The Supreme Court has ruled that employees who were not previously receiving Cost of Living Allowance (COLA) before its integration into standardized salaries are not entitled to back payments. This decision clarifies the application of the Salary Standardization Law (SSL) and Letter of Implementation (LOI) No. 97, emphasizing that the integration of allowances into salaries means that back payments are only warranted if the allowance was previously received and then discontinued. This ruling affects government-owned and controlled corporations (GOCCs) and local water districts (LWDs), providing guidance on COLA entitlements.

Navigating COLA Claims: When Prior Receipt Determines Entitlement

This case revolves around the disallowance by the Commission on Audit (COA) of the payment of backpay differential of COLA to the officials and employees of Metro Naga Water District (MNWD). The COA disallowed the payment amounting to P3,499,681.14, arguing that the employees were not entitled to it. The MNWD, relying on previous court rulings and opinions from the Office of the Government Corporate Counsel (OGCC), had granted the payment of accrued COLA covering the period from 1992 to 1999. The central legal question is whether the MNWD employees were entitled to receive COLA as a matter of right, and whether the COA gravely abused its discretion in disallowing the payment.

The MNWD argued that as a local water district (LWD), it was covered under the provisions of LOI No. 97, which pertains to the implementation of standard compensation plans for the infrastructure and utilities group of GOCCs. The Court acknowledged that LWDs are indeed included in the scope of LOI No. 97. However, the Court clarified that the inclusion of LWDs under LOI No. 97 dates back to the enactment of Presidential Decree (P.D.) No. 198 in 1973, which established LWDs as GOCCs, and not merely from the 1991 ruling in Davao City Water District, et al. v. CSC and CO A.

The MNWD also contended that the requirements of incumbency and prior receipts, as laid down in Aquino v. PPA, should not apply in determining the propriety of its COLA back payments. The Court agreed, citing Ambros v. COA, which explained that the requirements of incumbency and prior receipt are applicable only to non-integrated benefits that were being received as of July 1, 1989. Since COLA is not among the non-integrated benefits enumerated under Section 12 of the SSL or added by a subsequent issuance of the Department of Budget and Management (DBM), the twin requirements do not apply.

However, the Court ultimately sided with the COA, finding that the back payment of COLA to MNWD employees was rightfully disallowed. The Court emphasized that the Salary Standardization Law (SSL) mandates the consolidation of allowances into standardized salary rates. Section 12 of the SSL states:

SECTION 12. Consolidation of Allowances and Compensation. — All allowances, except for representation and transportation allowances; clothing and laundry allowances; subsistence allowance of marine officers and crew on board government vessels and hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad; and such other additional compensation not otherwise specified herein as may be determined by the DBM, shall be deemed included in the standardized salary rates herein prescribed. Such other additional compensation, whether in cash or in kind, being received by incumbents only as of July 1, 1989 not integrated into the standardized salary rates shall continue to be authorized.

In Maritime Industry Authority v. COA (MIA), the Court explained that all allowances, including COLA, were generally deemed integrated into the standardized salary received by government employees. Therefore, the MNWD had no basis in claiming COLA back payments because the same had already been integrated into the salaries received by its employees.

The Court also distinguished the present case from PPA Employees hired after July 1, 1989 v. COA (PPA Employees). In Napocor Employees Consolidated Union v. The National Power Corporation (Napocor), the Court clarified that PPA Employees was inapplicable where there was no issue as to the incumbency of the employees. In PPA Employees, the COLA was paid on top of the salaries received by the employees before it was discontinued. The Court emphasized that, in the present case, the COLA was never withheld from MNWD employees in the first place. No diminution would take place as the MNWD employees only received the COLA in 2002.

Despite the disallowance, the Court ruled that the MNWD employees were not required to return the disallowed amount, citing good faith. Good faith, in this context, refers to an honest intention and freedom from knowledge of circumstances that would put one on inquiry. The MNWD employees had no participation in the approval of the COLA payment and were mere passive recipients without knowledge of any irregularity.

Similarly, the Court found that good faith could be appreciated in favor of the MNWD officers who approved the payment. They merely acted in accordance with the resolution passed by the Board authorizing the back payment of COLA to the employees. At the time the disbursements were made, no ruling similar to MIA was yet made declaring that the COLA was deemed automatically integrated into the salary notwithstanding the absence of a DBM issuance.

FAQs

What was the key issue in this case?	The key issue was whether the Commission on Audit (COA) erred in disallowing the payment of backpay differential of Cost of Living Allowance (COLA) to the officials and employees of Metro Naga Water District (MNWD). The core legal question was whether the MNWD employees were entitled to receive COLA as a matter of right.
What is Letter of Implementation (LOI) No. 97?	LOI No. 97 authorizes the implementation of standard compensation and position classification plans for the infrastructure/utilities group of government-owned or controlled corporations (GOCCs). It includes water utilities, such as local water districts (LWDs), within its scope.
Are local water districts (LWDs) covered by LOI No. 97?	Yes, local water districts (LWDs) are included in the scope of LOI No. 97. This inclusion dates back to the enactment of Presidential Decree (P.D.) No. 198 in 1973, which established LWDs as GOCCs.
What does the Salary Standardization Law (SSL) say about allowances?	The SSL mandates the consolidation of allowances into standardized salary rates. Section 12 of the SSL provides that all allowances, with certain exceptions, shall be deemed included in the standardized salary rates.
Why was the back payment of COLA disallowed in this case?	The back payment of COLA was disallowed because the Court found that the COLA had already been integrated into the salaries received by the MNWD employees. The employees had never previously received COLA, and so, were not entitled to back payments.
What is the significance of the PPA Employees case?	The PPA Employees case involved a situation where COLA was paid on top of the salaries received by the employees before it was discontinued. The Supreme Court distinguished the present case from PPA Employees, emphasizing that COLA was never withheld from MNWD employees in the first place.
Were the MNWD employees required to refund the disallowed amount?	No, the Court ruled that the MNWD employees were not required to return the disallowed amount, citing good faith. The employees had no participation in the approval of the COLA payment and were mere passive recipients.
What is the meaning of “good faith” in this context?	In this context, good faith refers to an honest intention and freedom from knowledge of circumstances that would put one on inquiry. It implies that the recipients were unaware of any irregularity in the payment of COLA.
Were the MNWD officers who approved the COLA payment also absolved from refunding the amount?	Yes, the Court found that good faith could also be appreciated in favor of the MNWD officers who approved the payment. They acted in accordance with the resolution passed by the Board and without knowledge of any legal prohibition at the time.

In conclusion, the Supreme Court’s decision underscores the importance of prior receipt of benefits in determining entitlement to back payments following the integration of allowances into standardized salaries. While the Metro Naga Water District employees were not required to refund the disallowed amounts due to good faith, the ruling clarifies that employees must have been previously receiving the allowance to claim back payments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Metropolitan Naga Water District vs. Commission on Audit, G.R. No. 218072, March 08, 2016