Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 204651 August 6, 2014

OUR HAUS REALTY DEVELOPMENT CORPORATION, Petitioner,

vs.
ALEXANDER PARIAN, JAY C. ERINCO, ALEXANDER CANLAS, BERNARD
TENEDERO and JERRY SABULAO, Respondents.

DECISION

BRION, J.:

We resolve in this petition for review on certiorari1 the challenge to the May 7, 2012
decision2 and the November 27, 2012 resolution3 (assailed CA rulings) of the Court of
Appeals (CA) in CA-G.R. SP No. 123273. These assailed CA rulings affirmed the July 20,
2011 decision4 and the December 2, 2011 resolution5 (NLRC rulings) of the National
Labor Relations Commission (NLRC) in NLRC LAC No. 02-000489-11 (NLRC NCR Case
No. 06-08544-10). The NLRC rulings in turn reversed and set aside the December 10,
2010 decision6 of the labor arbiter (LA).

Factual Antecedents

Respondents Alexander Parian, Jay Erinco, Alexander Canlas, Jerry Sabulao and
Bernardo Tenederowere all laborers working for petitioner Our Haus Realty Development
Corporation (Our Haus), a company engaged in the construction business.The
respondents’ respective employment records and daily wage rates from 2007 to 2010 are
summarized in the table7 below:
Name Date Hired Years of Service Year and Place of Assignment Daily Rate
Alexander M. Parian October 1999 10 years 2007-2010- Quezon City
₱353.50
Jay C. Erinco January 2000 10 years 2008- Quezon City 2009- Antipolo 2010-
Quezon City ₱342.00
Alexander R. Canlas 2005 5 years 2007-2010- Quezon City ₱312.00
Jerry Q. Sabulao August 1999 10 years 2008- Quezon City 2009- Antipolo 2010-
Quezon City ₱342.00
Bernardo N. Tenedero 1994 16 years 2007-2010- Quezon City ₱383.50
Sometime in May 2010, Our Haus experienced financial distress. To alleviate its
condition, Our Haus suspended some of its construction projects and asked the affected
workers, including the respondents, to take vacation leaves.8

Eventually, the respondents were asked to report back to work but instead of doing so,
they filed with the LA a complaint for underpayment of their daily wages. They claimed
that except for respondent Bernardo N. Tenedero, their wages were below the minimum
rates prescribed in the following wage orders from 2007 to 2010:

1. Wage Order No. NCR-13, which provides for a daily minimum wage rate of ₱362.00for
the non-agriculture sector (effective from August 28, 2007 until June 13, 2008); and

2. Wage Order No. NCR-14, which provides for a daily minimum wage rate of ₱382.00for
the non-agriculture sector (effective from June 14, 2008 until June 30, 2010).

The respondents also alleged thatOur Haus failed to pay them their holiday, service
incentive leave (SIL), 13th month and overtime pays.9

The Labor Arbitration Rulings

Before the LA, Our Haus primarily argued that the respondents’ wages complied with the
law’s minimum requirement. Aside from paying the monetary amount of the respondents’
wages, Our Haus also subsidized their meals (3 times a day), and gave them free lodging
near the construction project they were assigned to.10 In determining the total amount of
the respondents’ daily wages, the value of these benefits should be considered, in line
with Article 97(f)11 of the Labor Code.

Our Haus also rejected the respondents’ other monetary claims for lack of proof that they
were entitled to it.12

On the other hand, the respondents argued that the value of their meals should not be
considered in determining their wages’ total amount since the requirements set under
Section 413 of DOLE14 Memorandum Circular No. 215 were not complied with.

The respondents pointed out that Our Haus never presented any proof that they agreed
in writing to the inclusion of their meals’ value in their wages.16 Also, Our Haus failed to
prove that the value of the facilities it furnished was fair and reasonable.17 Finally, instead
of deducting the maximum amount of 70% of the value of the meals, Our Haus actually
withheld its full value (which was Php290.00 per week for each employee).18

The LA ruled in favor of Our Haus. He held that if the reasonable values of the board and
lodging would be taken into account, the respondents’ daily wages would meet the
minimum wage rate.19 As to the other benefits, the LA found that the respondents were
not able to substantiate their claims for it.20

The respondents appealed the LA’s decision to the NLRC, which in turn, reversed it.
Citing the case of Mayon Hotel & Restaurant v. Adana,21 the NLRC noted that the
respondents did not authorize Our Haus in writing to charge the values of their board and
lodging to their wages. Thus, the samecannot be credited.

The NLRC also ruled that the respondents are entitled to their respective proportionate
13th month payments for the year 2010 and SIL payments for at least three
years,immediately preceding May 31, 2010, the date when the respondents leftOur Haus.
However, the NLRC sustained the LA’s ruling that the respondents were not entitled to
overtime pay since the exact dates and times when they rendered overtime work had not
been proven.22
Our Haus moved for the reconsideration23 of the NLRC’s decision and submitted new
evidence (the five kasunduans) to show that the respondents authorized Our Haus in
writing to charge the values of their meals and lodging to their wages.

The NLRC denied Our Haus’ motion, thus it filed a Rule 65 petition24 with the CA. In its
petition, Our Haus propounded a new theory. It made a distinction between deduction
and charging. A written authorization is only necessary if the facility’s value will be
deducted and will not be needed if it will merely be charged or included in the computation
of wages.25 Our Haus claimed that it did not actually deduct the values of the meals and
housing benefits. It only considered these in computing the total amount of wages paid to
the respondents for purposes of compliance with the minimum wage law. Hence, the
written authorization requirement should not apply.

Our Haus also asserted that the respondents’ claim for SIL pay should be denied as this
was not included in their pro formacomplaint. Lastly, it questioned the
respondents’entitlement to attorney’s fees because they were not represented by a
private lawyer but by the Public Attorney’s Office (PAO).

The CA’s Ruling

The CA dismissed Our Haus’ certiorari petition and affirmed the NLRC rulings in toto. It
found no real distinction between deduction and charging,26 and ruled that the legal
requirements before any deduction or charging can be made, apply to both. Our Haus,
however, failed to prove that it complied with any of the requirements laid down in Mabeza
v. National Labor Relations Commission.27 Accordingly, it cannot consider the values of
its meal and housing facilities in the computation of the respondents’ total wages.

Also, the CA ruled that since the respondents were able to allege non-payment of SIL in
their position paper, and Our Haus, in fact, opposed it in its various pleadings,28 then the
NLRC properly considered it as part of the respondents’ causes of action. Lastly, the CA
affirmed the respondent’s entitlement to attorney’s fees.29

Our Haus filed a motion for reconsideration but the CA denied its motion, prompting it to
file the present petition for review on certiorari under Rule 45.

The Petition
Our Haus submits that the CA erred in ruling that the legal requirements apply without
distinction ―whether the facility’s value will be deducted or merely included in the
computation of the wages. At any rate, it complied with the requirements for deductibility
of the value of the facilities. First, the five kasunduans executed by the respondents
constitute the written authorization for the inclusion of the board and lodging’s values to
their wages. Second, Our Haus only withheld the amount of ₱290.00 which represents
the food’s raw value; the weekly cooking cost (cook’s wage, LPG, water) at ₱239.40 per
person is a separate expense that Our Haus did not withhold from the respondents’
wages.30 This disproves the respondents’claim that it deducted the full amount of the
meals’ value.

Lastly, the CA erred in ruling that the claim for SIL pay may still be granted though not
raised in the complaint; and that the respondents are entitled to an award of attorney’s
fees.31

The Case for the Respondents

The respondents prayed for the denial of the petition.32 They maintained that the CA did
not err inruling that the values of the board and lodging cannot be deducted from their
wages for failure to comply with the requirements set by law.33 And though the claim for
SIL pay was not included in their pro forma complaint, they raised their claims in their
position paper and Our Haus had the opportunity to contradict it in its pleadings.34

Finally, under the PAO law, the availment of the PAO’s legal services does not exempt
its clients from an award of attorney’s fees.35

The Court’s Ruling

We resolve to DENYthe petition.

The nature of a Rule 45 petition ― only questions of law

Basic is the rule that only questions of lawmay be raised in a Rule 45 petition.36 However,
in this case, weare confronted with mixed questions of fact and law that are subsumed
under the issue of whether Our Haus complied with the legal requirements on the
deductibility of the value of facilities. Strictly, factual issues cannot be considered under
Rule 45 except in the course of resolving if the CA correctly determined whether or not
the NLRC committed grave abuse of discretion in considering and appreciating the factual
issues before it.37

In ruling for legal correctness, we have to view the CA decision in the same context that
the petition for certiorariit ruled upon was presented to it; we have to examine the CA
decision from the prism of whether it correctly determined the presence or absence of
grave abuse of discretion in the NLRC decision before it, not on the basis of whether the
NLRC decision, on the merits of the case, was correct. In other words, we have to be
keenly aware that the CA undertook a Rule 65 review, not a review on appeal, of the
NLRC decision challenged before it. This is the approach that should bebasic in a Rule
45 review of a CA ruling in a labor case. In question form, the question to ask in the
present case is: did the CA correctly determine that the NLRC did not commit grave abuse
of discretion in ruling on the case?38 We rule that the CA correctly did.

No substantial distinction between deducting and charging a facility’s value from the
employee’s wage; the legal requirements for creditability apply to both

To justify its non-compliance with the requirements for the deductibility of a facility, Our
Haus asks us to believe that there is a substantial distinction between the deduction and
the charging of a facility’s value to the wages. Our Haus explains that in deduction, the
amount of the wage (which may already be below the minimum) would still be lessened
by the facility’s value, thus needing the employee’s consent. On the other hand, in
charging, there is no reduction of the employee’s wage since the facility’s value will just
be theoretically added to the wage for purposes of complying with the minimum wage
requirement.39

Our Haus’ argument is a vain attempt to circumvent the minimum wage law by trying to
create a distinction where none exists.

In reality, deduction and charging both operate to lessen the actual take-home pay of an
employee; they are two sides of the same coin. In both, the employee receives a lessened
amount because supposedly, the facility’s value, which is part of his wage, had already
been paid to him in kind. As there is no substantial distinction between the two, the
requirements set by law must apply to both.

As the CA correctly ruled, these requirements, as summarized in Mabeza, are the

following:

a. proof must be shown thatsuch facilities are customarily furnished by the trade;

b. the provision of deductiblefacilities must be voluntarily accepted in writingby the

employee; and

c. The facilities must be charged at fair and reasonable value.40

We examine Our Haus’ compliance with each of these requirements in seriatim.

a. The facility must be customarily furnished by the trade

In a string of cases, we have concluded that one of the badges to show that a facility is
customarily furnished by the trade is the existence of a company policy or guideline
showing that provisions for a facility were designated as part of the employees’
salaries.41 To comply with this, Our Haus presented in its motion for reconsideration with
the NLRC the joint sinumpaang salaysayof four of its alleged employees. These
employees averred that they were recipients of free lodging, electricity and water, as well
as subsidized meals from Our Haus.42

We agree with the NLRC’s finding that the sinumpaang salaysay statements submitted
by Our Haus are self-serving.1âwphi1 For one, Our Haus only produced the documents
when the NLRC had already earlier determined that Our Haus failed to prove that it was
traditionally giving the respondents their board and lodging. This document did not state
whether these benefits had been consistently enjoyed by the rest of Our Haus’
employees. Moreover, the records reveal that the board and lodging were given on a per
project basis. Our Haus did not show if these benefits were also provided inits other
construction projects, thus negating its claimed customary nature. Even assuming the
sinumpaang salaysay to be true, this document would still work against Our Haus’ case.
If Our Haus really had the practice of freely giving lodging, electricity and water provisions
to its employees, then Our Haus should not deduct its values from the respondents’
wages. Otherwise, this will run contrary to the affiants’ claim that these benefits were
traditionally given free of charge.

