Philippine National Construction Corporation vs. Erece, Jr.

A benefit granted in violation of a Commission on Audit regulation cannot ripen into a company practice or a vested right, and its subsequent withdrawal to comply with the law does not violate the prohibition against diminution of benefits under Article 100 of the Labor Code. The non-diminution rule does not shield unauthorized or illegal compensation, and the government is not estopped from correcting errors in the application and enforcement of law.

Philippine National Construction Corporation was originally incorporated under the Corporation Code in 1966 as the Construction Development Corporation of the Philippines. After it defaulted on loans from government financial institutions, those institutions converted their loan exposure to common equity, eventually becoming majority stockholders. The corporation was renamed and became a government-acquired asset corporation, ultimately a government-owned and controlled corporation (GOCC) without an original charter, 90.3% owned by the government. In 2011, PNCC implemented a retrenchment program; respondents, who had been separated, executed quitclaims but were later rehired into executive and managerial positions. Beginning that year, as part of their executive incentives, they were granted a monthly allowance for a personal driver or fuel consumption under a 1996 Board Resolution. The Commission on Audit Resident Auditor issued Audit Observation Memoranda finding the allowance disallowable because respondents already enjoyed service vehicles, contrary to COA Circular No. 77-61. In September 2014, PNCC stopped granting the allowance without a formal notice of disallowance from the COA, prompting respondents’ complaint.

• Nature of the Corporation: PNCC was incorporated in 1966 under the Corporation Code as the Construction Development Corporation of the Philippines. Its failure to repay loans from government financial institutions led to the conversion of those debts into equity under Letter of Instruction No. 1295, making the government the majority stockholder. By 1988, PNCC had become a government-acquired asset corporation, 90.3% owned by the government. The Supreme Court’s rulings in Strategic Alliance Development Corporation v. Radstock Securities Ltd. and Alejandrino v. Commission on Audit have settled that PNCC is a GOCC without an original charter, organized and existing under the Corporation Code, but under the direct supervision of the Office of the President.

• Employment and Retrenchment: In 2011, PNCC implemented a retrenchment program due to continued financial losses. Respondents were laid off and executed quitclaims. They were subsequently rehired to executive and managerial positions because of their familiarity with PNCC’s operations. The positions held were Assistant Vice-President (Head, Personnel Services), Senior Vice-President (Head, Administration and Property Management), Vice-President (Treasurer), Vice-President (Head, Materials Management), and Assistant Vice-President (Legal Officer).

• Grant of the Subject Allowance: Beginning 2011, as part of their incentives, respondents received a monthly allowance for a personal driver or fuel consumption. This allowance was granted pursuant to PNCC Board Resolution No. BD-029-1996 dated May 28, 1996. Under the 1997 Company Policy on Service Vehicles, the allowance could be used either for fuel consumption or as compensation for a personal driver.

• COA Audit Observations: The COA Resident Auditor issued Audit Observation Memorandum No. 13-019 (2012) dated April 16, 2013, and AOM No. 14-010 (2013) dated May 26, 2014. The AOMs found that the subject allowance consisted of a fixed monthly gasoline allowance (ranging from PHP 12,000.00 to PHP 20,000.00 depending on rank) and a variable reimbursable transportation allowance. The COA concluded that the allowance was grossly disadvantageous and disallowable in audit because it was granted in addition to service vehicles already provided to the executives, in contravention of COA Circular No. 77-61, which prohibits an official receiving transportation allowance from using government motor transportation. The 2013 COA Audit Report reiterated the recommendation to stop the grant. All AOMs required PNCC management’s comments and contained recommendations, not final disallowances.

• Withdrawal of the Allowance and Complaint: In September 2014, without any notice of disallowance having been issued by the COA, PNCC unilaterally ceased granting the allowance. Respondents filed a complaint with the Labor Arbiter for payment of the allowance, moral and exemplary damages, and attorney’s fees, arguing that the benefit had ripened into a company policy that could not be diminished under Article 100 of the Labor Code.

• Jurisdiction of COA: PNCC argued that jurisdiction over respondents’ money claims is lodged with the COA, not the Labor Arbiter, because the withdrawal of the allowance was prompted by the audit findings of the COA Resident Auditor and PNCC is a GOCC subject to COA audit.

• Non-Applicability of Article 100: PNCC maintained that the withdrawal was not unilateral but was compelled by the COA’s audit observations; thus, Article 100 of the Labor Code on non-diminution of benefits does not apply.

