The Supreme Court has affirmed that if an employer consistently includes non-basic benefits in the computation of an employee’s 13th-month pay, this practice becomes a vested right that cannot be unilaterally withdrawn. Sevilla Trading Company’s attempt to correct what it claimed was a payroll error by excluding certain benefits from the 13th-month pay calculation was deemed a violation of Article 100 of the Labor Code, which prohibits the diminution of employee benefits. This decision emphasizes the importance of consistent company practices in creating enforceable employee rights, even if those practices deviate from strict statutory requirements.

The Thirteenth Month Surprise: Can a Company Reclaim ‘Erroneously’ Granted Benefits?

Sevilla Trading Company, engaged in the trading business, had for several years included non-basic pay items in its calculation of the 13th-month pay for employees. These included overtime premiums, holiday pays, night premiums, and various leave pays. In 1999, after computerizing its payroll system and conducting an audit, the company claimed it discovered an error in its calculations. Citing Presidential Decree No. 851 and its implementing rules, Sevilla Trading sought to revert to a computation based solely on the net basic pay, excluding the previously included benefits.

This change led to a reduction in the 13th-month pay received by the employees, prompting the Sevilla Trading Workers Union–SUPER to contest the new computation through the Collective Bargaining Agreement’s grievance machinery. When the parties failed to reach a resolution, the dispute was submitted to Accredited Voluntary Arbitrator Tomas E. Semana. The Union argued that the company’s new computation violated Article 100 of the Labor Code, which prohibits the elimination or reduction of existing employee benefits. The arbitrator ruled in favor of the Union, ordering the company to include the previously considered benefits in the 13th-month pay calculation and to pay the corresponding back wages for 1999. Sevilla Trading then appealed this decision, ultimately reaching the Supreme Court.

The Supreme Court first addressed the procedural issue of the company’s choice of remedy. The Court emphasized that the proper recourse from a voluntary arbitrator’s decision is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, not a petition for certiorari under Rule 65. The company’s failure to file a timely appeal under Rule 43 rendered the arbitrator’s decision final and executory. Even considering the merits of the case, the Court found no grave abuse of discretion on the part of the arbitrator. The Court concurred with the arbitrator’s decision that the exclusion of long-standing benefits from the 13th-month pay computation was unwarranted.

Building on this principle, the Court highlighted that Sevilla Trading’s claim of mistake in its prior computation was dubious, especially considering that the company employed a certified public accountant to audit its finances annually. The fact that the ‘error’ was allegedly discovered only after several years suggested a lack of diligence in cost accounting practices. It further noted that the company had presented insufficient evidence to substantiate its claim of error. Other than the self-serving allegation of ‘mistake’, the company’s petition was unsupported by verifiable documentation of a good faith error in accounting principles.

The Court contrasted the present case with Globe Mackay Cable and Radio Corp. vs. NLRC, where an employer’s erroneous application of the law due to the absence of clear administrative guidelines was not considered a voluntary act that could not be unilaterally discontinued. In Globe Mackay, the ambiguity in computation stemmed from initial lack of guidance on the cost-of-living allowance. Here, the Court stressed that as early as 1981, the Supreme Court had already clarified in San Miguel Corporation vs. Inciong that the basic salary excludes earnings and other remunerations, such as payments for sick leave, vacation leave, and premium pay for work performed on rest days and holidays. Thus, there was no reasonable ground for confusion in construing or applying the law, thereby further invalidating any suggestion of good faith on the employer’s part.

Furthermore, in Davao Fruits Corporation vs. Associated Labor Unions, the Court emphasized the prohibition against reducing, diminishing, discontinuing, or eliminating employee benefits. It was specified that even in a case where there was an apparent error, that:

The “Supplementary Rules and Regulations Implementing P.D. No. 851” which put to rest all doubts in the computation of the thirteenth month pay, was issued by the Secretary of Labor as early as January 16, 1976, barely one month after the effectivity of P.D. No. 851 and its Implementing Rules. And yet, petitioner computed and paid the thirteenth month pay, without excluding the subject items therein until 1981. Petitioner continued its practice in December 1981, after promulgation of the aforequoted San Miguel decision on February 24, 1981, when petitioner purportedly “discovered” its mistake.

That same reasoning has direct application in the present case.

In summary, the Court emphasized that consistent inclusion of non-basic benefits in the 13th-month pay calculation for at least two years constituted a voluntary employer practice. This practice cannot be unilaterally withdrawn without violating Article 100 of the Labor Code, which explicitly prohibits the elimination or diminution of existing employee benefits.

FAQs

What was the key issue in this case?	The central issue was whether Sevilla Trading Company could unilaterally exclude certain benefits from the computation of the 13th-month pay after having included them for several years, thereby diminishing the employees’ benefits. The court had to determine if this historical inclusion was a mistake or a company practice that had ripened into an employee right.
What are considered “non-basic” benefits in the context of 13th-month pay?	“Non-basic” benefits include overtime pay, premium pay for holidays and rest days, night shift differential, and various leave benefits (sick, vacation, maternity, paternity, bereavement, union). These are not typically included in the calculation of the 13th-month pay under standard labor laws, and basic salary dictates the calculation.
What is the significance of Article 100 of the Labor Code?	Article 100 of the Labor Code prohibits employers from eliminating or diminishing supplements or other employee benefits that are being enjoyed at the time of the Code’s promulgation. This provision aims to protect employees from the erosion of their existing benefits.
What is the difference between a petition for review under Rule 43 and a petition for certiorari under Rule 65?	A petition for review under Rule 43 is the proper mode of appeal from the decisions of quasi-judicial agencies, including voluntary arbitrators. A petition for certiorari under Rule 65 is an extraordinary remedy used to correct grave abuse of discretion amounting to lack or excess of jurisdiction.
How long must a company practice continue to be considered a vested benefit?	Jurisprudence has not established a specific minimum number of years. What the courts will consider is whether the employer freely, voluntarily and continuously conferred a certain benefit over a considerable period of time to conclude it has indeed ripened into company practice or policy.
What was the ruling of the Voluntary Arbitrator in this case?	The Voluntary Arbitrator ruled in favor of the Union, ordering Sevilla Trading Company to include sick leave, vacation leave, paternity leave, union leave, bereavement leave, other leaves with pay in the CBA, premium for work done on rest days and special holidays, and pay for regular holidays in the computation of the 13th-month pay. The company was also required to pay corresponding back wages for 1999 resulting from the improper exclusion of these benefits.
Did the Supreme Court find any abuse of discretion on the part of the Voluntary Arbitrator?	No, the Supreme Court did not find any grave abuse of discretion on the part of the Voluntary Arbitrator. The Court affirmed that the arbitrator’s decision was sound, valid, and in accordance with law and jurisprudence.
What can other companies learn from this ruling?	Companies should be mindful of their payroll practices, ensuring that they comply with the basic requirements of the law regarding 13th-month pay. Companies that include non-basic benefits in the computation of the 13th-month pay for a sustained period should be cognizant that they may be unable to later claim it was an error and must remove such benefits.

In conclusion, the Supreme Court’s decision in Sevilla Trading Company vs. A.V.A. Tomas E. Semana serves as a reminder to employers regarding the significance of maintaining consistent compensation practices. A company’s voluntary act of including certain benefits in the computation of 13th-month pay, even if not strictly required by law, can create an enforceable right for employees, thereby precluding the employer from unilaterally diminishing or eliminating those benefits.

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: Sevilla Trading Company v. A.V.A. Tomas E. Semana, G.R. No. 152456, April 28, 2004