Apart from company policy, the employer may also prove compliance with the first
requirement by showing the existence of an industry-wide practice of furnishingthe
benefits in question among enterprises engaged in the same line of business. If it were
customary among construction companies to provide board and lodging to their workers
and treat their values as part of their wages, we would have more reason to conclude that
these benefits were really facilities.

However, Our Haus could not really be expected to prove compliance with the first
requirement since the living accommodation of workers in the construction industry is not
simply a matter of business practice. Peculiar to the construction business are the
occupational safety and health (OSH) services which the law itself mandates employers
to provide to their workers. This isto ensure the humane working conditions of
construction employees despite their constant exposure to hazardous working
environments. Under Section 16 of DOLE Department Order (DO) No. 13, series of
1998,43 employers engaged in the construction business are required to providethe
following welfare amenities:

16.1 Adequate supply of safe drinking water

16.2 Adequate sanitaryand washing facilities

16.3 Suitable living accommodation for workers, and as may be applicable, for their
families

16.4 Separate sanitary, washing and sleeping facilitiesfor men and women workers.
[emphasis ours]

Moreover, DOLE DO No. 56, series of 2005, which sets out the guidelines for the
implementation ofDOLE DO No. 13, mandates that the cost of the implementation of the
requirements for the construction safety and health of workers, shall be integrated to the
overall project cost.44 The rationale behind this isto ensure that the living accommodation
of the workers is not substandard and is strictly compliant with the DOLE’s OSH criteria.

As part of the project cost that construction companies already charge to their clients, the
value of the housing of their workers cannot be charged again to their employees’
salaries. Our Haus cannot pass the burden of the OSH costs of its construction projects
to its employees by deducting it as facilities. This is Our Haus’ obligation under the law.

Lastly, even if a benefit is customarily provided by the trade, it must still pass the purpose
testset by jurisprudence. Under this test, if a benefit or privilege granted to the employee
is clearly for the employer’s convenience, it will not be considered as a facility but a
supplement.45 Here, careful consideration is given to the nature of the employer’s
business in relation to the work performed by the employee. This test is used to address
inequitable situations wherein employers consider a benefit deductible from the wages
even if the factual circumstances show that it clearly redounds to the employers’ greater
advantage.

While the rules serve as the initial test in characterizing a benefit as a facility, the purpose
test additionally recognizes that the employer and the employee do not stand at the same
bargaining positions on benefits that must or must not formpart of an employee’s wage.
In the ultimate analysis, the purpose test seeks to prevent a circumvention of the minimum
wage law.

a1. The purpose test in jurisprudence

Under the law,46 only the value of the facilities may be deducted from the employees’
wages but not the value of supplements. Facilities include articles or services for the
benefit of the employee or his family but exclude tools of the trade or articles or services
primarily for the benefit of the employer or necessary to the conduct of the employer’s
business.47

The law also prescribes that the computation of wages shall exclude whatever benefits,
supplementsor allowances given to employees. Supplements are paid to employees on
top of their basic pay and are free of charge.48 Since it does not form part of the wage, a
supplement’s value may not be includedin the determination of whether an employer
complied with the prescribed minimum wage rates.
In the present case, the board and lodging provided by Our Haus cannot be categorized
asfacilities but as supplements. In SLL International Cables Specialist v. National Labor
Relations Commission,49 this Court was confronted with the issue on the proper
characterization of the free board and lodging provided by the employer. We explained:

The Court, at this point, makes a distinction between "facilities" and "supplements". It is
of the view that the food and lodging, or the electricity and water allegedly consumed by
private respondents in this case were not facilities but supplements. In the case of Atok-
Big Wedge Assn. v. Atok-Big Wedge Co., the two terms were distinguished from one
another in this wise:

"Supplements", therefore, constitute extra remuneration or special privileges or benefits

given to or received by the laborers overand above their ordinary earnings or wages.
"Facilities", on the other hand, are items of expense necessary for the laborer's and his
family's existence and subsistence so thatby express provision of law (Sec. 2[g]), they
form part of the wage and when furnished by the employer are deductible therefrom, since
if they are not so furnished, the laborer would spend and pay for them just the same.

In short, the benefit or privilege given to the employee which constitutes an extra
remuneration above and over his basic or ordinary earning or wage is supplement; and
when said benefit or privilege is part of the laborers' basic wages, it is a facility. The
distinction lies not so much in the kind of benefit or item (food, lodging, bonus or sick
leave) given, but in the purpose for which it is given.In the case at bench, the items
provided were given freely by SLLfor the purpose of maintaining the efficiency and health
of its workers while they were working attheir respective projects.50

Ultimately, the real difference lies not on the kind of the benefit but on the purpose why it
was given by the employer. If it is primarily for the employee’s gain, then the benefit is a
facility; if its provision is mainly for the employer’s advantage, then it is a supplement.
Again, this is to ensure that employees are protected in circumstances where the
employer designates a benefit as deductible from the wages even though it clearly works
to the employer’s greater convenience or advantage.

Under the purpose test, substantial consideration must be given to the nature of the
employer’s business inrelation to the character or type of work performed by the
employees involved.
Our Haus is engaged in the construction business, a laborintensive enterprise. The
success of its projects is largely a function of the physical strength, vitality and efficiency
of its laborers. Its business will be jeopardized if its workers are weak, sickly, and lack the
required energy to perform strenuous physical activities. Thus, by ensuring that the
workers are adequately and well fed, the employer is actually investing on its business.

Unlike in office enterprises where the work is focused on desk jobs, the construction
industry relies heavily and directly on the physical capacity and endurance of its workers.
This is not to say that desk jobs do not require muscle strength; wesimply emphasize that
in the construction business, bulk of the work performed are strenuous physical activities.

Moreover, in the construction business, contractors are usually faced with the problem
ofmeeting target deadlines. More often than not, work is performed continuously, day and
night, in order to finish the project on the designated turn-over date. Thus, it will be more
convenient to the employer if itsworkers are housed near the construction site to ensure
their ready availability during urgent or emergency circumstances. Also, productivity
issues like tardiness and unexpected absences would be minimized. This observation
strongly bears in the present case since three of the respondents are not residents of the
National Capital Region. The board and lodging provision might have been a substantial
consideration in their acceptance of employment in a place distant from their provincial
residences.

Based on these considerations, we conclude that even under the purpose test, the
subsidized meals and free lodging provided by Our Haus are actually supplements.
Although they also work to benefit the respondents, an analysis of the nature of these
benefits in relation to Our Haus’ business shows that they were given primarily for Our
Haus’ greater convenience and advantage. If weighed on a scale, the balance tilts more
towards Our Haus’ side. Accordingly, their values cannot be considered in computing the
total amount of the respondents’ wages. Under the circumstances, the dailywages paid
to the respondents are clearly below the prescribed minimum wage rates in the years
2007-2010.

b. The provision of deductible facilities must be voluntarily accepted in writing by the

employee
In Mayon Hotel, we reiterated that a facility may only be deducted from the wage if the
employer was authorized in writingby the concerned employee.51 As it diminishes the
take-home pay of an employee, the deduction must be with his express consent.

Again, in the motion for reconsideration with the NLRC, Our Haus belatedly submitted
five kasunduans, supposedly executed by the respondents, containing their conformity to
the inclusion of the values of the meals and housing to their total wages. Oddly, Our Haus
only offered these documents when the NLRC had already ruled that respondents did not
accomplish any written authorization, to allow deduction from their wages. These five
kasunduans were also undated, making us wonder if they had reallybeen executed when
respondents first assumed their jobs.

Moreover, in the earlier sinumpaang salaysay by Our Haus’ four employees, it was not
mentioned that they also executed a kasunduanfor their board and lodging benefits.
Because of these surrounding circumstances and the suspicious timing when the five
kasunduanswere submitted as evidence, we agree withthe CA that the NLRC committed
no grave abuse of discretion in disregarding these documents for being self serving.

c. The facility must be charged at a fair and reasonable value

Our Haus admitted that it deducted the amount of ₱290.00 per week from each of the
respondents for their meals. But it now submits that it did not actually withhold the entire
amount as it did not figure in the computation the money it expended for the salary of the
cook, the water, and the LPG used for cooking, which amounts to ₱249.40 per week per
person. From these, it appears that the total meal expense per week for each person is
₱529.40,making Our Haus’ ₱290.00 deduction within the 70% ceiling prescribed by the
rules.

However, Our Haus’ valuation cannotbe plucked out of thin air. The valuation of a facility
must besupported by relevant documents such as receipts and company records for it to
be considered as fair and reasonable. In Mabeza, we noted:

Curiously, in the case at bench, the only valuations relied upon by the labor arbiter in his
decision were figures furnished by the private respondent's own accountant, without
corroborative evidence.On the pretext that records prior to the July 16, 1990 earthquake
were lost or destroyed, respondent failed to produce payroll records, receipts and other
relevant documents, where he could have, as has been pointedout in the Solicitor
General's manifestation, "secured certified copies thereof from the nearest regional office
of the Department of Labor, the SSS or the BIR".52 [emphasis ours]

In the present case, Our Haus never explained how it came up with the valuesit assigned
for the benefits it provided; it merely listed its supposed expenses without any supporting
document. Since Our Haus is using these additional expenses (cook’s salary, water and
LPG) to support its claim that it did not withhold the full amount of the meals’ value, Our
Haus is burdened to present evidence to corroborate its claim. The records however, are
bereft of any evidence to support Our Haus’ meal expense computation. Eventhe value it
assigned for the respondents’ living accommodations was not supported by any
documentary evidence. Without any corroborative evidence, it cannot be said that Our
Haus complied withthis third requisite.

A claim not raised in the pro forma complaint may still beraised in the position paper.

Our Haus questions the respondents’ entitlement to SIL pay by pointing out that this claim
was not included in the pro forma complaint filed with the NLRC. However, we agree with
the CA that such omission does not bar the labor tribunals from touching upon this cause
of action since this was raised and discussed inthe respondents’ position paper. In
Samar-Med Distribution v. National Labor Relations Commission,53 we held:

Firstly, petitioner’s contention that the validity of Gutang’s dismissal should not be
determined because it had not been included in his complaint before the NLRC is bereft
of merit. The complaint of Gutang was a mere checklist of possible causes of action that
he might have against Roleda. Such manner of preparing the complaint was obviously
designed to facilitate the filing of complaints by employees and laborers who are thereby
enabled to expediently set forth their grievances in a general manner. But the non-
inclusion in the complaint of the issue on the dismissal did not necessarily mean that the
validity of the dismissal could not be an issue.The rules of the NLRC require the
submission of verified position papers by the parties should they fail to agree upon an
amicable settlement, and bar the inclusion of any cause of action not mentioned in the
complaint or position paper from the time of their submission by the parties. In view of
this, Gutang’s cause of action should be ascertained not from a reading of his complaint
alone but also from a consideration and evaluation of both his complaint and position
paper.54

The respondents’ entitlement to the other monetary benefits

Generally a party who alleges payment as a defense has the burden of proving
it.Particularly in labor cases, the burden of proving payment of monetary claims rests on
the employeron the reasoning that the pertinent personnel files, payrolls, records,
remittances and other similar documents — which will show that overtime, differentials,
service incentive leave and other claims of workers have been paid — are not in the
possession of the worker but in the custody and absolute control of the employer.55

Unfortunately, records will disclose the absence of any credible document which will show
that respondents had been paid their 13th month pay, holiday and SIL pays. Our Haus
merely presented a handwritten certification from its administrative officer that its
employees automatically become entitled to five days of service incentive leave as soon
as they pass probation. This certification was not even subscribed under oath. Our Haus
could have at least submitted its payroll or copies of the pay slips of respondents to show
payment of these benefits. However, it failed to do so.