• Jurisdiction of the Labor Arbiter: Respondents averred that PNCC is a private corporation organized under the Corporation Code, as declared in Cuenca v. Atas and PNCC v. Pabion, and therefore their money claims fall under the exclusive jurisdiction of the Labor Arbiter.

• Violation of Non-Diminution Rule: They contended that the COA had not issued any notice of disallowance against the allowance, making PNCC’s withdrawal unilateral. The grant of the allowance had ripened into a company policy that could not be diminished or withdrawn under Article 100 of the Labor Code. They further characterized the allowance as a “driver’s allowance,” not a fuel allowance.

• Jurisdiction over Money Claims: Whether the Court of Appeals correctly determined that the Labor Arbiter has original and exclusive jurisdiction over respondents’ claims for payment of the subject allowance, or whether jurisdiction is vested in the Commission on Audit.

• Non-Diminution of Benefits: Whether the grant of the subject allowance had ripened into a company practice that cannot be withdrawn under Article 100 of the Labor Code.

• Jurisdiction over Money Claims: The Labor Arbiter has original and exclusive jurisdiction. PNCC is a GOCC without an original charter, and its employees’ terms and conditions of employment are governed by the Labor Code, not the Civil Service Law. Article 217 of the Labor Code expressly vests in Labor Arbiters exclusive original jurisdiction over all money claims arising from employer-employee relations exceeding PHP 5,000.00. Although the Government Auditing Code and the 2009 COA Rules of Procedure grant the COA general jurisdiction over money claims against the government, that jurisdiction is concurrent; no provision of law confers exclusive original jurisdiction to the COA over such claims. Where a special law, like the Labor Code, vests exclusive jurisdiction in another tribunal, the special law must prevail. Only a notice of disallowance or charge constitutes an audit decision; an Audit Observation Memorandum is merely a preliminary initiatory step with non-conclusive findings. Because no notice of disallowance was issued, no final COA audit decision existed to activate the COA’s appellate jurisdiction, and the Labor Arbiter retained cognizance over the claims.

• Non-Diminution of Benefits: The allowance, correctly characterized as a monthly transportation allowance (comprising a fixed gasoline allowance and a reimbursable transportation component), could not ripen into a company practice or vested right. It is undisputed that respondents had been granted service vehicles in addition to the allowance. This arrangement directly contravened COA Circular No. 77-61, which has the force and effect of law and prohibits government officials who receive a transportation allowance from using government motor vehicles. The rule against diminution of benefits under Article 100 does not encompass the continuous grant of unauthorized compensation. The government is not estopped from correcting errors in the application and enforcement of law, and practice, no matter how long continued, cannot give rise to any vested right if it is contrary to an express statutory provision. Because the grant of the allowance was prohibited by COA regulations, its withdrawal to comply with the law was not a unilateral diminution but a necessary correction.

• GOCC Without Original Charter — Labor Code Coverage — Government-owned or controlled corporations without original charters are governed by the Labor Code, not the Civil Service Law, with respect to terms and conditions of employment. Consequently, money claims of their employees fall within the original and exclusive jurisdiction of the Labor Arbiter under Article 217 of the Labor Code, and the COA’s general jurisdiction over money claims against the government is merely concurrent, not exclusive.

• Audit Observation Memorandum Distinguished from Notice of Disallowance — An Audit Observation Memorandum is not a decision or ruling by the COA on disallowance; it is an initiatory step in an investigative audit containing preliminary findings that require the auditee’s comments and merely recommend action. Only a Notice of Disallowance or Charge, issued under Rule IV, Section 4 of the 2009 COA Rules of Procedure, constitutes an audit decision that may be appealed.

• Mistaken Grant of Benefits Cannot Ripen into Company Practice — A benefit granted in violation of an express statutory or regulatory prohibition cannot ripen into a company practice or vested right. The prohibition against diminution of benefits under Article 100 of the Labor Code does not protect unauthorized or illegal compensation. The government is not estopped from correcting errors in the application and enforcement of law, and no practice, however long continued, can give rise to a vested right if it is contrary to law.

• Concurrent Jurisdiction of COA Over Money Claims — Section 26 of the Government Auditing Code and the 2009 COA Rules of Procedure grant the COA general, but not exclusive, original jurisdiction over money claims against the government. Where a special law, such as Executive Order No. 1008 or the Labor Code, vests exclusive and original jurisdiction over a particular class of money claims in another tribunal, that special law prevails over the general provisions of the Government Auditing Code.

