Philippine Geothermal, Inc. Employees Union vs. Chevron Geothermal Phils. Holdings, Inc.

An employer's grant of salary increases to probationary employees based on higher hiring rates, rather than CBA wage increases, is a valid exercise of management prerogative and does not constitute wage distortion under Article 124 of the Labor Code, which applies only to distortions arising from prescribed wage increases by virtue of a law or wage order.

Petitioner is a legitimate labor organization and the certified bargaining agent of the rank-and-file employees of respondent Chevron Geothermal Phils. Holdings, Inc. The parties executed a Collective Bargaining Agreement effective November 1, 2007 to October 31, 2012, which under Article VII, Section 1 provided for staggered wage increases, with implementing guidelines in Annex D tying entitlement to the employee's date of regularization. The dispute concerns the interpretation of these provisions and the concept of wage distortion under Article 124 of the Labor Code, as amended by R.A. No. 6727 (Wage Rationalization Act).

Petitioner Philippine Geothermal, Inc. Employees Union (PGIEU) is a legitimate labor organization and the certified bargaining agent of the rank-and-file employees of respondent Chevron Geothermal Phils. Holdings, Inc. On July 31, 2008, the parties formally executed a Collective Bargaining Agreement (CBA) effective for the period from November 1, 2007 until October 31, 2012. Article VII, Section 1 of the CBA stipulated salary increases: a P260,000.00 lump sum payment effective November 1, 2007; a P1,500.00 across-the-board monthly salary increase effective November 1, 2008; and another P1,500.00 across-the-board monthly salary increase effective November 1, 2009. The parties appended implementing guidelines as Annex D, which tied entitlement to the wage increases to the employee's date of regularization: employees regularized on or before April 30, 2008 received all three increases; those regularized between May 1, 2008 and October 31, 2008, or on or before April 30, 2009, received the two P1,500.00 increases but not the lump sum; and those regularized between May 1, 2009 and October 31, 2009, or on or before April 30, 2010, received only the P1,500.00 increase effective November 1, 2009.

On October 6, 2009, petitioner's President sent a letter dated September 20, 2009 to respondent expressing, on behalf of its members, concern that the CBA provision and implementing rules were not being implemented properly pursuant to the guidelines and that, if not addressed, might result in salary distortion among union members. On the same date, respondent replied, denying any occurrence of salary distortion and reiterating its remuneration philosophy of "similar values for similar jobs," which meant that employees in similarly-valued jobs would have similar salary rates, achieved through annual reviews and necessary adjustments of salaries and hiring rates based on the computed values for each job.

Finding the explanation unsatisfactory, petitioner, with respondent's approval, referred the dispute to the Voluntary Arbitration of the National Conciliation and Mediation Board (NCMB). Petitioner averred that respondent breached the CBA provision on wage increase because it granted salary increases even to probationary employees, in contravention of the express mandate of the CBA article and implementing guidelines that increases were to be given only to regular employees. Petitioner cited as examples probationary employees Sherwin Lanao and Jonel Cordovales, who were regularized only on January 1, 2010 and April 16, 2010, respectively, yet were given the P1,500.00 increase effective November 1, 2008. As a consequence of their accelerated increases, their wages equated those of regular employees, obliterating the wage rate distinctions based on merit, skills, and length of service, and necessitating increases to the salaries of regular employees to maintain the higher strata of their salaries.

Respondent maintained that it did not commit any violation of the CBA provision and its implementing guidelines, asserting that the questioned increases were granted not during Lanao and Cordovales' probationary employment but after they were already regularized, and that no salary distortion existed since the disparity resulted from their being hired on different dates, regularization at different occasions, and differences in their hiring rates at the time of their employment. The Voluntary Arbitrator rendered a Decision dated August 16, 2010 in favor of respondent, ruling that petitioner failed to duly substantiate its allegations of premature wage increases and resultant salary distortion. The CA, on November 5, 2012, dismissed petitioner's petition for review and sustained the Voluntary Arbitrator's decision, and denied reconsideration on May 17, 2013.

• CBA Violation: Petitioner argued that respondent breached Article VII, Section 1 and Annex D of the CBA by granting the P1,500.00 wage increase to probationary employees Lanao and Cordovales at a time when they had not yet attained regular status, in contravention of the express mandate that salary increases were to be given only to regular employees.
• Wage Distortion: Petitioner argued that the premature increases obliterated the wage rate distinctions based on merit, skills, and length of service, resulting in salary distortion, and that its members' salaries must necessarily be increased to maintain the higher strata of their salaries from those of the probationary employees who were given the premature increases.