Respondents are entitled to attorney’s fees.

Finally, we affirm that respondents are entitled to attorney’s fees. Our Haus’ asserts that
respondents’ availment of free legal services from the PAO disqualifies them from such
award. We find this untenable.

It is settled that in actions for recovery of wages or where an employee was forced to
litigate and, thus, incur expenses to protect his rights and interest, the award of attorney's
fees is legally and morally justifiable.56 Moreover, under the PAO Law or Republic Act
No. 9406, the costs of the suit, attorney's fees and contingent fees imposed upon the
adversary of the PAO clients after a successful litigation shall be deposited in the National
Treasury as trust fund and shall be disbursed for special allowances of authorized officials
and lawyers of the PAO.57

Thus, the respondents are still entitled to attorney's fees. The attorney's fees awarded to
them shall be paid to the PAO. It serves as a token recompense to the PAO for its
provision of free legal services to litigants who have no means of hiring a private lawyer.

WHEREFORE, in light of these considerations, we conclude that the Court of Appeals

correctly found that the National Labor Relations Commission did not abuse its discretion
in its decision of July 20, 2011 and Resolution of December 2, 2011.1âwphi1
Consequently we DENY the petition and AFFIRM the Court of Appeals' decision dated
May 7, 2012 and resolution dated November 27, 2012 in CA-G.R. SP No. 123273. No
costs.

SO ORDERED.
G.R. No. 108031 March 1, 1995

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONOR A ANG, respondents.

BELLOSILLO, J.:

Is declaration of bankruptcy or judicial liquidation required before the worker's preference

may be invoked under Art. 110 of the Labor Code?

On 21 March 1977 private respondent Leonor A. Ang started employment as Executive

Secretary with Tropical Philippines Wood Industries, Inc. (TPWII), a corporation engaged
in the manufacture and sale of veneer, plywood and sawdust panel boards. In 1982 she
was promoted to the position of Personnel Officer.

In September 1983 petitioner Development Bank of the Philippines, as mortgagee of

TPWII, foreclosed its plant facilities and equipment. Nevertheless TPWII continued its
business operations interrupted only by brief shutdowns for the purpose of servicing its
plant facilities and equipment. In January 1986 petitioner took possession of the
foreclosed properties. From then on the company ceased its operations. As a
consequence private respondent was on 15 April 1986 verbally terminated from the
service.

On 14 December 1987 aggrieved by the termination of her employment, private

respondent filed with the Labor Arbiter a complaint for separation pay, 13th month pay,
vacation and sick leave pay, salaries and allowances against TPWII, its General
Manager, and petitioner.

After hearing the Labor Arbiter found TPWII primarily liable to private respondent but only
for her separation pay and vacation and sick leave pay because her claims for unpaid
wages and 13th month pay were later paid after the complaint was filed.1 The General
Manager was absolved of any liability. But with respect to petitioner, it was held
subsidiarily liable in the event the company failed to satisfy the judgment. The Labor
Arbiter rationalized that the right of an employee to be paid benefits due him from the
properties of his employer is superior to the right of the latter's mortgage, citing this Court's
resolution in PNB v. Delta Motor Workers Union.2

On 16 November 1992 public respondent National Labor Relations Commission affirmed

the ruling of the Labor Arbiter.3

The issue now before us is whether public respondent committed grave abuse of
discretion in holding that Art. 110 of the Labor Code, as amended, which refers to worker
preference in case of bankruptcy or liquidation of an employer's business is applicable to
the present case notwithstanding the absence of any formal declaration of bankruptcy or
judicial liquidation of TPWII.

Petitioner argues that the decision of public respondent runs counter to the consistent
rulings of this Court in a long line of cases emphasizing that the application of Art. 110 of
the Labor Code is contingent upon the institution of bankruptcy or judicial liquidation
proceedings against the employer.

We hold that public respondent gravely abused its discretion in affirming the decision of
the Labor Arbiter. Art. 110 should not be treated apart from other laws but applied in
conjunction with the pertinent provisions of the Civil Code and the Insolvency Law to the
extent that piece-meal distribution of the assets of the debtor is avoided. Art. 110, then
prevailing, provides:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period prior to the bankruptcy or
liquidation, any provision to the contrary notwithstanding. Unpaid wages shall be paid in
full before other creditors may establish any claim to a share in the assets of the employer.

Complementing Art. 110, Sec. 10, Rule VIII, Book III, of the Revised Rules and
Regulations Implementing the Labor Code provides:

Sec. 10. Payment of wages in case of bankruptcy. — Unpaid wages earned by the
employees before the declaration of bankruptcy or judicial liquidation of the employer's
business shall be given first preference and shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer.

We interpreted this provision in Development Bank of the Philippines v. Santos4 to mean

that —

. . . a declaration of bankruptcy or a judicial liquidation must be present before the worker's

preference may be enforced. Thus, Article 110 of the Labor Code and its implementing
rule cannot be invoked by the respondents in this case absent a formal declaration of
bankruptcy or a liquidation order . . . . (Emphasis supplied).

The rationale is that to hold Art. 110 to be applicable also to extrajudicial proceedings
would be putting the worker in a better position than the State which could only assert its
own prior preference in case of a judicial proceeding.5 Art. 110, which was amended by
R.A. 6715 effective 21 March 1989, now reads:

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as regards
their unpaid wages and other monetary claims, any provision of law to the contrary
notwithstanding. Such unpaid wages and monetary claims shall be paid in full before the
claims of the Government and other creditors may be paid.

Obviously, the amendment expanded the concept of "worker preference" to cover not
only unpaid wages but also other monetary claims to which even claims of the
Government must be deemed subordinate. The Rules and Regulations Implementing
R.A. 6715, approved 24 May 1989, also amended the corresponding implementing rule,
and now reads:

Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. — In
case of bankruptcy or liquidation of the employer's business, the unpaid wages and other
monetary claims of the employees shall be given first preference and shall be paid in full
before the claims of government and other creditors may be paid.

Although the terms "declaration" (of bankruptcy) or "judicial" (liquidation) have been
notably eliminated, still in Development Bank of the Philippines v. NLRC,6 this Court did
not alter its original position that the right to preference given to workers under Art. 110
cannot exist in any effective way prior to the time of its presentation in distribution
proceedings. In effect, we reiterated our previous interpretation in Development Bank of
the Philippines v. Santos where we said:

It (worker preference) will find application when, in proceedings such as insolvency, such
unpaid wages shall be paid in full before the "claims of the Government and other
creditors" may be paid. But, for an orderly settlement of a debtor's assets, all creditors
must be convened, their claims ascertained and inventoried, and thereafter the
preferences determined. In the course of judicial proceedings which have for their object
the subjection of the property of the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of preference of creditors' claims is
assured (Philippine Savings Bank vs. Lantin, No. L-33929, September 2, 1983, 124
SCRA 476); the adjudication made will be binding on all parties-in-interest since those
proceedings are proceedings in rem; and the legal scheme of classification, concurrence
and preference of credits in the Civil Code, the Insolvency Law, and the Labor Code is
preserved in harmony.7

In ruling, as we did, in Development Bank of the Philippines v. Santos, we took into

account the following pronouncements:

In the event of insolvency, a principal objective should be to effect an equitable distribution

of the insolvents property among his creditors. To accomplish this there must first be
some proceeding where notice to all of the insolvent's creditors may be given and where
the claims of preferred creditors may be bindingly adjudicated. (De Barreto v. Villanueva,
No.
L-14938, December 29, 1962, 6 SCRA 928). The rationale therefore has been expressed
in the recent case of DBP v. Secretary of Labor (G.R. No. 79351, 28 November 1989),
which we quote:

A preference of credit bestows upon the preferred creditor an advantage of having his
credit satisfied first ahead of other claims which may be established against the debtor.
Logically, it becomes material only when the properties and assets of the debtors are
insufficient to pay his debts in full; for if the debtor is amply able to pay his various creditors
in full, how can the necessity exist to determine which of his creditors shall be paid first
or whether they shall be paid out of the proceeds of the sale (of) the debtor's specific
property. Indubitably, the preferential right of credit attains significance only after the
properties of the debtor have been inventoried and liquidated, and the claims held by his
various creditors have been established (Kuenzle & Sheriff (Ltd.) v. Villanueva, 41 Phil.
611 [1916]; Barretto v. Villanueva, G.R. No. 14938, 29 December 1962, 6 SCRA 928;
Philippine Savings Bank v. Lantin, G.R. No. 33929, 2 September 1983, 124 SCRA 476).

In the present case, there is as yet no declaration of bankruptcy nor judicial liquidation of
TPWII. Hence, it would be premature to enforce the worker's preference.

The additional ratiocination of public respondent that "under Article 110 of the Labor Code
complainant enjoys a preference of credit over the properties of TPWII being held in
possession by DBP," is a dismal misconception of the nature of preference of credit, a
subject matter which we have already discussed in clear and simple terms and even
distinguished from a lien in Development Bank of the Philippines v. NLRC8 —

. . . A preference applies only to claims which do not attach to specific properties. A lien
creates a charge on a particular property. The right of first preference as regards unpaid
wages recognized by Article 110 does not constitute a lien on the property of the insolvent
debtor in favor of workers. It is but a preference of credit in their favor, a preference in
application. It is a method adopted to determine and specify the order in which credits
should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right
to a first preference in the discharge of the funds of the judgment debtor . . . In the words
of Republic v. Peralta, supra: Article 110 of the Labor Code does not purport to create a
lien in favor of workers or employees for unpaid wages either upon all of the properties
or upon any particular property owned by their employer. Claims for unpaid wages do not
therefore fall at all within the category of specially preferred claims established under
Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid
wages are already covered by Article 2241, number 6: "claims for laborers: wages, on the
goods manufactured or the work done;" or by Article 2242, number 3, "claims of laborers
and other workers engaged in the construction reconstruction or repair of buildings,
canals and other works, upon said buildings, canals and other works . . . . To the extent
that claims for unpaid wages fall outside the scope of Article 2241, number 6, and 22421
number 3, they would come within the ambit of the category of ordinary preferred credits
under Article 2244.

The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately
subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted (Article 2176, Civil Code).
It creates a real right which is enforceable against the whole world. It is a lien on an
identified immovable property, which a preference is not. A recorded mortgage credit is a
special preferred credit under Article 2242 (5) of the Civil Code on classification of credits.
The preference given by Article 1l0, when not falling within Article 2241 (6) and Article
2242 (3), of the Civil Code and not attached to any specific property, is all ordinary
preferred credit although its impact is to move it from second priority to first priority in the
order of preference established by Article 2244 of the Civil Code.

The present controversy could have been easily settled by public respondent had it
referred to ample jurisprudence which already provides the solution. Stare decisions et
non quiet movere. Once a case is decided by this Court as the final arbiter of any
justifiable controversy one way, then another case involving exactly the same point at
issue should be decided in the same manner. Public respondent had no choice on the
matter. It could not have ruled any other way. This Court having spoken in a string of
cases against public respondent, its duty is simply to obey judicial precedents.9 Any
further disregard, if not defiance, of our rulings will be considered a ground to hold public
respondent in contempt.

WHEREFORE, the petition is GRANTED. The decision of public respondent National

Labor Relations Commission affirming the decision of the Labor Arbiter insofar as it held
petitioner Development Bank of the Philippines liable for the monetary claims of private
respondent Leonor A. Ang is SET ASIDE. The temporary restraining order we issued on
8 February 1993 10 enjoining the execution of the decision of public respondent against
petitioner is made PERMANENT.

SO ORDERED.

Padilla, Davide, Jr. Bellosillo, Quiason and Kapunan, JJ., concur.