• “An audit observation memorandum is not a decision or ruling by the COA on disallowance; instead, the issuance of an audit observation memorandum is merely an initiatory step in the investigative audit being conducted by the COA, and all the findings stated therein are not yet conclusive.” (citing Corales v. Republic)

• “Although the Government Auditing Code and the 2009 COA Rules of Procedure provide that the COA has general jurisdiction over money claims against government agencies, the jurisdiction does not extend to the money claims of an employee against a GOCC without an original charter. Instead, the money claims of the employee are governed by the Labor Code, which grants to the Labor Arbiters the exclusive and original jurisdiction over the claims.”

• “The rule against diminution of benefits espoused in Article 100 of the Labor Code does not contemplate the continuous grant of unauthorized compensation. It cannot estop the Government from correcting errors in the application and enforcement of law. [...] [P]ractice, without more — no matter how long continued — cannot give rise to any vested right if it is contrary to law.”

• Strategic Alliance Development Corporation v. Radstock Securities Ltd., 622 Phil. 431 (2009) — Settled that PNCC is a GOCC without an original charter; followed as controlling in determining the status of PNCC.

• Alejandrino v. Commission on Audit, 866 Phil. 188 (2019) — Reaffirmed that PNCC is a GOCC without an original charter, 90.3% government-owned, and under the direct supervision of the Office of the President; applied to establish PNCC’s legal nature.

• Corales v. Republic, 716 Phil. 432 (2013) — Distinguished an audit observation memorandum from a notice of disallowance, holding that an AOM contains only preliminary and non-conclusive findings; relied upon to rule that no COA audit decision existed.

• Taisei Shimizu Joint Venture v. Commission on Audit, 873 Phil. 323 (2020) — Held that COA’s jurisdiction over money claims is general and concurrent, and that a special law vesting exclusive jurisdiction in another tribunal must prevail; applied to resolve the jurisdictional conflict in favor of the Labor Arbiter.

• Philippine National Construction Corp. v. National Labor Relations Commission, G.R. No. 248401, June 23, 2021 — Ruled that PNCC did not violate the non-diminution rule when it stopped granting a mid-year bonus after the enactment of Republic Act No. 10149, as the benefit’s infirmity prevented it from ripening into a vested right; followed and extended to the transportation allowance context.

• Boncodin v. National Power Corporation Employees Consolidated Union (NECU), 534 Phil. 741 (2006) — Established that the rule against diminution of benefits does not contemplate the continuous grant of unauthorized compensation; applied to bar respondents’ claim of a vested right.

• Article 217(6), Labor Code — Vests in Labor Arbiters original and exclusive jurisdiction over all claims arising from employer-employee relations exceeding PHP 5,000.00; served as the statutory basis for the Labor Arbiter’s jurisdiction.

• Article 100, Labor Code — Prohibition against elimination or diminution of benefits; held inapplicable because the benefit was granted contrary to law.

• Article IX-B, Section 2(1), 1987 Constitution — Limits Civil Service coverage to GOCCs with original charters; impliedly places GOCCs without original charters under the Labor Code.

• Article IX-D, Section 2, 1987 Constitution — Empowers the COA to promulgate accounting and auditing rules, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures; invoked as the constitutional anchor for COA Circular No. 77-61.

• Section 26, Presidential Decree No. 1445 (Government Auditing Code) — Grants the COA general jurisdiction over settlement of debts and claims due from the government, including GOCCs; interpreted as concurrent, not exclusive.

• Rule IV, Section 4, 2009 COA Rules of Procedure — Provides that a Notice of Disallowance/Charge is the audit decision on disallowances; used to distinguish AOMs from final audit decisions.

• COA Circular No. 77-61 (September 26, 1977) — Prohibits any official granted a transportation allowance from using government motor transportation; the allowance was withdrawn to comply with this regulation, which has the force and effect of law.

• Republic Act No. 10149 (GOCC Governance Act of 2011) — Removed the authority of all GOCCs, with or without original charters, to determine their own compensation system; cited as reinforcing the public-interest limitation on GOCC management prerogative, though the specific allowance was invalidated under the older COA circular.

Gaerlan, Dimaampao, and Singh, JJ., concurred. Justice Caguioa (Chairperson) was on official leave.