Backwages

The law guarantees the right of employees to security of tenure. This means that an employee may not be dismissed from his employment except for just or authorized causes under the Labor Code and only after observance of his right to due process.

A dismissal effected in violation of any of these rights is unlawful. Consequently, the employee who was illegally dismissed shall be "made whole" or restored to his former status and position. As a rule, he shall be entitled (1) to reinstatement, without loss of seniority and other privileges and (2) to his full backwages, that is, to the salaries, allowances and other benefits or their monetary equivalent, which he should have received had he not been unlawfully dismissed. With regard to the payment of full backwages, the issue that immediately comes to mind is the manner by which it should be computed. Jurisprudence on the matter will tell us that, throughout the years, different methods have been used in the computation of backwages.

Under the Industrial Peace Act of 1953, the Court of Industrial Relations was given the discretion to grant or deny backwages. In instances where backwages were allowed, the CIR may even order a deduction therefrom of whatever earnings obtained elsewhere by the employee from the time he was dismissed up to the time of his reinstatement. However, in 1974, the Supreme Court adopted a new rule in the case of Mercury Drug Co. Inc. v. CIR, where it granted backwages for a period of three years without qualification and without deduction, so as not to require the employee to prove his income during the period he was out of the service and the employee to submit counter-proofs, which usually delayed the execution of the decision.

In 1993, the Mercury Drug rule was modified in Ferrer v. NLRC, where the Supreme Court again directed payment of backwages for the entire period that a dismissed employee was without work subject, however, to a deduction of the total earnings derived by the employee elsewhere from the date of his dismissal up to the date of his reinstatement. This modification was a consequence of the amendment of the Labor Code by R.A. 6715, which expressly directed an award of full backwages to an illegally dismissed employee.

At present, the prevailing doctrine is that enunciated in Bustamante, et al. v. NLRC, where the Supreme Court allowed full recovery of backwages without deduction and without qualification, which means that backwages should not be diminished or reduced by earning derived by the employee elsewhere during the period of his separation.

Apart from the method of computation of backwages, another issue that usually comes to fore is what base figure should be used in the computation. Present laws expressly include allowances and other benefits in the term "backwages", so long as such allowances and benefits are substantial and are proven to be considered as part of the salaries of an employee. For instance, 13th month pay, holiday pay, vacation leaves, sick leaves and service incentive leaves are among those held to be included in the computation of backwages. The most contentious issue in this regard is the inclusion of annual salary increases in the computation.

Last month, the Supreme Court had occasion to rule in Equitable Banking Corp. v. Sadac, that general salary increases do not form part of the base pay to be used in the computation. In this case, the employee was found to have been illegally dismissed. At the execution of the decision, the employee factored in annual salary increases amounting to 15 percent of his monthly salary in the computation of the backwages due him. The bank disagreed, so that the issue that had to be resolved by the Court was whether salary increases, usually received but not guaranteed to an employee, should be included in his backwages.

Ruling against the employee’s contention, the Supreme Court held that although the law expressly includes allowances and benefits as part of the computation of backwages, general salary increases, being different from allowances and benefit, should not be included. The Court explained that salary increases are increments to a person’s salary and form part of it once granted, while allowances and benefits are separate from a person’s salary and are usually granted only in addition thereto.

The Court reasoned that the employee’s general salary increases are a mere expectancy. They are volatile by nature and depend on numerous factors, such as the company’s financial situation, the employee’s future performance on the job or the employee’s continued stay in his position. They simply do not have that degree of assuredness that is the outstanding feature of backwages.

Also, the Supreme Court reiterated its ruling in the cases of Paramount Vinyl (1990), Evangelista (1955) and Espejo (1996), to the effect that an unqualified award of backwages means that the employee should be paid his wage rate at the time of his dismissal. Hence, an employee’s salary increases that are yet to form part of his wages at the time he was dismissed are obviously not included in his backwages.

However, it is interesting to note that the salary increase referred to in the Equitable case is based merely on expectancy. It is based merely on the assumption that, because in the past the employee’s salary had been increased, it is probable that he would similarly have been given salary increases had he not been unlawfully dismissed.

It is arguable whether the same rule will apply with respect to salary increases that are not "volatile" but are certain, such as those supported by a law or wage order, or those granted under a collective bargaining agreement. This is especially contentious in view of the long line of cases beginning with the Paramount case, where it was held that an unqualified award of backwages means that the employee is paid at the wage rate at the time of his dismissal. Since an employee’s wage rate "at the time of his dismissal" necessarily excludes salary increases granted during his separation, whether such salary increases are "volatile" or guaranteed by law or contract, it is seriously doubtful whether the rule enunciated in the Equitable Bank case will also apply to salary increases guaranteed by law or contract.

(The author is a Senior Partner at the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at tel. 830-8000 or e-mailed at [email protected])