Separate Opinions
PADILLA, J., dissenting:

I am constrained to record my dissent from the ponencia prepared by

Mr. Justice Bellosillo. I have no difficulty in going along with the proposition that rulings
pronounced by the majority in litigations reaching the Supreme Court should be followed
by lower courts and other agencies and instrumentalities of the government. But my
silence in the wake of the reiterations made by the majority opinion in this case could be
misconstrued as a relaxation or softening of my views on the matter of workers' absolute
preference in the payment of their wages and monetary claims for benefits. It is only for
this reason that I reiterate perhaps with greater vigor, my views on this subject in the hope
that, in the not too distant future, my humble views could merit acceptance by the Court.
After all, these views are anchored on the worth and dignity of the human person such
that pay or compensation for his toil should really be a topmost priority in our scale of
values.

In DBP v. NLRC, et al., G.R. Nos. 82763-64, 183 SCRA 328, I said in my dissenting
opinion:

The majority, in my considered opinion, has failed to fully take into account the radical
change introduced by Republic Act 6715 into the system of priorities or preferences
among credits or creditors ordained by the Civil Code.

Under the provisions of the Civil Code, specifically, Articles 2241 and 2242, jointly with
Articles 2246 to 2249, a two-tier order of preference of credits is established. The first tier
includes only taxes, duties and fees on specific movable or immovable property. All other
special preferred credits stand on a second tier.1

Under the system of preferences in the Civil Code, only taxes enjoy absolute preference,
i.e. they exclude the credits of the lower order until such taxes are fully satisfied out of the
proceeds of the sale of the property subject of the preference, and taxes can even exhaust
such proceeds. All other special preferred credits enjoy no priority among themselves but
must be paid or satisfied pro rata. To make the prorating fully effective, the preferred
creditors enumerated in Nos. 2 to 13 of Article 2241 and Nos. 2 to 10 of Article 2242 must
be convened and the import of their claims as certained in some proceeding where the
claims of all may be bindingly adjudicated.
With the amendment of Article 110 of the Labor Code by Republic Act 6715, a three-tier
order of preference is established wherein unpaid wages and other monetary claims of
workers enjoy absolute preference over all other claims, including those of the
Government, in cases where a debtor-employer is unable to pay in full all his obligations.
The absolute preference given to monetary claims of workers, to which claims of the
Government, i.e. taxes, are now subordinated, manifests the clear and deliberate intent
of our lawmaker to put flesh and blood into the expressed Constitutional policy of
protecting the rights of workers and promoting their welfare.2

I thus take exception to the proposition that a prior formal declaration of insolvency or
bankruptcy or a judicial liquidation of the employer's business is a condition sine qua non
to the operation of the preference accorded to workers under Article 110 of the Labor
Code, for the following specific reasons:

First, the majority reads into the law and implementing rule a qualification that is not there.
Nowhere is it stated in the present law and its new implementing rule that a prior
declaration of bankruptcy or judicial liquidation is a condition sine qua non to the operation
of Article 110. In fact, it will benoted that the phase declaration of bankruptcy or judicial
liquidation of the employer's business, which formerly appeared in Section 10, Rule VIII,
Book III of the Revised Rules and Regulations Implementing the Labor Code has been
deleted in the new implementing rule. What is to me even more obvious and, therefore,
significant in the present law and implementing new rule is the unconditional and
unqualified grant of priority to workers' monetary claims over and above all other claims
as against all the assets of an employer incapable of fully paying his obligations.

Second, a proceeding in rem, by its nature, seeks to bar any other person who claims
any interest in the property or right subject of the suit. To my mind, such a proceeding is
not essential or necessary to enforce the workers' preferential right over the assets of the
insolvent debtor as against other creditors of the lower tier, as Article 110 of the Labor
Code itself bars the satisfaction of claims of other creditors, including the Government,
until unpaid wages and monetary claims of the workers are first satisfied in full. Further,
it appears that such a proceeding is essential only where the credits are concurring and
enjoy no preference over one another, but not when the law accords to one of the credits
absolute priority and undisputed supremacy. This submission finds support, by analogy,
in the case of De Barreto vs. Villanueva, where the Court stated:
Thus it becomes evident that one preferred creditor's third party claim to the proceeds of
the foreclosure (as in the case now before us) is not the proceeding contemplated by law
for the en forcement of preference under Article 2242, unless the claimants were en
forcing credit for taxes that enjoy absolute priority. If none of the claim is for taxes, a
dispute between two creditors will not enable the court to ascertain the prorata dividend
corresponding to each, because the rights of other creditors likewise enjoying; preference
under Article 2242 cannot be ascertained.3 (Emphasis ours)

In sum it is to me clear that, whether or not there be a judicial proceeding in rem, i.e.,
insolvency, bankcruptcy or liquidation proceedings, the fact remains that Congress
intends that the assets of the involvent debtor be held, first and above all else, to satisfy
in full the unpaid wages and monetary claims of its workers. Translated into the case at
bar, a formal declaration of insolvency or bankruptcy or judicial liquidation of the
employer's business should not be a price imposed upon the workers to enable them to
get their much needed and already adjudicated unpaid wages. This position, I believe, is
only in keeping with a fundamental state policy enshrined in the Constitutional mandate
to accord protection to labor. The legislative intent being clear and manifest, it is the duty
of this Court, I submit, not to decimate but to give it breath and life.

ACCORDINGLY, I vote to DISMISS the DBP petition and to AFFIRM the resolution of the
NLRC in favor of LAND.

In Conchita S. Hautea, etc. v. NLRC, et al., G.R. No. 96149, 230 SCRA 119, I said in my
dissenting opinion:

1. The distinction made between a preference of credit and a lien does not, in my
view, negate the clear intent of the law (Rep. Act No. 6 7 1 5 ) in giving absolute preference
to unpaid wages and other monetary claims of workers over and all other claims including
those of the Government.

It should be recalled that Article 110 of the Labor Code as amended by Republic Act No.
6715 states:

Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an

employer's business, his workers shall enjoy first preference as regards their wages and
other monetary claims, any provisions of law to the contrary notwithstanding. Such unpaid
wages and monetary claims shall be paid in full before claims of the government and
other creditors may be paid. (emphasis supplied)

It is to be noted that the law gives absolute preference to workers' claims for unpaid wages
and monetary benefits, subordinating even claims of the government. The clear legislative
intent is to give life to Article II, Section 18 of the Constitution which protects the rights of
workers and promotes their welfare.

2. Neither can the argument in the DBP case that a mortgage credit is a "special
preferred credit" under Article 2242(5) of the Civil Code be used to support the conclusion
of the majority, for the law expressly and unqualifiedly states that workers' claims are
given first preference over all other claims, any provision of law to the contrary
notwithstanding This, to me, is the only logical interpretation that can be made from the
letter, intent and spirit of the law and the Constitution. To give any claim other than those
of workers first preference would plainly violate that letter, intent and spirit of the law and
the Constitution.

ACCORDINGLY, I vote to DISMISS the petition and to AFFIRM the decision of public
respondent NLRC affirming the decision of the Labor Arbiter insofar as it holds petitioner
DBP liable for the monetary claims of private respondent Leonor A. Ang.

Separate Opinions

PADILLA, J., dissenting:

I am constrained to record my dissent from the ponencia prepared by

Mr. Justice Bellosillo. I have no difficulty in going along with the proposition that rulings
pronounced by the majority in litigations reaching the Supreme Court should be followed
by lower courts and other agencies and instrumentalities of the government. But my
silence in the wake of the reiterations made by the majority opinion in this case could be
misconstrued as a relaxation or softening of my views on the matter of workers' absolute
preference in the payment of their wages and monetary claims for benefits. It is only for
this reason that I reiterate perhaps with greater vigor, my views on this subject in the hope
that, in the not too distant future, my humble views could merit acceptance by the Court.
After all, these views are anchored on the worth and dignity of the human person such
that pay or compensation for his toil should really be a topmost priority in our scale of
values.

In DBP v. NLRC, et al., G.R. Nos. 82763-64, 183 SCRA 328, I said in my dissenting
opinion:

The majority, in my considered opinion, has failed to fully take into account the radical
change introduced by Republic Act 6715 into the system of priorities or preferences
among credits or creditors ordained by the Civil Code.

Under the provisions of the Civil Code, specifically, Articles 2241 and 2242, jointly with
Articles 2246 to 2249, a two-tier order of preference of credits is established. The first tier
includes only taxes, duties and fees on specific movable or immovable property. All other
special preferred credits stand on a second tier.1

Under the system of preferences in the Civil Code, only taxes enjoy absolute preference,
i.e. they exclude the credits of the lower order until such taxes are fully satisfied out of the
proceeds of the sale of the property subject of the preference, and taxes can even exhaust
such proceeds. All other special preferred credits enjoy no priority among themselves but
must be paid or satisfied pro rata. To make the prorating fully effective, the preferred
creditors enumerated in Nos. 2 to 13 of Article 2241 and Nos. 2 to 10 of Article 2242 must
be convened and the import of their claims as certained in some proceeding where the
claims of all may be bindingly adjudicated.

With the amendment of Article 110 of the Labor Code by Republic Act 6715, a three-tier
order of preference is established wherein unpaid wages and other monetary claims of
workers enjoy absolute preference over all other claims, including those of the
Government, in cases where a debtor-employer is unable to pay in full all his obligations.
The absolute preference given to monetary claims of workers, to which claims of the
Government, i.e. taxes, are now subordinated, manifests the clear and deliberate intent
of our lawmaker to put flesh and blood into the expressed Constitutional policy of
protecting the rights of workers and promoting their welfare.2

I thus take exception to the proposition that a prior formal declaration of insolvency or
bankruptcy or a judicial liquidation of the employer's business is a condition sine qua non
to the operation of the preference accorded to workers under Article 110 of the Labor
Code, for the following specific reasons:

First, the majority reads into the law and implementing rule a qualification that is not there.
Nowhere is it stated in the present law and its new implementing rule that a prior
declaration of bankruptcy or judicial liquidation is a condition sine qua non to the operation
of Article 110. In fact, it will benoted that the phase declaration of bankruptcy or judicial
liquidation of the employer's business, which formerly appeared in Section 10, Rule VIII,
Book III of the Revised Rules and Regulations Implementing the Labor Code has been
deleted in the new implementing rule. What is to me even more obvious and, therefore,
significant in the present law and implementing new rule is the unconditional and
unqualified grant of priority to workers' monetary claims over and above all other claims
as against all the assets of an employer incapable of fully paying his obligations.

Second, a proceeding in rem, by its nature, seeks to bar any other person who claims
any interest in the property or right subject of the suit. To my mind, such a proceeding is
not essential or necessary to enforce the workers' preferential right over the assets of the
insolvent debtor as against other creditors of the lower tier, as Article 110 of the Labor
Code itself bars the satisfaction of claims of other creditors, including the Government,
until unpaid wages and monetary claims of the workers are first satisfied in full. Further,
it appears that such a proceeding is essential only where the credits are concurring and
enjoy no preference over one another, but not when the law accords to one of the credits
absolute priority and undisputed supremacy. This submission finds support, by analogy,
in the case of De Barreto vs. Villanueva, where the Court stated:

Thus it becomes evident that one preferred creditor's third party claim to the proceeds of
the foreclosure (as in the case now before us) is not the proceeding contemplated by law
for the en forcement of preference under Article 2242, unless the claimants were en
forcing credit for taxes that enjoy absolute priority. If none of the claim is for taxes, a
dispute between two creditors will not enable the court to ascertain the prorata dividend
corresponding to each, because the rights of other creditors likewise enjoying; preference
under Article 2242 cannot be ascertained.3 (Emphasis ours)

In sum it is to me clear that, whether or not there be a judicial proceeding in rem, i.e.,
insolvency, bankcruptcy or liquidation proceedings, the fact remains that Congress
intends that the assets of the involvent debtor be held, first and above all else, to satisfy
in full the unpaid wages and monetary claims of its workers. Translated into the case at
bar, a formal declaration of insolvency or bankruptcy or judicial liquidation of the
employer's business should not be a price imposed upon the workers to enable them to
get their much needed and already adjudicated unpaid wages. This position, I believe, is
only in keeping with a fundamental state policy enshrined in the Constitutional mandate
to accord protection to labor. The legislative intent being clear and manifest, it is the duty
of this Court, I submit, not to decimate but to give it breath and life.

