In cases of illegal dismissal, the Supreme Court clarifies how backwages are computed when an employee is not reinstated but instead receives separation pay. The court held that backwages should be computed from the time of illegal dismissal until the finality of the decision ordering separation pay, marking the end of the employment relationship. This ruling provides a clear guideline for computing monetary awards in labor disputes where reinstatement is no longer feasible due to strained relations or other factors, ensuring fair compensation for illegally dismissed employees.

From Reinstatement to Separation: How ‘Strained Relations’ Altered Backwage Calculations

This case revolves around the illegal dismissal of Teresa de Guzman and Edgar C. Tan by Bani Rural Bank, Inc. and ENOC Theater I and II. Initially, the National Labor Relations Commission (NLRC) ordered the petitioners to reinstate the respondents with backwages. However, during the execution of the NLRC’s decision, the issue of strained relations between the parties emerged. This led to a modification of the original order, substituting reinstatement with separation pay. The central legal question became: until when should the backwages be computed—up to the point of intended reinstatement or up to the finality of the decision awarding separation pay?

The NLRC’s initial resolution on March 17, 1995, mandated reinstatement with backwages from the time of dismissal until actual reinstatement. However, this resolution was later modified due to the strained relations between the parties. The NLRC justified this modification by noting that neither party had taken steps to implement the reinstatement, suggesting that the employment relationship had become untenable. This led to the award of separation pay in lieu of reinstatement, a decision that significantly impacted the computation of backwages.

The concept of ‘strained relations’ is critical here. This legal principle acknowledges that in some cases, the animosity between employer and employee makes a harmonious working relationship impossible. As the Supreme Court explained in this case, the existence of strained relations can justify the substitution of reinstatement with separation pay. This principle is rooted in the understanding that forcing parties to work together in a hostile environment is not conducive to productivity or industrial peace.

The petitioners argued that the respondents’ backwages should only be computed until August 25, 1995, based on an alleged manifestation that they no longer wanted to be reinstated. However, the NLRC and the Court of Appeals (CA) disagreed, holding that the backwages should be computed until January 29, 1999, the date when the NLRC’s decision awarding separation pay became final. The CA emphasized that the finality of the decision ordering separation pay marked the end of the employment relationship, thus setting the cutoff for backwage computation.

The Supreme Court affirmed the CA’s decision, emphasizing the principle of immutability of judgment. Generally, a final judgment can no longer be altered, amended, or modified. However, an exception exists for supervening events, which are facts that transpire after the judgment becomes final or new circumstances that develop after finality. In this case, the strained relations between the parties constituted a supervening event that justified the NLRC’s modification of its original order.

The Court also clarified the distinction between separation pay and backwages. Separation pay is based on the length of the employee’s service, while backwages are based on the period during which the employee was unlawfully prevented from working. Both are intended to compensate the employee for the illegal dismissal, but they serve different purposes and are calculated differently. The court in Macasero v. Southern Industrial Gases Philippines stated:

Thus, an illegally dismissed employee is entitled to two reliefs: backwages and reinstatement. The two reliefs provided are separate and distinct. In instances where reinstatement is no longer feasible because of strained relations between the employee and the employer, separation pay is granted. In effect, an illegally dismissed employee is entitled to either reinstatement, if viable, or separation pay if reinstatement is no longer viable, and backwages.

The court identified three scenarios for computing backwages following an illegal dismissal: (1) when reinstatement is ordered, backwages are computed until the employee’s reinstatement; (2) when separation pay is ordered in lieu of reinstatement, backwages are computed until the finality of the decision ordering separation pay; and (3) when separation pay is ordered after the finality of a reinstatement order due to a supervening event, backwages are again computed until the finality of the decision ordering separation pay.

In this case, the Supreme Court found that the NLRC’s decision to award separation pay due to strained relations effectively terminated the employment relationship as of the date the decision became final. Therefore, the respondents’ backwages were correctly computed until January 29, 1999. This ruling underscores the importance of considering the practical realities of the employment relationship when fashioning remedies for illegal dismissal.

The Supreme Court also addressed the issue of legal interest on the monetary awards. The Court modified the CA’s ruling to include legal interest of six percent (6%) per annum on the total monetary awards, computed from January 29, 1999, until full satisfaction. This addition ensures that the respondents are fully compensated for the delay in receiving their due compensation. The Court emphasized that the payment of legal interest is not barred by the principle of immutability of judgment, as it is a compensatory interest arising from the final judgment.

FAQs

What was the key issue in this case?	The main issue was determining the correct period for computing backwages in an illegal dismissal case where reinstatement was replaced by separation pay due to strained relations between the employer and employees.
What does ‘strained relations’ mean in labor law?	‘Strained relations’ refers to a situation where the animosity between employer and employee is so severe that a harmonious working relationship is impossible, justifying separation pay instead of reinstatement.
How are backwages calculated when reinstatement is ordered?	When reinstatement is ordered, backwages are calculated from the time of illegal dismissal until the employee is actually reinstated to their former position.
Until when are backwages computed if separation pay is awarded instead of reinstatement?	If separation pay is awarded in lieu of reinstatement, backwages are computed from the time of illegal dismissal until the finality of the decision ordering the payment of separation pay.
What is the difference between separation pay and backwages?	Separation pay is based on the length of service, while backwages compensate for lost earnings from the time of dismissal until the finality of the decision.
What is a ‘supervening event’ in the context of a final judgment?	A ‘supervening event’ is a new fact or circumstance that arises after a judgment has become final, which can justify a modification of the original judgment.
Why was reinstatement not ordered in this case?	Reinstatement was not ordered because the NLRC determined that strained relations between the employer and employees made a harmonious working environment impossible.
What was the significance of the NLRC’s July 31, 1998 decision?	The July 31, 1998 decision was significant because it modified the original reinstatement order to separation pay, changing the calculation of backwages to the date of finality of that decision.
Did the Supreme Court award legal interest in this case?	Yes, the Supreme Court ordered the payment of legal interest of six percent (6%) per annum on the total monetary awards, computed from January 29, 1999, until their full satisfaction.

In conclusion, the Bani Rural Bank case clarifies the proper computation of backwages in situations where reinstatement is no longer feasible and separation pay is awarded. The decision emphasizes that backwages should be computed until the finality of the decision ordering separation pay, aligning with the termination of the employment relationship. This ruling provides valuable guidance for labor disputes involving illegal dismissal and ensures that employees receive fair compensation in accordance with the law.

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: BANI RURAL BANK, INC. VS. TERESA DE GUZMAN, G.R. No. 170904, November 13, 2013