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June 1, 2022

Understanding and fixing wage distortion issues

Photo from Unsplash | Slashio Photography

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

 

WbWa

 

 

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.


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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20 thoughts on “Understanding and fixing wage distortion issues

  • Dear Atty.
    Sa wage distortion formula kasama po ba ang COLA o yung basic lang. basic 502.00 o 512.00 inc COLA.

  • Hello Atty Arjay,

    I would like to ask, ibig sabihin ba ng parehong position-those rank and file employees?ang structure namin sa company all rank and files halos magkapareha ang sweldo, regardless of their position , job description and length of service. May wage distortion ba dito?

  • Saang article po makikita ang suggested formulas to fix wage distortion? Para maconvince po ang mga employees na talagang legal ito at hindi gawa gawa lang ng employers?

  • Sir,
    If let’s say for example we already adjusted the rate of the worker to 400/day which is mandated by the W.O. and we have also existing workers receiving 409/day, do we need a distortion? Thanks

    • Dear minda,

      If a difference in salary between the employees earning P400 and P409 are really intended based on rank, skill or other relevant factors, then I believe that salary distortion had already taken place, considering that the intended distinction in salary rates was severely contracted already. However, resolving salary distortion issues, though advisable, is not legally mandatory. It is still upon the management’s sound business judgment whether they will resolve it or not, taking into consideration the possibility that it could breed unrest among the workforce if not resolved accordingly.

      -Atty. Arjay

  • Atty. pag may bagong wage order po ba automatic may wage distortion din? Bakit po hindi lahat ng empleyado nag iincrease yug sweldo pag may bagong wage order?

    • Dear Angel,

      Dahil sa pagtaas ng minimum wage, hindi ibig sabihin nun ay meron na agad wage distortion. Meron lang wage distortion pag nawala na (or halos nawala na) ang intentional differences sa salary rates ng mga empleyado sa kompanya.

      For example, sweldo ng staff ay P450/day at sweldo ng supervisor nya ay P520/day (sinadyang mas mataas because of rank). Biglang nagtaas ng minimum wage, at ang new minimum rate ay biglang naging P515/day. In such case, naging P5 na ang ang difference ng sweldo ng staff at ng kanyang supervisor, which is sobrang maliit na. In that instance, meron wage distortion.

      Using the same example above, kung ang sweldo ni supervisor ay P600/day, malayo parin ang difference nila ng staff nya kahit tumaas ang minimum wage rate sa P515/day. In such case, walang wage distortion.

      Hindi porke nagtaas ng minimum wage ay may wage distortion na agad. So, hindi ibig sabihin tataas din ang sweldo ng lahat ng empleyado kapag may bagong wage order.

      -Atty. Arjay

  • mandatory po ba talaga na once na tumaas ang minimum wage automatic po ba na may distortion na magaganap sa mga above minimum na salary. kasi sabi po sa amin na HR namin knina hindi daw po mandatory un. ang nangyayari po kasi ung suweldo ng mga bago po sa amin and suweldo ng mga luma ay halos magka pareho lang.

    • Dear rose silva,

      Wage distortion is neither mandatory nor automatic. Though it is highly advisable for the employer to address wage distortion issues, it still depends on the management whether wage distortion will be addressed or not.

      -Atty. Arjay

  • may wage distortion po ba kung mas malaki ang sahod ng 7years sa 15 years pero same posisyon sila?

    • Dear arnold bawag,

      Kung intention talaga ng management na magkaroon ng difference sa sweldo based on seniority or length of service, at biglang nawala ang difference na yun dahil sa ipinatupad na Wage Order ng gobyerno na nagtataas ng mininum wage, masasabi nating merong wage distortion. Pero kung based sa salary structure ng kompaya ay talagang parehas lang ng sweldo ang mga nasa parehong posisyon, regardless of the length of service, walang wage distortion.

      -Atty. Arjay

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