ACCORDINGLY, I vote to DISMISS the DBP petition and to AFFIRM the resolution of the
NLRC in favor of LAND.

In Conchita S. Hautea, etc. v. NLRC, et al., G.R. No. 96149, 230 SCRA 119, I said in my
dissenting opinion:

1. The distinction made between a preference of credit and a lien does not, in my
view, negate the clear intent of the law (Rep. Act No. 6 7 1 5 ) in giving absolute preference
to unpaid wages and other monetary claims of workers over and all other claims including
those of the Government.

It should be recalled that Article 110 of the Labor Code as amended by Republic Act No.
6715 states:

Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an

employer's business, his workers shall enjoy first preference as regards their wages and
other monetary claims, any provisions of law to the contrary notwithstanding. Such unpaid
wages and monetary claims shall be paid in full before claims of the government and
other creditors may be paid. (emphasis supplied)

It is to be noted that the law gives absolute preference to workers' claims for unpaid wages
and monetary benefits, subordinating even claims of the government. The clear legislative
intent is to give life to Article II, Section 18 of the Constitution which protects the rights of
workers and promotes their welfare.

2. Neither can the argument in the DBP case that a mortgage credit is a "special
preferred credit" under Article 2242(5) of the Civil Code be used to support the conclusion
of the majority, for the law expressly and unqualifiedly states that workers' claims are
given first preference over all other claims, any provision of law to the contrary
notwithstanding This, to me, is the only logical interpretation that can be made from the
letter, intent and spirit of the law and the Constitution. To give any claim other than those
of workers first preference would plainly violate that letter, intent and spirit of the law and
the Constitution.

ACCORDINGLY, I vote to DISMISS the petition and to AFFIRM the decision of public
respondent NLRC affirming the decision of the Labor Arbiter insofar as it holds petitioner
DBP liable for the monetary claims of private respondent Leonor A. Ang.
G.R. No. 143304 July 8, 2004

SPECIAL STEEL PRODUCTS, INC., petitioner,

vs.
LUTGARDO VILLAREAL AND FREDERICK SO, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

May an employer withhold its employees’ wages and benefits as lien to protect its interest
as a surety in the latter’s car loan and for expenses incurred in a training abroad? This is
the basic issue for our resolution in the instant case.

At bar is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, assailing the Decision1 dated October 29, 1999 and Resolution2
dated May 8, 2000 of the Court of Appeals in CA-G.R. SP No. 50957, entitled "Special
Steel Products, Inc. vs. National Labor Relations Commission, Lutgardo Villareal and
Frederick So."

The factual antecedents as borne by the records are:

Special Steel Products, Inc., petitioner, is a domestic corporation engaged in the principal
business of importation, sale, and marketing of BOHLER steel products. Lutgardo C.
Villareal and Frederick G. So, respondents, worked for petitioner as assistant sales
manager and salesman, respectively.

Sometime in May 1993, respondent Villareal obtained a car loan from the Bank of
Commerce, with petitioner as surety, as shown by a "continuing suretyship agreement"
and "promissory note" wherein they jointly and severally agreed to pay the bank
P786,611.60 in 72 monthly installments. On January 15, 1997, respondent Villareal
resigned and thereafter joined Hi-Grade Industrial and Technical Products, Inc. as
executive vice-president.

Sometime in August 1994, petitioner "sponsored" respondent Frederick So to attend a

training course in Kapfenberg, Austria conducted by BOHLER, petitioner’s principal
company. This training was a reward for respondent So’s outstanding sales performance.
When respondent returned nine months thereafter, petitioner directed him to sign a
memorandum providing that BOHLER requires trainees from Kapfenberg to continue
working with petitioner for a period of three (3) years after the training. Otherwise, each
trainee shall refund to BOHLER $6,000.00 (US dollars) by way of set-off or compensation.
On January 16, 1997 or 2 years and 4 months after attending the training, respondent
resigned from petitioner.

Immediately, petitioner ordered respondents to render an accounting of its various

Christmas giveaways3 they received. These were intended for distribution to petitioner’s
customers.

In protest, respondents demanded from petitioner payment of their separation benefits,

commissions, vacation and sick leave benefits, and proportionate 13th month pay. But
petitioner refused and instead, withheld their 13th month pay and other benefits.

On April 16, 1997, respondents filed with the Labor Arbiter a complaint for payment of
their monetary benefits against petitioner and its president, Augusto Pardo, docketed as
NLRC NCR Case No. 04-02820-97.

In due course, the Labor Arbiter rendered a Decision dated February 18, 1998, the
dispositive portion of which reads:

"WHEREFORE, decision is hereby rendered ordering the respondents, Special Steel

Products, Inc. and Mr. Augusto Pardo to pay, jointly and severally, complainants
Frederick G. So and Lutgardo C. Villareal the amounts of Seventy One Thousand Two
Hundred Seventy Nine Pesos and Fifty Eight Centavos (P71,279.58) and One Hundred
Sixty Four Thousand Eight Hundred Seventy Three Pesos (P164,873.00), respectively,
representing their commissions, retirement benefit (for Villareal), proportionate 13th
month, earned vacation and sick leave benefits, and attorney’s fees.
xxx

SO ORDERED."

On appeal, the National Labor Relations Commission (NLRC), in a Decision dated June
29, 1998, affirmed with modification the Arbiter’s Decision in the sense that Pardo,
petitioner’s president, was exempted from any liability.

On September 11, 1998, petitioner filed a motion for reconsideration but was denied.

Hence, petitioner filed with the Court of Appeals a petition for certiorari.

On October 29, 1999, the Court of Appeals rendered a Decision dismissing the petition
and affirming the assailed NLRC Decision, thus:

"At the outset, the Court notes that despite its Seventh Assignment of Error, petitioner
does not question the NLRC’s decision affirming the labor arbiter’s award to private
respondents of commissions, proportionate 13th month pay, earned vacation and sick
leave benefits and retirement benefit (for Villareal). It merely asserts that it was
withholding private respondents’ claims by reason of their pending obligations.

Petitioner justifies its withholding of Villareal’s monetary benefits as a lien for the
protection of its right as surety in the car loan. It asserts that it would release Villareal’s
monetary benefits if he would cause its substitution as surety by Hi-Grade. It further
asserts that since Villareal’s debt to the Bank is now due and demandable, it may,
pursuant to Art. 2071 of the New Civil Code, ‘demand a security that shall protect him
from any proceeding by the creditor and from the danger of insolvency of the debtor.’

Petitioner’s posture is not sanctioned by law. It may only protect its right as surety by
instituting an ‘action x x x to demand a security’ (Kuenzle and Streiff vs. Tan Sunco, 16
Phil 670). It may not take the law into its own hands. Indeed, it is ‘unlawful for any person,
directly or indirectly, to withhold any amount from the wages of a worker or induce him to
give up any part of his wages by force, stealth, intimidation, threat or by any other means
whatsoever without the worker’s consent’ (Art. 116, Labor Code).

Moreover, petitioner has made no payment on the car loan. Consequently, Villareal is not
indebted to petitioner. On the other hand, petitioner owes Villareal for the decreed
monetary benefits. The withholding of Villareal’s monetary benefits had effectively
prevented him from settling his arrearages with the Bank.

With regard to So’s money claims. We find no cogent reason to disturb the findings of the
NLRC. x x x.

So’s all-expense paid trip to Austria was a bonus for his outstanding sales performance.
Before his sojourn to Austria, petitioner issued him a memorandum (or ‘memo’) stating
that ‘Bohler is now imposing that trainees coming to Kapfenberg to stay with the local
representative for at least three (3) years after training, otherwise, a lump sum
compensation of not less than US $6,000.00 will have to be refunded to them by the
trainee’. So did not affix his signature on the memo. However, nine (9) months after
coming back from his training, he was made to sign the memo. In his letter to Augusto
Pardo dated July 18, 1997, So stated that his signature was needed only as a formality
and that he was left with no choice but to accommodate Augusto Pardo’s request. The
labor arbiter gave credence to such explanation.

Assuming arguendo that the memo is binding on So, his more than two years post-training
stay with petitioner is a substantial compliance with the condition. Besides, So tendered
his resignation effective February 16, 1997. Instead of asking So to defer his resignation
until the expiration of the three-year period, petitioner advanced its effectivity by one
month - as of January 16, 1997. This means that petitioner no longer needed So’s
services, particularly the skill and expertise acquired by him from the training. More
importantly, the party entitled to claim the US $6,000.00 liquidated damages is BOHLER
and not petitioner. Consequently, petitioner has no right to insist on payment of the
liquidated damages, much less to withhold So’s monetary benefits in order to exact
payment thereof.

With regard to the Christmas giveaways. We agree with the findings of the labor arbiter
(affirmed by the NLRC) ‘that there is no existing memorandum requiring the accounting
of such giveaways and that no actual accounting has ever been required before, as in the
case of then Sales Manager Benito Sayo whose resignation took effect on December 31,
1996 but was not required to account for the Christmas giveaways. To make So account
now for said items would amount to discrimination.’ In any event, the matter of accounting
of the giveaways may be ventilated in the proper forum.

Finally, petitioner may not offset its claims against private respondents’ monetary
benefits. With respect to its being the surety of Villareal, two requisites of compensation
are lacking, to wit: ‘that each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other’ and ‘that (the two debts) be liquidated and
demandable’ (Art. 1279 (1) and (4), New Civil Code). And in respect to its claim for
liquidated damages against So, there can be no compensation because his ‘creditor’ is
not petitioner but BOHLER (Art. 1278, New Civil Code).

Consequently, the NLRC committed no grave abuse of discretion.

WHEREFORE, the petition is DISMISSED while the assailed decision of the NLRC is
AFFIRMED.

SO ORDERED."

On December 15, 1999, petitioner filed a motion for reconsideration but was denied by
the Appellate Court in a Resolution dated May 8, 2000.

Hence, this petition for review on certiorari. Petitioner contends that as a guarantor, it
could legally withhold respondent Villareal’s monetary benefits as a preliminary remedy
pursuant to Article 2071 of the Civil Code, as amended.4 As to respondent So, petitioner,
citing Article 113 of the Labor Code, as amended,5 in relation to Article 1706 of the Civil
Code, as amended,6 maintains that it could withhold his monetary benefits being
authorized by the memorandum he signed.

Article 116 of the Labor Code, as amended, provides:

"ART. 116. Withholding of wages and kickbacks prohibited. – It shall be unlawful for any
person, directly or indirectly, to withhold any amount from the wages (and benefits) of a
worker or induce him to give up any part of his wages by force, stealth, intimidation, threat
or by any other means whatsoever without the worker’s consent."
The above provision is clear and needs no further elucidation. Indeed, petitioner has no
legal authority to withhold respondents’ 13th month pay and other benefits. What an
employee has worked for, his employer must pay.7 Thus, an employer cannot simply
refuse to pay the wages or benefits of its employee because he has either defaulted in
paying a loan guaranteed by his employer; or violated their memorandum of agreement;
or failed to render an accounting of his employer’s property.8

Nonetheless, petitioner, relying on Article 2071 (earlier cited), contends that the right to
demand security and obtain release from the guaranty it executed in favor of respondent
Villareal may be exercised even without initiating a separate and distinct action.

