When Can an Employer Reduce Employee Benefits in the Philippines?

Philippine National Construction Corporation vs. Felix M. Erece, Jr., G.R. No. 235673, July 22, 2024

Imagine you’re a valued executive at a company, receiving a monthly allowance as part of your compensation. Suddenly, without a clear explanation, that allowance is cut off. Can your employer legally do that? This question of ‘diminution of benefits’ is a common concern for employees in the Philippines. The Supreme Court’s decision in Philippine National Construction Corporation vs. Felix M. Erece, Jr. sheds light on when a company can reduce or eliminate employee benefits, particularly when those benefits are deemed unauthorized or contrary to law.

Understanding the Legal Landscape of Employee Benefits

The Labor Code of the Philippines protects employees from having their benefits unilaterally reduced or eliminated. Article 100 of the Labor Code, titled “Prohibition against elimination or diminution of benefits,” states: “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 promulgation of this Code.” This provision aims to prevent employers from arbitrarily reducing employee compensation packages.

However, this protection isn’t absolute. The key is to determine whether the benefit is considered a ‘vested right’ or if its grant was based on a mistake or violation of existing laws and regulations. In the case of government-owned and controlled corporations (GOCCs), the Commission on Audit (COA) plays a crucial role in ensuring that expenditures, including employee benefits, comply with relevant rules and regulations.

For example, if a company, due to a misinterpretation of the law, starts providing an extra allowance to its employees, and then the COA points out that this allowance violates existing regulations, the company is within its rights to remove the allowance. This is because the allowance was never legally granted in the first place. This principle is rooted in the idea that an error in the application of law cannot create a vested right.

The PNCC Case: A Closer Look

The Philippine National Construction Corporation (PNCC) vs. Felix M. Erece, Jr. case revolves around a transportation allowance granted to PNCC executives. Here’s a breakdown of the key events:

• PNCC, a GOCC, provided its executives with a monthly allowance for a personal driver or fuel consumption.
• The COA Resident Auditor issued Audit Observation Memoranda (AOMs), finding that the allowance was disadvantageous to PNCC, especially given its financial situation, and potentially violated COA regulations.
• Based on the AOMs, PNCC stopped granting the allowance without a formal notice of disallowance from COA.
• The affected executives filed a complaint with the Labor Arbiter (LA), arguing that the allowance had become a company policy and its removal violated Article 100 of the Labor Code.

The case then went through the following stages:

• Labor Arbiter (LA): Initially ruled in favor of the executives, stating that the allowance had ripened into company policy.
• National Labor Relations Commission (NLRC): Reversed the LA’s decision, dismissing the complaint for lack of jurisdiction, arguing that the COA had jurisdiction over the matter.
• Court of Appeals (CA): Set aside the NLRC decision and remanded the case to the NLRC, stating that the Labor Code governed the money claims.
• Supreme Court: Ultimately denied PNCC’s petition, affirming the CA’s decision on jurisdiction but modifying the ruling. The Supreme Court dismissed the executives’ complaint, stating they had no vested right to the allowance.

The Supreme Court emphasized that while PNCC is governed by the Labor Code, it’s also subject to other laws on compensation and benefits for government employees. The Court stated:

“Although the employees of a GOCC without an original charter and organized under the Corporation Code are covered by the Labor Code, they remain subject to other applicable laws on compensation and benefits for government employees.”

The Court also highlighted that the allowance violated COA Circular No. 77-61, which prohibits government officials who have been granted transportation allowance from using government motor transportation or service vehicles. Since the executives already had service vehicles, the allowance was deemed an unauthorized benefit. In relation to diminution of benefits, the court added:

“Relevantly, the Court has held that the rule against diminution of benefits espoused in Article 100 of the Labor Code does not contemplate the continuous grant of unauthorized compensation. It cannot estop the Government from correcting errors in the application and enforcement of law.”

Practical Implications for Employers and Employees

This case provides valuable lessons for both employers and employees, especially those in GOCCs or companies subject to government regulations. For employers, it reinforces the importance of ensuring that all employee benefits comply with applicable laws and regulations. A ‘practice,’ no matter how long continued, cannot give rise to any vested right if it is contrary to law.

For employees, it serves as a reminder that not all benefits are guaranteed, especially if they are later found to be unauthorized or in violation of regulations. While Article 100 protects against arbitrary reduction of benefits, it does not shield benefits that were illegally or erroneously granted in the first place.

Key Lessons

• Compliance is Key: Always ensure that employee benefits comply with relevant laws and regulations, especially COA circulars for GOCCs.
• No Vested Right in Illegality: An erroneous grant of benefits does not create a vested right.
• Management Prerogative Limited: The exercise of management prerogative by government corporations are limited by the provisions of law applicable to them.

Here’s a hypothetical example: A private company in the IT sector provides unlimited free coffee to its employees. Later, due to financial constraints, they decide to limit the free coffee to two cups per day. This would likely be considered a valid exercise of management prerogative, as long as it’s done in good faith and doesn’t violate any existing labor laws or contracts. However, if the company had been illegally evading taxes to afford this unlimited coffee, and then decided to scale back the benefit to comply with tax laws, the “no vested right in illegality” principle might apply.

Frequently Asked Questions

Q: What is ‘diminution of benefits’ under the Labor Code?

A: It refers to the act of an employer reducing or eliminating employee benefits that were previously being enjoyed. Article 100 of the Labor Code prohibits this, but with exceptions.

Q: Can a company reduce benefits if it’s facing financial difficulties?

A: Yes, but it must be done in good faith and comply with labor laws, such as providing notice and consulting with employees. However, the reduction must not violate existing employment contracts or collective bargaining agreements.

Q: What is the role of the Commission on Audit (COA) in employee benefits?

A: For GOCCs, the COA ensures that all expenditures, including employee benefits, comply with relevant government rules and regulations. COA findings can prompt a GOCC to reduce or eliminate benefits deemed unauthorized.

Q: Does Article 100 of the Labor Code protect all types of employee benefits?

A: No. Benefits that were illegally or erroneously granted do not fall under the protection of Article 100.

Q: What should an employee do if their benefits are reduced?

A: Consult with a labor lawyer to assess the legality of the reduction. Gather evidence of the previous benefits and any communications regarding the change.

ASG Law specializes in labor law and government regulations. Contact us or email hello@asglawpartners.com to schedule a consultation.