpose and nature of an allowance are crucial in determining if it forms part of ‘wage’. Allowances intended as genuine compensation are more likely to be included than those designed for reimbursement or employer convenience.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q1: What is separation pay in the Philippines?

A: Separation pay is the amount an employer is legally obligated to pay an employee upon termination of employment under certain circumstances, such as retrenchment, redundancy, or closure of business. It is intended to provide financial assistance to employees during job loss.

Q2: What allowances are typically included in separation pay?

A: Generally, fixed or regular allowances that are considered an integral part of the employee’s compensation for work performed are included. This often includes cost of living allowances (COLA) or fixed monthly allowances that are consistently given.

Q3: Are transportation allowances always excluded from separation pay?

A: Not always. It depends on the nature of the transportation allowance. If it’s a fixed, unconditional allowance considered part of the regular wage, it might be included. However, if it’s a reimbursement for expenses, contingent on vehicle use and liquidation, as in Millares, it’s likely excluded.

Q4: What is the difference between ‘wage’ and ‘facilities’ under the Labor Code?

A: ‘Wage’ is broadly defined as remuneration for work, including the value of ‘facilities’ customarily furnished by the employer for the employee’s benefit. ‘Facilities’ refers to items or services for the employee’s and their family’s benefit, excluding tools of trade or items primarily for the employer’s benefit.

Q5: How does this case affect employees facing retrenchment?

A: This case clarifies that not all allowances are automatically included in separation pay. Employees should understand the nature of their allowances and be prepared to discuss or negotiate the inclusion of genuinely compensatory allowances during retrenchment.

Q6: What should employers do to avoid disputes about separation pay and allowances?

A: Employers should clearly define allowance policies, document the purpose of different allowances, and ensure their separation pay policies are transparent and legally compliant. Consulting with legal counsel to review policies is advisable.

Q7: Is the ‘Bislig Allowance’ always excluded from separation pay?

A: The ‘Bislig Allowance’ in Millares was excluded because it was contingent on assignment to a specific location and considered compensation for adverse working conditions, not a regular part of the wage. The exclusion isn’t automatic for all allowances named ‘Bislig Allowance’ but depends on its specific nature and purpose in each employment context.

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