The Supreme Court has affirmed that government-owned and controlled corporations (GOCCs) cannot grant salary increases to their employees if a moratorium on such increases is in effect, even if the GOCC’s board of directors has the authority to set compensation. In Small Business Corporation vs. Commission on Audit, the Court ruled that Executive Order No. 7, which imposed a moratorium on salary increases, took precedence over the Small Business Corporation’s (SB Corp.) board’s authority to determine its employees’ compensation. This decision underscores the limits of GOCC autonomy in the face of executive orders designed to ensure fiscal prudence.

SB Corp.’s Quest for Merit Increases: When Presidential Moratoriums Override Board Discretion

This case revolves around the Small Business Corporation (SB Corp.), a government-owned and controlled corporation, and its attempt to grant merit increases to five of its officers. SB Corp. argued that its Board of Directors (BOD) had the authority to set the compensation of its employees, as provided in its charter. However, the Commission on Audit (COA) disallowed the merit increases, citing Executive Order No. 7 (EO No. 7), which imposed a moratorium on increases in salaries, allowances, incentives, and other benefits for GOCCs. The central question is whether EO No. 7 overrides the authority of SB Corp.’s BOD to grant merit increases.

SB Corp. was created under Republic Act (RA) No. 6977, as amended by RA No. 8289, and further amended by RA No. 9501, known as the Magna Carta for Micro, Small and Medium Enterprises (MSMEs). Section 14(f) of RA No. 9501 states:

“Notwithstanding the provisions of Republic Act. No. 6758 and Compensation Circular No. 10, Series of 1989 issued by the Department of Budget and Management, the Board shall have the authority to provide for the organizational structure, staffing pattern of SB Corporation and extend to the employees and personnel thereof salaries, allowances, and fringe benefits similar to those extended to and currently enjoyed by employees and personnel of other government financial institutions.”

SB Corp. argued that this provision granted its BOD the authority to set its employees’ compensation, regardless of other laws or regulations. However, in September 2010, President Benigno S. Aquino III issued EO No. 7, which imposed a moratorium on increases in salaries, allowances, and other benefits for GOCC officers and employees. Section 9 of EO No. 7 states:

“SECTION 9. Moratorium on Increases in Salaries, Allowances, Incentives, and Other Benefits Moratorium on increases in the rates of salaries, and the grant of new increases in the rates of allowances, incentives, and other benefits, except salary adjustments pursuant to Executive Order No. 811 dated June 17, 2009 and Executive Order No. 900 dated June 23, 2010 are hereby imposed until specifically authorized by the President.”

The COA argued that EO No. 7 applied to SB Corp. and that the merit increases granted to the five officers were therefore disallowed. SB Corp., however, contended that EO No. 7 should not apply retroactively and that its BOD had the authority to grant the merit increases. Furthermore, they argued that by requesting GCG approval, they did not acknowledge GCG’s authority over SB Corp.

The Supreme Court disagreed with SB Corp.’s arguments. The Court held that EO No. 7 was applicable to the grant of merit increases because the moratorium was already in effect when the increases were granted in April 2013. The court reasoned that a merit increase constitutes an “increase in the rates of salaries,” which is expressly prohibited by EO No. 7. The Court further emphasized that the moratorium’s intent was to curb excessive compensation in GOCCs and GFIs.

Building on this principle, the Court clarified that EO No. 7 did not apply retroactively because the merit increases were granted after the issuance of the EO. The Court stated:

“There is no question that EO No. 7 does not provide for any retroactive application. However, petitioner’s interpretation of which acts are prohibited by the moratorium runs contrary to the plain wording of EO No. 7 when it imposed the moratorium on “increases in the rates of salaries, and the grant of new increases in the rates of allowances, incentives and other benefits.” The E.O. did not prohibit merely the grant of increased salary rates in corporate salary structures; it also intended to halt the actual giving of increased salary rates.”

This approach contrasts with SB Corp.’s argument that the salary structure was already in place before EO No. 7. The Court found that the operative act was the actual grant of the increase, not the existence of the salary structure. The Court further held that SB Corp. recognized the Governance Commission for GOCCs’ (GCG) jurisdiction over it when it sought confirmation from the GCG to proceed with the merit increase program. The court cited SB Corp.’s letter stating they “look up to GCG as the proper authority to confirm our request prior to implementation”. This letter was interpreted as an acknowledgment that SB Corp. needed GCG approval.

The Supreme Court emphasized the powers and functions of the GCG as outlined in RA No. 10149, the GOCC Governance Act of 2011. Section 5 of RA No. 10149 provides that the GCG has the authority to:

“(h) Conduct compensation studies, develop and recommend to the President a competitive compensation and remuneration system which shall attract and retain talent, at the same time allowing the GOCC to be financially sound and sustainable… (j) Coordinate and monitor the operations of GOCCs, ensuring alignment and consistency with the national development policies and programs.”

Therefore, the Supreme Court ultimately ruled that the COA did not commit grave abuse of discretion in disallowing the merit increases. The Court held that EO No. 7 was applicable, that it was not applied retroactively, and that SB Corp. was within the jurisdiction of the GCG. The petition was denied.

FAQs

What was the key issue in this case?	The key issue was whether Executive Order No. 7, which imposed a moratorium on salary increases for GOCCs, overrides the authority of the Small Business Corporation’s (SB Corp.) Board of Directors to grant merit increases to its employees.
What is a government-owned and controlled corporation (GOCC)?	A GOCC is a corporation that is owned or controlled by the government. These corporations are typically established to provide essential services or to engage in activities that are important to the national economy.
What is the significance of Executive Order No. 7?	Executive Order No. 7 imposed a moratorium on increases in salaries, allowances, incentives, and other benefits for GOCC officers and employees. This EO aimed to promote transparency, accountability, and prudence in government spending.
Did the court find that SB Corp. was subject to EO No. 7?	Yes, the court found that SB Corp. was subject to EO No. 7, as the EO applied to all GOCCs unless specifically exempted. SB Corp. was not exempt from the coverage of EO No. 7.
Why did the COA disallow the merit increases?	The COA disallowed the merit increases because they were granted during the period when EO No. 7’s moratorium was in effect. The COA determined that the increases violated the EO’s prohibition on salary increases.
Did SB Corp.’s request for GCG confirmation affect the court’s decision?	Yes, the court considered SB Corp.’s request for confirmation from the GCG as an acknowledgment that SB Corp. needed GCG approval. This request undermined SB Corp.’s argument that it had the sole authority to grant the merit increases.
What is the role of the Governance Commission for GOCCs (GCG)?	The GCG is the central advisory, monitoring, and oversight body for GOCCs. It has the authority to formulate, implement, and coordinate policies concerning GOCCs, including their compensation and remuneration systems.
What was SB Corp.’s main argument in challenging the disallowance?	SB Corp.’s main argument was that its Board of Directors had the authority to set employee compensation and that EO No. 7 should not be applied retroactively. However, the court rejected both of these arguments.

This case clarifies the limits of a GOCC’s autonomy when executive orders are in place to regulate fiscal matters. Even when a GOCC’s board has the power to determine compensation, that power is not absolute and can be restricted by presidential directives aimed at ensuring responsible government spending.

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: SMALL BUSINESS CORPORATION, PETITIONER, VS. COMMISSION ON AUDIT, RESPONDENT., G.R. No. 230628, October 03, 2017