There is no guaranty involved herein and, therefore, the provision of Article 2071 does
not apply.

A guaranty is distinguished from a surety in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal is unable to pay, while a surety
is the insurer of the debt, and he obligates himself to pay if the principal does not pay.9

Based on the above distinction, it appears that the contract executed by petitioner and
respondent Villareal (in favor of the Bank of Commerce) is a contract of surety. In fact, it
is denominated as a "continuing suretyship agreement." Hence, petitioner could not just
unilaterally withhold respondent’s wages or benefits as a preliminary remedy under Article
2071. It must file an action against respondent Villareal. Thus, the Appellate Court aptly
ruled that petitioner "may only protect its right as surety by instituting an ‘action to demand
a security’."

As to respondent So, petitioner maintains that there can be a set-off or legal

compensation between them. Consequently, it can withhold his 13th month pay and other
benefits.

For legal compensation to take place, the requirements set forth in Articles 1278 and 1279
of the Civil Code, quoted below, must be present.
"ARTICLE 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.

"ARTICLE 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."

In the present case, set-off or legal compensation cannot take place between petitioner
and respondent So because they are not mutually creditor and debtor of each other.

A careful reading of the Memorandum10 dated August 22, 1994 reveals that the "lump
sum compensation of not less than US $6,000.00 will have to be refunded" by each
trainee to BOHLER, not to petitioner.

In fine, we rule that petitioner has no legal right to withhold respondents’ 13th month pay
and other benefits to recompense for whatever amount it paid as security for respondent
Villareal’s car loan; and for the expenses incurred by respondent So in his training abroad.

WHEREFORE, the petition is DENIED. The Decision dated October 29, 1999 and
Resolution dated May 8, 2000 of the Court of Appeals in CA-G.R. SP No. 50957 are
hereby AFFIRMED.
SO ORDERED.
G.R. No. 140689 February 17, 2004

BANKARD EMPLOYEES UNION-WORKERS ALLIANCE TRADE UNIONS, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and BANKARD, INC., respondents.

DECISION

CARPIO MORALES, J.:

The present Petition for Review on Certiorari under Rule 45 of the Rules of Court raises
the issue of whether the unilateral adoption by an employer of an upgraded salary scale
that increased the hiring rates of new employees without increasing the salary rates of
old employees resulted in wage distortion within the contemplation of Article 124 of the
Labor Code.

Bankard, Inc. (Bankard) classifies its employees by levels, to wit: Level I, Level II, Level
III, Level IV, and Level V. On May 28, 1993, its Board of Directors approved a "New Salary
Scale", made retroactive to April 1, 1993, for the purpose of making its hiring rate
competitive in the industry’s labor market. The "New Salary Scale" increased the hiring
rates of new employees, to wit: Levels I and V by one thousand pesos (P1,000.00), and
Levels II, III and IV by nine hundred pesos (P900.00). Accordingly, the salaries of
employees who fell below the new minimum rates were also adjusted to reach such rates
under their levels.

Bankard’s move drew the Bankard Employees Union-WATU (petitioner), the duly certified
exclusive bargaining agent of the regular rank and file employees of Bankard, to press
for the increase in the salary of its old, regular employees.

Bankard took the position, however, that there was no obligation on the part of the
management to grant to all its employees the same increase in an across-the-board
manner.
As the continued request of petitioner for increase in the wages and salaries of Bankard’s
regular employees remained unheeded, it filed a Notice of Strike on August 26, 1993 on
the ground of discrimination and other acts of Unfair Labor Practice (ULP).

A director of the National Conciliation and Mediation Board treated the Notice of Strike as
a "Preventive Mediation Case" based on a finding that the issues therein were "not
strikeable".

Petitioner filed another Notice of Strike on October 8, 1993 on the grounds of refusal to
bargain, discrimination, and other acts of ULP - union busting. The strike was averted,
however, when the dispute was certified by the Secretary of Labor and Employment for
compulsory arbitration.

The Second Division of the NLRC, by Order of May 31, 1995, finding no wage distortion,
dismissed the case for lack of merit.

Petitioner’s motion for reconsideration of the dismissal of the case was, by Resolution of
July 28, 1995, denied.

Petitioner thereupon filed a petition for certiorari before this Court, docketed as G.R.
121970. In accordance with its ruling in St. Martin Funeral Homes v. NLRC,1 the petition
was referred to the Court of Appeals which, by October 28, 1999, denied the same for
lack of merit.

Hence, the present petition which faults the appellate court as follows:

(1) It misapprehended the basic issues when it concluded that under Bankard’s new wage
structure, the old salary gaps between the different classification or level of employees
were "still reflected" by the adjusted salary rates2; and

(2) It erred in concluding that "wage distortion does not appear to exist", which conclusion
is manifestly contrary to law and jurisprudence.3
Upon the enactment of R.A. No. 6727 (WAGE RATIONALIZATION ACT, amending,
among others, Article 124 of the Labor Code) on June 9, 1989, the term "wage distortion"
was explicitly defined as:

... a situation where an increase in prescribed wage rates results in the elimination or
severe contraction of intentional quantitative differences in wage or salary rates between
and among employee groups in an establishment as to effectively obliterate the
distinctions embodied in such wage structure based on skills, length of service, or other
logical bases of differentiation.4

Prubankers Association v. Prudential Bank and Trust Company5 laid down the four
elements of wage distortion, to wit: (1.) An existing hierarchy of positions with
corresponding salary rates; (2) A significant change in the salary rate of a lower pay class
without a concomitant increase in the salary rate of a higher one; (3) The elimination of
the distinction between the two levels; and (4) The existence of the distortion in the same
region of the country.

Normally, a company has a wage structure or method of determining the wages of its
employees. In a problem dealing with "wage distortion," the basic assumption is that there
exists a grouping or classification of employees that establishes distinctions among them
on some relevant or legitimate bases.6

Involved in the classification of employees are various factors such as the degrees of
responsibility, the skills and knowledge required, the complexity of the job, or other logical
basis of differentiation. The differing wage rate for each of the existing classes of
employees reflects this classification.

Petitioner maintains that for purposes of wage distortion, the classification is not one
based on "levels" or "ranks" but on two groups of employees, the newly hired and the old,
in each and every level, and not between and among the different levels or ranks in the
salary structure.

Public respondent National Labor Relations Commission (NLRC) refutes petitioner’s

position, however. It, through the Office of the Solicitor General, essays in its Comment
of April 12, 2000 as follows:
To determine the existence of wage distortion, the "historical" classification of the
employees prior to the wage increase must be established. Likewise, it must be shown
that as between the different classification of employees, there exists a "historical" gap or
difference.

xxx

The classification preferred by petitioner is belied by the wage structure of private

respondent as shown in the new salary scale it adopted on May 28, 1993, retroactive to
April 1, 1993, which provides, thus:

Hiring Minimum Maximum

Level From To From To From To
I 3,100 4,100 3,200 4,200 7,200 9,250
II 3,200 4,100 3,300 4,200 7,500 9,500
III 3,300 4,200 3,400 4,300 8,000 10,000
IV 3,500 4,400 3,600 4,500 8,500 10,500
V 3,700 4,700 3,800 4,800 9,000 11,000
Thus the employees of private respondent have been "historically" classified into levels,
i.e. I to V, and not on the basis of their length of service. Put differently, the entry of new
employees to the company ipso facto place[s] them under any of the levels mentioned in
the new salary scale which private respondent adopted retroactive [to] April 1, 1993.
Petitioner cannot make a contrary classification of private respondent’s employees
without encroaching upon recognized management prerogative of formulating a wage
structure, in this case, one based on level.7 (Emphasis and underscoring supplied)

The issue of whether wage distortion exists being a question of fact that is within the
jurisdiction of quasi-judicial tribunals,8 and it being a basic rule that findings of facts of
quasi-judicial agencies, like the NLRC, are generally accorded not only respect but at
times even finality if they are supported by substantial evidence, as are the findings in the
case at bar, they must be respected. For these agencies have acquired expertise, their
jurisdiction being confined to specific matters.9
It is thus clear that there is no hierarchy of positions between the newly hired and regular
employees of Bankard, hence, the first element of wage distortion provided in Prubankers
is wanting.lawphi1.nêt

While seniority may be a factor in determining the wages of employees, it cannot be made
the sole basis in cases where the nature of their work differs.

Moreover, for purposes of determining the existence of wage distortion, employees

cannot create their own independent classification and use it as a basis to demand an
across-the-board increase in salary.

As National Federation of Labor v. NLRC, et al.10 teaches, the formulation of a wage

structure through the classification of employees is a matter of management judgment
and discretion.

[W]hether or not a new additional scheme of classification of employees for compensation

purposes should be established by the Company (and the legitimacy or viability of the
bases of distinction there embodied) is properly a matter of management judgment and
discretion, and ultimately, perhaps, a subject matter for bargaining negotiations between
employer and employees. It is assuredly something that falls outside the concept of "wage
distortion."11 (Emphasis and underscoring supplied)

As did the Court of Appeals, this Court finds that the third element provided in Prubankers
is also wanting. For, as the appellate court explained:

In trying to prove wage distortion, petitioner union presented a list of five (5) employees
allegedly affected by the said increase:

Pay of Old/ Pay of Newly Difference

Regular Employees Hired Employees
A. Prior to April 1, 1993
Level I P4,518.75
(Sammy Guce) P3,100 P1,418.75
Level II P6,242.00
(Nazario Abello) P3,200 P3,042.00
Level III P4,850.00
(Arthur Chavez) P3,300 P1,550.00
Level IV P5,339.00
Melissa Cordero) P3,500 P1,839.00
Level V P7,090.69
(Ma. Lourdes Dee) P3,700 P3,390.69
B. Effective April 1, 1993
Level I P4,518.75
Sammy Guce) P4,100 P418.75
Level II P6,242.00
(Nazario Abello) P4,100 P2,142.00
Level III P4,850.00
(Arthur Chavez) P4,200 P650.00
Level IV P5,330.00
(Melissa Cordero) P4,400 P939.00
Level V P7,090.69
(Ma. Lourdes Dee) P4,700 P2,390.69
Even assuming that there is a decrease in the wage gap between the pay of the old
employees and the newly hired employees, to Our mind said gap is not significant as to
obliterate or result in severe contraction of the intentional quantitative differences in the
salary rates between the employee group. As already stated, the classification under the
wage structure is based on the rank of an employee, not on seniority. For this reason,
,wage distortion does not appear to exist.12 (Emphasis and underscoring supplied)

Apart from the findings of fact of the NLRC and the Court of Appeals that some of the
elements of wage distortion are absent, petitioner cannot legally obligate Bankard to
correct the alleged "wage distortion" as the increase in the wages and salaries of the
newly-hired was not due to a prescribed law or wage order.
The wordings of Article 124 are clear. If it was the intention of the legislators to cover all
kinds of wage adjustments, then the language of the law should have been broad, not
restrictive as it is currently phrased:

Article 124. Standards/Criteria for Minimum Wage Fixing.

xxx

Where the application of any prescribed wage increase by virtue of a law or Wage Order
issued by any Regional Board results in distortions of the wage structure within an
establishment, the employer and the union shall negotiate to correct the distortions. Any
dispute arising from the wage distortions shall be resolved through the grievance
procedure under their collective bargaining agreement and, if it remains unresolved,
through voluntary arbitration.

x x x (Italics and emphasis supplied)

Article 124 is entitled "Standards/Criteria for Minimum Wage Fixing." It is found in

CHAPTER V on "WAGE STUDIES, WAGE AGREEMENTS AND WAGE
DETERMINATION" which principally deals with the fixing of minimum wage. Article 124
should thus be construed and correlated in relation to minimum wage fixing, the intention
of the law being that in the event of an increase in minimum wage, the distinctions
embodied in the wage structure based on skills, length of service, or other logical bases
of differentiation will be preserved.