• No CBA Violation: Respondent countered that it did not commit any violation of the CBA provision and its implementing guidelines, as the increases to Lanao and Cordovales were granted not during their probationary employment but after they were already regularized, and were due to higher hiring rates at the time of their employment, not the CBA wage increase provisions.
• No Wage Distortion: Respondent argued that no salary distortion existed since the disparity or difference of salaries between Lanao and Cordovales and the other company employees was merely a result of their being hired on different dates, regularization at different occasions, and differences in their hiring rates at the time of their employment.

• CBA Violation: Whether the CA gravely erred in holding that respondent did not violate the CBA in granting the wage increase of P1,500.00 to Lanao and Cordovales at a time when they had not yet attained regular status.
• Management Prerogative: Whether the CA gravely erred in holding that the grant of wage increase to Lanao and Cordovales was a valid exercise of management prerogative by respondent.
• Wage Distortion Remedy: Whether the CA erred in not ordering respondent to likewise increase the rates of other regular employees in order to maintain the difference between their rates and those of the employees who were allegedly granted premature wage increases.

• CBA Violation: No. The increases to Lanao and Cordovales were not CBA wage increases under Article VII, Section 1 and Annex D, but resulted from higher hiring rates at the time of their employment, and respondent complied with the CBA to the letter.
• Management Prerogative: Yes, the grant was a valid exercise of management prerogative. Setting and implementing hiring rates is a business prerogative that the Court will not interfere with, absent any showing that it was exercised in bad faith.
• Wage Distortion Remedy: No. No wage distortion exists under Article 124 of the Labor Code, which covers only distortions arising from prescribed wage increases by virtue of a law or wage order, not voluntary and unilateral increases in hiring rates.

• CBA Violation: The Court examined the actual pay slips of union members, which showed that Lanao and Cordovales both received a wage increase of P1,500.00 effective November 1, 2008, raising their salaries to P36,500.00 per month. However, respondent explained that the alleged "increase" was not due to the application of Article VII and Annex D of the CBA, but was brought about by the increase in hiring rates at the time these employees were hired. Respondent's reply letter clarified its remuneration philosophy of "similar values for similar jobs," stating that salaries and hiring rates are reviewed annually and adjusted as necessary based on the computed values of each job, and that an employee's tenure or seniority does not influence the value of the job. The Court illustrated the difference in hiring rates between Lanao and another employee, Robert Gawat: when Gawat was hired, the hiring rate for Pay Grade 12 was P31,800.00, whereas when Lanao was hired on July 1, 2009, the hiring rate for the same pay grade was already P35,000.00, having been adjusted by the company in accordance with market and industry practice. Thus, the increases were not CBA wage increases, and respondent never violated the CBA; petitioner's true gripe related to respondent's prerogative of setting hiring rates, over which the petitioner had neither the personality nor the privilege to meddle or interfere.

• Management Prerogative: Management prerogative gives an employer freedom to regulate, according to its discretion and best judgment, all aspects of employment, including work assignment, working methods, the processes to be followed, working regulations, transfer of employees, work supervision, lay-off of workers, and the discipline, dismissal, and recall of workers. This right is tempered only by the limitations that it must be exercised in good faith and with due regard to the rights of the employees. The setting and implementation of various engagement rates to attract or lure the best possible applicants in the market is a purely business prerogative, which the Court will not interfere with absent a showing that it was exercised in bad faith.

• Wage Distortion Remedy: Article 124 of the Labor Code, as amended by R.A. No. 6727, defines wage distortion as "a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rate between and among employee groups 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." The provision covers only wage adjustments and increases due to a prescribed law or wage order. The four elements of wage distortion, laid down in Prubankers Association vs. Prudential Bank and Trust Company, are: (1) an existing hierarchy of positions with corresponding salary rates; (2) a significant change in the salary rate of a lower pay class without a concomitant increase in the salary rate of a higher one; (3) the elimination of the distinction between the two levels; and (4) the existence of the distortion in the same region of the country. The increases to Lanao and Cordovales were not a result of the erroneous application of Article VII and Annex D of the CBA, but of higher hiring rates when they were hired in 2009. The Court cited Bankard Employees Union-Workers Alliance Trade Unions vs. National Labor Relations Commission for the proposition that applying the compulsory mandate under Article 124 to voluntary and unilateral increases by the employer in fixing hiring rates would tie the hands of the employer and discourage it from adjusting salary rates for fear of demands by all employees for similar increases. Not all increases in salary which obliterate the salary differences of certain employees should be perceived as wage distortion.

• Wage Distortion — Defined under Article 124 of the Labor Code, as amended by R.A. No. 6727, as 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, effectively obliterating distinctions based on skills, length of service, or other logical bases of differentiation. The four elements are: (1) an existing hierarchy of positions with corresponding salary rates; (2) a significant change in the salary rate of a lower pay class without a concomitant increase in the salary rate of a higher one; (3) the elimination of the distinction between the two levels; and (4) the existence of the distortion in the same region of the country. The Court applied this doctrine by holding that the increases to Lanao and Cordovales were not CBA wage increases but resulted from higher hiring rates, and thus no wage distortion occurred; the doctrine covers only distortions arising from prescribed wage increases by law or wage order, not voluntary increases in hiring rates.

