Understanding and fixing wage distortion issues

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Published — November 11, 2017

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Related Topic: Employer’s Guide to Minimum Terms and Conditions of Employment

As part of labor standards, it is the State’s mandate to fix minimum wages, consistent with the Constitutional right of workers to a living wage. This is done through Wage Orders issued by the Regional Tripartite Wages and Productivity Board (“RTWPB”), where a certain minimum is fixed for every region based on the cost of living, within the said region, the needs of workers and their families, and the employers’ capacity to pay, among others things.

However, whenever new Wage Orders are issued by the RTWPB, there is a possibility for affected establishments to experience wage distortion.

Wage distortion is a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rates between and among employee groups in an establishment as to effectively obliterate the distinctions embodied in such wage structure based on skills, length of service, or other logical bases of differentiation [See: Sec. 124, R.A. No. 6727].

General principles of wage distortion

The concept of wage distortion assumes an existing grouping or classification of employees which establishes distinctions among such employees on some relevant or legitimate basis. This classification is reflected in a differing wage rate for each of the existing classes of employees.

Wage distortions have often been the result of government-mandated increases in minimum wages. Should a wage distortion exist, there is no legal requirement that, in rectifying the distortion by re-adjusting the wage rates of the differing classes of employees, the gap which had previously or historically existed be restored in precisely the same amount (such as when an across-the-board wage increase of the same amount is given to all employees). In other words, correction of a wage distortion may be done by re-establishing a substantial or significant gap (as distinguished from the historical gap) between the wage rates of the differing classes of employees. [See: G.R. No. 116008].

Procedure in correcting wage distortion

In organized establishments (where a legitimate labor union acts as the employee unit’s exclusive bargaining agent), the employer and the union shall negotiate to correct the distortions. Any dispute arising from wage distortions shall be resolved through the grievance procedure under their Collective Bargaining Agreement and, if it remains unresolved, through voluntary arbitration. Unless otherwise agreed by the parties in writing, such dispute shall be decided by the voluntary arbitrator or panel of voluntary arbitrators within 10 calendar days from the time said dispute was referred to voluntary arbitration.

In cases where there are no Collective Bargaining Agreements or any recognized labor union, the employers and workers shall endeavor to correct such distortions. Any dispute arising wage distortion shall be settled through the National Conciliation and Mediation Board (“NCMB”) and, if it remains unresolved after 10 calendar days of conciliation, the matter shall then be referred to the appropriate branch of the National Labor Relations Commission (“NLRC”). It shall be mandatory for the NLRC to conduct continuous hearings and decide the dispute within 20 calendar days from the time said dispute is submitted for compulsory arbitration [R.A. No. 6727].

Suggested formulas to address wage distortion

Any of the following formulas may be adopted in resolving wage distortion issues in an establishment.

1. Pineda Formula

	Previous minimum wage
Wage distortion adjustment =		x Mandated wage increase
	Present wage of employee

2. Pineda-Cruz-So Formula

	Previous minimum wagen
Wage distortion adjustment =		x Mandated wage increase
	Present wage of employee
Where: Exponent is represented by n

3. Percentile Approach

Wage distortion adjustment =

Percentile weight of pay group

x Mandated wage increase

4. Philippine Construction Supply Formula

	Existing minimum wage
Wage distortion adjustment =		x Mandated wage increase
	Formula Base Range (FBR)
Where: FBR = Actual wage rate (AWR) + Agreed amount of adjustment

5. Jimenez, Ofreneo, Delas Alas Jr. (JODA) Formula

	Wb – Wa
Wage distortion adjustment =
	2
New Daily wage rate = wage distortion adjustment + Wc Where: Wa = Old daily minimum wage Wb = Daily wage of employee (where Wb>Wa, or Wb is above Wa) Wc = New daily minimum wage        = Wa + mandated wage increase

6. Wirerope Formula

	Existing minimum wage
Wage distortion adjustment =		x (Mandated Wage Increase – Creditable Increase)
	Present wage of employee

7. Bagtas Approach

	Mandated wage increase
Wage distortion adjustment =		x Present wage of employee
	Existing minimum wage

Wage distortion issues, if left unresolved, may affect productivity of employees because the intended differentiation in salary structure between classes has been left indistinct. It is therefore advisable for employers to address the issue, if it occurs, in order to avoid labor unrest and maintain peaceful industrial relations. After all, the last thing employers would want is to see discontentment breeding upon their employees despite mandated wage increases just having taken effect.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding labor standards, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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