If the compulsory mandate under Article 124 to correct "wage distortion" is applied to
voluntary and unilateral increases by the employer in fixing hiring rates which is inherently
a business judgment prerogative, then the hands of the employer would be completely
tied even in cases where an increase in wages of a particular group is justified due to a
re-evaluation of the high productivity of a particular group, or as in the present case, the
need to increase the competitiveness of Bankard’s hiring rate. An employer would be
discouraged from adjusting the salary rates of a particular group of employees for fear
that it would result to a demand by all employees for a similar increase, especially if the
financial conditions of the business cannot address an across-the-board increase.
Petitioner cites Metro Transit Organization, Inc. v. NLRC13 to support its claim that the
obligation to rectify wage distortion is not confined to wage distortion resulting from
government decreed law or wage order.

Reliance on Metro Transit is however misplaced, as the obligation therein to rectify the
wage distortion was not by virtue of Article 124 of the Labor Code, but on account of a
then existing "company practice" that whenever rank-and-file employees were paid a
statutorily mandated salary increase, supervisory employees were, as a matter of
practice, also paid the same amount plus an added premium. Thus this Court held in said
case:

We conclude that the supervisory employees, who then (i.e., on April 17, 1989) had,
unlike the rank-and-file employees, no CBA governing the terms and conditions of their
employment, had the right to rely on the company practice of unilaterally correcting the
wage distortion effects of a salary increase given to the rank-and-file employees, by giving
the supervisory employees a corresponding salary increase plus a premium. . . .14
(Emphasis supplied)

Wage distortion is a factual and economic condition that may be brought about by different
causes. In Metro Transit, the reduction or elimination of the normal differential between
the wage rates of rank-and-file and those of supervisory employees was due to the
granting to the former of wage increase which was, however, denied to the latter group
of employees.

The mere factual existence of wage distortion does not, however, ipso facto result to an
obligation to rectify it, absent a law or other source of obligation which requires its
rectification.

Unlike in Metro Transit then where there existed a "company practice," no such
management practice is herein alleged to obligate Bankard to provide an across-the-
board increase to all its regular employees.

Bankard’s right to increase its hiring rate, to establish minimum salaries for specific jobs,
and to adjust the rates of employees affected thereby is embodied under Section 2, Article
V (Salary and Cost of Living Allowance) of the parties’ Collective Bargaining Agreement
(CBA), to wit:
Section 2. Any salary increase granted under this Article shall be without prejudice to the
right of the Company to establish such minimum salaries as it may hereafter find
appropriate for specific jobs, and to adjust the rates of the employees thereby affected to
such minimum salaries thus established.15 (Italics and underscoring supplied)

This CBA provision, which is based on legitimate business-judgment prerogatives of the

employer, is a valid and legally enforceable source of rights between the parties.

In fine, absent any indication that the voluntary increase of salary rates by an employer
was done arbitrarily and illegally for the purpose of circumventing the laws or was devoid
of any legitimate purpose other than to discriminate against the regular employees, this
Court will not step in to interfere with this management prerogative. Employees are of
course not precluded from negotiating with its employer and lobby for wage increases
through appropriate channels, such as through a CBA.

This Court, time and again, has shown concern and compassion to the plight of workers
in adherence to the Constitutional provisions on social justice and has always upheld the
right of workers to press for better terms and conditions of employment. It does not mean,
however, that every dispute should be decided in favor of labor, for employers
correspondingly have rights under the law which need to be respected.

WHEREFORE, the present petition is hereby DENIED.

SO ORDERED.
G.R. No. 167217 February 4, 2008

P.I. MANUFACTURING, INCORPORATED, petitioner,

vs.
P.I. MANUFACTURING SUPERVISORS AND FOREMAN ASSOCIATION and the
NATIONAL LABOR UNION, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

The Court has always promoted the policy of encouraging employers to grant wage and
allowance increases to their employees higher than the minimum rates of increases
prescribed by statute or administrative regulation. Consistent with this, the Court also
adopts the policy that requires recognition and validation of wage increases given by
employers either unilaterally or as a result of collective bargaining negotiations in an effort
to correct wage distortions.1

Before us is a motion for reconsideration of our Resolution dated April 18, 2005 denying
the present petition for review on certiorari for failure of the petitioner to show that a
reversible error has been committed by the Court of Appeals in its (a) Decision dated July
21, 2004 and (b) Resolution dated February 18, 2005.

The facts are:

Petitioner P.I. Manufacturing, Incorporated is a domestic corporation engaged in the

manufacture and sale of household appliances. On the other hand, respondent P.I.
Manufacturing Supervisors and Foremen Association (PIMASUFA) is an organization of
petitioner’s supervisors and foremen, joined in this case by its federation, the National
Labor Union (NLU).
On December 10, 1987, the President signed into law Republic Act (R.A.) No. 66402
providing, among others, an increase in the statutory minimum wage and salary rates of
employees and workers in the private sector. Section 2 provides:

SEC. 2. The statutory minimum wage rates of workers and employees in the private
sector, whether agricultural or non-agricultural, shall be increased by ten pesos (P10.00)
per day, except non-agricultural workers and employees outside Metro Manila who shall
receive an increase of eleven pesos (P11.00) per day: Provided, That those already
receiving above the minimum wage up to one hundred pesos (P100.00) shall receive an
increase of ten pesos (P10.00) per day. Excepted from the provisions of this Act are
domestic helpers and persons employed in the personal service of another.

Thereafter, on December 18, 1987, petitioner and respondent PIMASUFA entered into a
new Collective Bargaining Agreement (1987 CBA) whereby the supervisors were granted
an increase of P625.00 per month and the foremen, P475.00 per month. The increases
were made retroactive to May 12, 1987, or prior to the passage of R.A. No. 6640, and
every year thereafter until July 26, 1989. The pertinent portions of the 1987 CBA read:

ARTICLE IV

SALARIES AND OVERTIME

Section 1. The COMPANY shall grant to all regular supervisors and foremen within the
coverage of the unit represented by the ASSOCIATION, wage or salary increases in the
amount set forth as follows:

A. For FOREMEN

Effective May 12, 1987, an increase of P475,00 per month to all qualified regular foremen
who are in the service of the COMPANY as of said date and who are still in its employ on
the signing of this Agreement, subject to the conditions set forth in sub-paragraph (d)
hereunder;
a) Effective July 26, 1988, an increase of P475.00 per month/employee to all covered
foremen;

b) Effective July 26, 1989, an increase of P475.00 per month/per employee to all covered
foremen;

c) The salary increases from May 12, 1987 to November 30, 1987 shall be excluding and
without increment on fringe benefits and/or premium and shall solely be on basic salary.

B. For SUPERVISORS

a) Effective May 12, 1987, an increase of P625.00 per month/employee to all qualified
regular supervisors who are in the service of the COMPANY as of said date and who are
still in its employ on the signing of the Agreement, subject to the conditions set forth in
subparagraph (d) hereunder;

b) Effective July 26, 1988, an increase of P625.00 per month/employee to all covered
supervisors;

c) Effective July 26, 1989, an increase of P625.00 per month/employee to all covered
supervisors;

d) The salary increase from May 12, 1987 to November 30, 1987 shall be excluding and
without increment on fringe benefits and/or premiums and shall solely be on basic salary.

On January 26, 1989, respondents PIMASUFA and NLU filed a complaint with the
Arbitration Branch of the National Labor Relations Commission (NLRC), docketed as
NLRC-NCR Case No. 00-01-00584, charging petitioner with violation of R.A. No. 6640.3
Respondents attached to their complaint a numerical illustration of wage distortion
resulting from the implementation of R.A. No. 6640.

On March 19, 1990, the Labor Arbiter rendered his Decision in favor of respondents.
Petitioner was ordered to give the members of respondent PIMASUFA wage increases
equivalent to 13.5% of their basic pay they were receiving prior to December 14, 1987.
The Labor Arbiter held:

As regards the issue of wage distortion brought about by the implementation of R.A. 6640
– It is correctly pointed out by the union that employees cannot waive future benefits,
much less those mandated by law. That is against public policy as it would render
meaningless the law. Thus, the waiver in the CBA does not bar the union from claiming
adjustments in pay as a result of distortion of wages brought about by the implementation
of R.A. 6640.

Just how much are the supervisors and foremen entitled to correct such distortion is now
the question. Pursuant to the said law, those who on December 14, 1987 were receiving
less than P100.00 are all entitled to an automatic across- the-board increase of P10.00 a
day. The percentage in increase given those who received benefits under R.A. 6640
should be the same percentage given to the supervisors and foremen.

The statutory minimum pay then was P54.00 a day. With the addition of P10.00 a day,
the said minimum pay raised to P64.00 a day. The increase of P10.00 a day is P13.5%
of the minimum wage prior to December 14, 1987. The same percentage of the pay of
members of petitioner prior to December 14, 1987 should be given them.

Finally, the claim of respondent that the filing of the present case, insofar as the provision
of R.A. 6640 is concerned, is premature does not deserve much consideration
considering that as of December 1988, complainant submitted in grievance the
aforementioned issue but the same was not settled.4

On appeal by petitioner, the NLRC, in its Resolution dated January 8, 1991, affirmed the
Labor Arbiter’s judgment.

Undaunted, petitioner filed a petition for certiorari with this Court. However, we referred
the petition to the Court of Appeals pursuant to our ruling in St. Martin Funeral Homes v.
NLRC.5 It was docketed therein as CA-G.R. SP No. 54379.

On July 21, 2004, the appellate court rendered its Decision affirming the Decision of the
NLRC with modification by raising the 13.5% wage increase to 18.5%. We quote the
pertinent portions of the Court of Appeals Decision, thus:
Anent the fourth issue, petitioner asseverates that the wage distortion issue is already
barred by Sec. 2 Article IV of the Contract denominated as "The Company and
Supervisors and Foremen Contract" dated December 18, 1987 declaring that it "absolves,
quit claims and releases the COMPANY for any monetary claim they have, if any there
might be or there might have been previous to the signing of this agreement." Petitioner
interprets this as absolving it from any wage distortion brought about by the
implementation of the new minimum wage law. Since the contract was signed on
December 17, 1987, or after the effectivity of Republic Act No. 6640, petitioner claims
that private respondent is deemed to have waived any benefit it may have under the new
law.

We are not persuaded.

Contrary to petitioner’s stance, the increase resulting from any wage distortion caused by
the implementation of Republic Act 6640 is not waivable. As held in the case of Pure
Foods Corporation vs. National Labor Relations Commission, et al.:

"Generally, quitclaims by laborers are frowned upon as contrary to public policy and are
held to be ineffective to bar recovery for the full measure of the worker’s rights. The reason
for the rule is that the employer and the employee do not stand on the same footing."

Moreover, Section 8 of the Rules Implementing RA 6640 states:

No wage increase shall be credited as compliance with the increase prescribed herein
unless expressly provided under valid individual written/collective agreements; and
provided further that such wage increase was granted in anticipation of the legislated
wage increase under the act. But such increases shall not include anniversary wage
increases provided in collective bargaining agreements.

Likewise, Article 1419 of the Civil Code mandates that:

When the law sets, or authorizes the setting of a minimum wage for laborers, and a
contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to
recover the deficiency.
Thus, notwithstanding the stipulation provided under Section 2 of the Company and
Supervisors and Foremen Contract, we find the members of private respondent union
entitled to the increase of their basic pay due to wage distortion by reason of the
implementation of RA 6640.