• Management Prerogative — The freedom of an employer to regulate, according to its discretion and best judgment, all aspects of employment, including work assignment, working methods, the processes to be followed, working regulations, transfer of employees, work supervision, lay-off of workers, and the discipline, dismissal, and recall of workers. This right is tempered only by the limitations that it must be exercised in good faith and with due regard to the rights of the employees. The Court applied this doctrine by upholding respondent's setting of hiring rates to attract the best possible applicants in the market, absent any showing of bad faith, and by holding that labor law does not authorize the substitution of the judgment of the employer in the conduct of its business.

• Finality of Labor Officials' Factual Findings — Factual findings of labor officials, who are deemed to have acquired expertise in matters within their jurisdiction, are generally accorded not only respect but even finality by the courts when supported by substantial evidence and affirmed by the CA. The Court applied this doctrine in affirming the Voluntary Arbitrator's finding that petitioner failed to substantiate its allegations of premature wage increases and resultant salary distortion.

• "Where the application of any prescribed wage increase by virtue of a law or Wage Order issued by any Regional Board results in distortions of the wage structure within an establishment, the employer and union shall negotiate to correct the distortions. Any dispute arising from the wage distortions shall be resolved through the grievance procedure under their collective bargaining agreement and, if it remains unresolved, through voluntary arbitration." — This passage from Article 124 of the Labor Code delimits the scope of wage distortion to prescribed wage increases by law or wage order, which is the controlling statutory basis for the Court's holding that no wage distortion occurred in this case.

• "If the compulsory mandate under Article 124 to correct 'wage distortion' is applied to voluntary and unilateral increases by the employer in fixing hiring rates which is inherently a business judgment prerogative, then the hands of the employer would be completely tied even in cases where an increase in wages of a particular group is justified due to a re-evaluation of the high productivity of a particular group, or as in the present case, the need to increase the competitiveness of Bankard's hiring rate." — This quotation from Bankard explains why the wage distortion remedy should not be extended to voluntary increases in hiring rates, and was adopted by the Court to reject petitioner's claim.

• "Management prerogative gives an employer freedom to regulate according to their discretion and best judgment, all aspects of employment including work assignment, working methods, the processes to be followed, working regulations, transfer of employees, work supervision, lay-off of workers and the discipline, dismissal and recall of workers." — This passage defines the scope of management prerogative, which the Court applied to uphold respondent's setting of hiring rates as a valid business judgment.

• "It is the prerogative of management to regulate, according to its discretion and judgment all aspects of employment. This flows from the established rule that labor law does not authorize the substitution of the judgment of the employer in the conduct of its business." — This quotation reinforces the management prerogative doctrine and the principle that courts will not substitute their judgment for that of the employer in business conduct, so long as it is exercised in good faith.

• Prubankers Association vs. Prudential Bank and Trust Company, 361 Phil. 744 (1999) — Controlling precedent that laid down the four elements of wage distortion, which the Court applied to determine that no wage distortion existed in this case.
• Bankard Employees Union-Workers Alliance Trade Unions vs. National Labor Relations Commission, 467 Phil. 570 (2004) — Followed, holding that the compulsory mandate under Article 124 to correct wage distortion should not be applied to voluntary and unilateral increases by the employer in fixing hiring rates, which is inherently a business judgment prerogative.
• Philippine Airlines, Inc. vs. NLRC, 392 Phil. 50 (2000) — Cited for the definition of management prerogative as the freedom to regulate all aspects of employment.
• Julie's Bakeshop, et al. vs. Arnaiz, et al., 682 Phil. 95 (2012) — Cited for the limitations on management prerogative: that it must be exercised in good faith and with due regard to the rights of the employees.
• Wise and Co., Inc. vs. Wise and Co. Inc. Employees Union-NATU, 258-A Phil. 321-322 (1989) — Cited for the principle that management prerogative may be availed of without fear of liability so long as it is exercised in good faith for the advancement of the employer's interest and not for the purpose of defeating or circumventing the rights of the employees under special laws or agreements.

• Article 124, Labor Code of the Philippines — Defines wage distortion and requires the employer and union to negotiate to correct distortions arising from the application of any prescribed wage increase by virtue of a law or wage order; applied to hold that no wage distortion occurred since the increases to Lanao and Cordovales were not prescribed wage increases but voluntary hiring rate adjustments.
• R.A. No. 6727 (Wage Rationalization Act) — Amended Article 124 of the Labor Code on June 9, 1989 to explicitly define the term "wage distortion"; cited as the statutory basis for the definition of wage distortion applied in this case.

Carpio (Chairperson), Peralta, Perlas-Bernabe, and Caguioa, JJ., concurred.