The Supreme Court affirmed that a company cannot unilaterally reduce employee benefits, especially when these benefits have been consistently provided over a long period, establishing them as company practice. Central Azucarera de Tarlac was mandated to continue its established practice of including certain benefits in the computation of the 13th-month pay, despite claiming an initial error in interpretation of Presidential Decree No. 851. This ruling underscores the principle that long-standing company practices become integral parts of the employment contract, protecting employees from arbitrary reduction of benefits.

Retroactive Reversal? The Battle Over Thirty Years of 13th-Month Pay

At the heart of this case is a dispute between Central Azucarera de Tarlac (CAT) and its labor union regarding the computation of the 13th-month pay. For nearly three decades, CAT had included in its computation of the Total Basic Annual Salary items such as overtime pay, night premium pay, and vacation and sick leaves. However, in 2006, CAT changed its method, leading the labor union to file a complaint, arguing that the company was diminishing their benefits. The core legal question is whether CAT could unilaterally alter a long-standing practice in computing the 13th-month pay, especially after consistently applying the same method for almost 30 years.

The legal framework for this case primarily relies on Presidential Decree (P.D.) No. 851, which mandates the provision of 13th-month pay to employees. The implementing rules and regulations define the 13th-month pay as one-twelfth of the basic salary earned within a calendar year. The dispute arises in interpreting what constitutes the “basic salary.” CAT argued that it had erroneously included certain benefits in the past and sought to rectify this alleged error. The labor union, on the other hand, contended that the long-standing practice had created a vested right that could not be unilaterally withdrawn. This aligns with Article 100 of the Labor Code, the Non-Diminution Rule, which protects employees from the reduction or elimination of benefits that have become part of their employment contract.

The Labor Arbiter initially sided with CAT, stating that the company had the right to correct its error. However, the NLRC reversed this decision, ordering CAT to adhere to its established practice. The NLRC’s decision emphasizes the importance of company practice in determining the scope of employee benefits. The Court of Appeals (CA) affirmed the NLRC’s decision, leading CAT to elevate the case to the Supreme Court. The Supreme Court denied CAT’s petition, upholding the CA’s decision and solidifying the principle that long-standing company practices cannot be unilaterally withdrawn. The court emphasized that clear administrative guidelines have existed since the inception of P.D. No. 851, ensuring uniform interpretation and application.

The Supreme Court leaned heavily on the principle of non-diminution of benefits. It stated that the consistent practice of including specific items in the computation of the 13th-month pay had ripened into a company policy or practice, which could not be unilaterally withdrawn. The court cited Article 100 of the Labor Code, stating:

“benefits given to employees cannot be taken back or reduced unilaterally by the employer because the benefit has become part of the employment contract, written or unwritten.”

This principle is crucial in protecting employees from arbitrary actions by employers, ensuring that established benefits are maintained. The court also dismissed CAT’s argument that the grant of the benefit was not voluntary and was due to an error. The court found that the voluntariness was manifested by the number of years the employer had paid the benefit, and no difficult question of law was involved. The court underscored the significance of the duration and consistency of the practice, stating that CAT only changed the formula after nearly 30 years, following a dispute with the employees. This change at such a late stage indicated bad faith.

Furthermore, the court addressed CAT’s implicit claim of financial difficulty, stating that under Section 7 of the Rules and Regulations Implementing P.D. No. 851, distressed employers must obtain prior authorization from the Secretary of Labor to claim exemption from the 13th-month pay requirement. CAT had not obtained such authorization, disqualifying it from claiming the exemption. The ruling’s practical implications are significant for both employers and employees. Employers must recognize that long-standing practices regarding employee benefits can create legally binding obligations. They cannot unilaterally alter these practices without risking legal challenges. Employees, on the other hand, are protected from arbitrary reductions in their benefits, especially when these benefits have been consistently provided over an extended period.

This case serves as a reminder of the importance of clearly defining employee benefits and consistently adhering to established practices. It highlights the potential legal ramifications of changing such practices, particularly when they have become ingrained in the employment relationship. The principle of non-diminution of benefits aims to protect employees from sudden and unfavorable changes in their compensation packages, ensuring fairness and stability in the workplace.

FAQs

What was the key issue in this case?	The central issue was whether Central Azucarera de Tarlac (CAT) could unilaterally change its long-standing practice of computing 13th-month pay by excluding certain benefits previously included in the calculation. This involved interpreting the scope of “basic salary” under Presidential Decree No. 851 and the principle of non-diminution of benefits.
What is the Non-Diminution Rule?	The Non-Diminution Rule, as embodied in Article 100 of the Labor Code, states that employers cannot unilaterally reduce or eliminate benefits that have become part of the employment contract, whether written or unwritten. It aims to protect employees from arbitrary reductions in their compensation and benefits.
What benefits were included in the computation of the 13th-month pay by CAT?	For almost 30 years, CAT included the basic monthly salary, first eight hours overtime pay on Sundays and legal/special holidays, night premium pay, and vacation and sick leaves in its computation of the Total Basic Annual Salary for 13th-month pay purposes. These were the items CAT sought to exclude in 2006.
Why did CAT change its computation method?	CAT claimed that it had made an error in interpreting P.D. No. 851 and its implementing rules regarding what constitutes “basic salary.” CAT argued that it was merely correcting this error when it changed the computation method in 2006.
What did the Labor Arbiter initially decide?	The Labor Arbiter initially dismissed the complaint, ruling that CAT had the right to rectify the error in the computation of the 13th-month pay of its employees. However, this decision was later reversed by the NLRC.
What was the final ruling of the Supreme Court?	The Supreme Court affirmed the Court of Appeals’ decision, which upheld the NLRC’s ruling. The Court ordered CAT to adhere to its established practice of granting 13th-month pay based on gross annual basic salary, including the contested benefits.
Can an employer claim financial distress to avoid paying the 13th-month pay?	An employer can claim exemption from the 13th-month pay requirement if they qualify as a distressed employer, but only upon prior authorization by the Secretary of Labor. CAT did not obtain such authorization, so it could not claim exemption.
What is the significance of company practice in determining employee benefits?	Long-standing company practices can ripen into company policies or implied contractual obligations. These practices cannot be unilaterally withdrawn, as they become part of the employment contract, whether written or unwritten.

This case illustrates the importance of maintaining consistent practices in providing employee benefits. Employers should be cautious about unilaterally altering these practices, especially when they have been in place for a significant period. Employees, conversely, should be aware of their rights and the protections afforded by the Non-Diminution Rule.

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: Central Azucarera de Tarlac vs. Central Azucarera de Tarlac Labor Union-NLU, G.R. No. 188949, July 26, 2010