On the last issue, the increase of 13.5% in the supervisors and foremen’s basic salary
must further be increased to 18.5% in order to correct the wage distortion brought about
by the implementation of RA 6640. It must be recalled that the statutory minimum pay
before RA 6640 was P54.00 a day. The increase of P10.00 a day under RA 6640 on the
prior minimum pay of P54.00 is 18.5% and not 13.5%. Thus, petitioner should be made
to pay the amount equivalent to 18.5% of the basic pay of the members or private
respondent union in compliance with the provisions of Section 3 of RA 6640."

Petitioner filed a motion for reconsideration but it was denied by the appellate court in its
Resolution dated February 18, 2005.

Hence, the present recourse, petitioner alleging that the Court of Appeals erred:

1) In awarding wage increase to respondent supervisors and foremen to cure an alleged

wage distortion that resulted from the implementation of R.A. No. 6640.

2) In disregarding the wage increases granted under the 1987 CBA correcting whatever
wage distortion that may have been created by R.A. No. 6640.

3) In awarding wage increase equivalent to 18.5% of the basic pay of the members of
respondent PIMASUFA in violation of the clear provision of R.A. No. 6640 excluding from
its coverage employees receiving wages higher than P100.00.

4) In increasing the NLRC’s award of wage increase from 13.5% to 18.5%, which increase
is very much higher than the P10.00 daily increase mandated by R.A. No. 6640.

Petitioner contends that the findings of the NLRC and the Court of Appeals as to the
existence of a wage distortion are not supported by evidence; that Section 2 of R.A. No.
6640 does not provide for an increase in the wages of employees receiving more than
P100.00; and that the 1987 CBA has obliterated any possible wage distortion because
the increase granted to the members of respondent PIMASUFA in the amount of P625.00
and P475.00 per month substantially widened the gap between the foremen and
supervisors and as against the rank and file employees.

Respondents PIMASUFA and NLU, despite notice, failed to file their respective
comments.

In a Minute Resolution dated April 18, 2005, we denied the petition for petitioner’s failure
to show that the Court of Appeals committed a reversible error.

Hence, this motion for reconsideration.

We grant the motion.

In the ultimate, the issue here is whether the implementation of R.A. No. 6640 resulted in
a wage distortion and whether such distortion was cured or remedied by the 1987 CBA.

R.A. No. 6727, otherwise known as the Wage Rationalization Act, explicitly defines "wage
distortion" as:

x x x a situation where an increase in prescribed wage rates results in the elimination or

severe contraction of intentional quantitative differences in wage or salary rates between
and among employee groups in an establishment as to effectively obliterate the
distinctions embodied in such wage structure based on skills, length of service, or other
logical bases of differentiation.

Otherwise stated, wage distortion means the disappearance or virtual disappearance of

pay differentials between lower and higher positions in an enterprise because of
compliance with a wage order.6
In this case, the Court of Appeals correctly ruled that a wage distortion occurred due to
the implementation of R.A. No. 6640. The numerical illustration submitted by
respondents7 shows such distortion, thus:

II WAGE DISTORTION REGARDING RA-6640 (P10.00 per day increase effective

December 31, 1987)

Illustration of Wage Distortion and corresponding wage adjustments as provided in RA-

6640

NAME OF SUPERVISOR (S)

AND
FOREMAN (F)

RATE BEFORE INCREASE OF

RA-6640 P10.00

RATE AFTER INCREASE OF

RA-6640 P10.00

P109.01
OVER-
PASSED
P108.80
RATE AFTER
ADJUSTMENT
P10.00

P118.80
OVER-
PASSED
P118.08
RATE AFTER
ADJUSTMENT
P10.00

P128.08
OVER-
PASSED
P123.76
RATE AFTER
ADJUSTMENT
P10.00

1. ALCANTARA, V (S)

P 99.01

P 109.01

2. MORALES, A (F)
94.93

104.93

3. SALVO, R (F)

96.45

106.45

Note: No. 1 to 3 with increase of RA-6640

4.BUENCUCHILLO, C (S)

102.38
102.38

P 112.38

5. MENDOZA, D (F)

107.14

107.14

117.14

6. DEL PRADO, M (S)

108.80

108.80

118.80
7. PALENSO, A (F)

109.71

109.71

P 119.71

8. OJERIO, E (S)

111.71

111.71

121.71
9. REYES, J (S)

114.98

114.98

124.98

10. PALOMIQUE, S (F)

116.79

116.79

126.79

11. PAGLINAWAN, A (S)

116.98
116.98

126.98

12. CAMITO, M (S)

117.04

117.04

127.04

13. TUMBOCON, P (S)

117.44

117.44
127.44

14. SISON JR., B (S)

118.08

118.08

128.08

15. BORJA, R (S)

119.80

119.80

P 129.80
16. GINON, D (S)

123.76

123.76

133.76

17. GINON, T (S)

151. 49

151.49

18. ANDRES, M (S)

255.72
255.72

Note: No. 4 to 18 no increase in R.A. No. 6640

Notably, the implementation of R.A. No. 6640 resulted in the increase of P10.00 in the
wage rates of Alcantara, supervisor, and Morales and Salvo, both foremen. They are
petitioner’s lowest paid supervisor and foremen. As a consequence, the increased wage
rates of foremen Morales and Salvo exceeded that of supervisor Buencuchillo. Also, the
increased wage rate of supervisor Alcantara exceeded those of supervisors Buencuchillo
and Del Prado. Consequently, the P9.79 gap or difference between the wage rate of
supervisor Del Prado and that of supervisor Alcantara was eliminated. Instead, the latter
gained a P.21 lead over Del Prado. Like a domino effect, these gaps or differences
between and among the wage rates of all the above employees have been substantially
altered and reduced. It is therefore undeniable that the increase in the wage rates by
virtue of R.A. No. 6640 resulted in wage distortion or the elimination of the intentional
quantitative differences in the wage rates of the above employees.

However, while we find the presence of wage distortions, we are convinced that the same
were cured or remedied when respondent PIMASUFA entered into the 1987 CBA with
petitioner after the effectivity of R.A. No. 6640. The 1987 CBA increased the monthly
salaries of the supervisors by P625.00 and the foremen, by P475.00, effective May 12,
1987. These increases re-established and broadened the gap, not only between the
supervisors and the foremen, but also between them and the rank-and-file employees.
Significantly, the 1987 CBA wage increases almost doubled that of the P10.00 increase
under R.A. No. 6640. The P625.00/month means P24.03 increase per day for the
supervisors, while the P475.00/month means P18.26 increase per day for the foremen.
These increases were to be observed every year, starting May 12, 1987 until July 26,
1989. Clearly, the gap between the wage rates of the supervisors and those of the
foremen was inevitably re-established. It continued to broaden through the years.
Interestingly, such gap as re-established by virtue of the CBA is more than a substantial
compliance with R.A. No. 6640. We hold that the Court of Appeals erred in not taking into
account the provisions of the CBA viz-a-viz the wage increase under the said law. In
National Federation of Labor v. NLRC,8 we held:

We believe and so hold that the re-establishment of a significant gap or differential

between regular employees and casual employees by operation of the CBA was more
than substantial compliance with the requirements of the several Wage Orders (and of
Article 124 of the Labor Code). That this re-establishment of a significant differential was
the result of collective bargaining negotiations, rather than of a special grievance
procedure, is not a legal basis for ignoring it. The NLRC En Banc was in serious error
when it disregarded the differential of P3.60 which had been restored by 1 July 1985 upon
the ground that such differential "represent[ed] negotiated wage increase[s] which should
not be considered covered and in compliance with the Wage Orders. x x x"

In Capitol Wireless, Inc. v. Bate,9 we also held:

x x x The wage orders did not grant across-the-board increases to all employees in the
National Capital Region but limited such increases only to those already receiving wage
rates not more than P125.00 per day under Wage Order Nos. NCR-01 and NCR-01-A
and P142.00 per day under Wage Order No. NCR-02. Since the wage orders specified
who among the employees are entitled to the statutory wage increases, then the
increases applied only to those mentioned therein. The provisions of the CBA should be
read in harmony with the wage orders, whose benefits should be given only to those
employees covered thereby.

It has not escaped our attention that requiring petitioner to pay all the members of
respondent PIMASUFA a wage increase of 18.5%, over and above the negotiated wage
increases provided under the 1987 CBA, is highly unfair and oppressive to the former.
Obviously, it was not the intention of R.A. No. 6640 to grant an across-the-board increase
in pay to all the employees of petitioner. Section 2 of R.A. No. 6640 mandates only the
following increases in the private sector: (1) P10.00 per day for the employees in the
private sector, whether agricultural or non-agricultural, who are receiving the statutory
minimum wage rates; (2) P11.00 per day for non-agricultural workers and employees
outside Metro Manila; and (3) P10.00 per day for those already receiving the minimum
wage up to P100.00. To be sure, only those receiving wages P100.00 and below are
entitled to the P10.00 wage increase. The apparent intention of the law is only to upgrade
the salaries or wages of the employees specified therein.10 As the numerical illustration
shows, almost all of the members of respondent PIMASUFA have been receiving wage
rates above P100.00 and, therefore, not entitled to the P10.00 increase. Only three (3) of
them are receiving wage rates below P100.00, thus, entitled to such increase. Now, to
direct petitioner to grant an across-the-board increase to all of them, regardless of the
amount of wages they are already receiving, would be harsh and unfair to the former. As
we ruled in Metropolitan Bank and Trust Company Employees Union ALU-TUCP v.
NLRC:11

x x x To compel employers simply to add on legislative increases in salaries or allowances

without regard to what is already being paid, would be to penalize employers who grant
their workers more than the statutory prescribed minimum rates of increases. Clearly, this
would be counter-productive so far as securing the interests of labor is concerned.

Corollarily, the Court of Appeals erred in citing Pure Foods Corporation v. National Labor
Relations Commission12 as basis in disregarding the provisions of the 1987 CBA. The
case involves, not wage distortion, but illegal dismissal of employees from the service.
The Release and Quitclaim executed therein by the Pure Food’s employees were
intended to preclude them from questioning the termination of their services, not their
entitlement to wage increase on account of a wage distortion.

At this juncture, it must be stressed that a CBA constitutes the law between the parties
when freely and voluntarily entered into.13 Here, it has not been shown that respondent
PIMASUFA was coerced or forced by petitioner to sign the 1987 CBA. All of its thirteen
(13) officers signed the CBA with the assistance of respondent NLU. They signed it fully
aware of the passage of R.A. No. 6640. The duty to bargain requires that the parties deal
with each other with open and fair minds. A sincere endeavor to overcome obstacles and
difficulties that may arise, so that employer-employee relations may be stabilized and
industrial strife eliminated, must be apparent.14 Respondents cannot invoke the
beneficial provisions of the 1987 CBA but disregard the concessions it voluntary extended
to petitioner. The goal of collective bargaining is the making of agreements that will
stabilize business conditions and fix fair standards of working conditions.15 Definitely,
respondents’ posture contravenes this goal.

In fine, it must be emphasized that in the resolution of labor cases, this Court has always
been guided by the State policy enshrined in the Constitution that the rights of workers
and the promotion of their welfare shall be protected. However, consistent with such
policy, the Court cannot favor one party, be it labor or management, in arriving at a just
solution to a controversy if the party concerned has no valid support to its claim, like
respondents here.
WHEREFORE, we GRANT petitioner’s motion for reconsideration and REINSTATE the
petition we likewise GRANT. The assailed Decision of the Court of Appeals in CA-G.R.
SP No. 54379 is REVERSED.

SO ORDERED.

Puno, C.J., Chairperson, Corona, Azcuna, Leonardo-de Castro, JJ., concur.