Wage Distortion and Use of Pineda Formula for Wage Distortion Correction based on Wage Order No. NCR-22

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 pp. 143-144 Solutions and Remedies on Wage Order and Minimum Wage by Atty. Elvin B. Villanueva citing Section 3, R.A. 6727 (Wage Rationalization Act); See also Definition of Terms (p), Rules to Implement R.A. 6727)

Wage distortion means the disappearance or virtual disappearance of pay differentials between lower and higher positions in an enterprise because of compliance with a wage order. (P.I. Manufacturing, Incorporated vs. P.I. Manufacturing Super- visors And Foreman Association, G.R. No. 167217, February 4, 2008)

As defined, there are two possible effects in the in- crease in the wage rates:

1. Elimination or
2. Severe contraction of intentional quantitative differences in wage or salary rates

In the 1987 case of P.I. Manufacturing, Incorporated, the Supreme Court held that there was elimination of the intentional quantitative differences resulting in wage distortion in the following:

Supervisor                Rate Before WO Increase              Rate After Increase

Alcantara                   99.01                                                  109.01

Buencuchillo                        102.38                                               102.38

Del Prado                  108.80                                               108.80

Foreman

Morales                     94.93                                                  104.93

Salvo                          96.45                                                  106.45

According to the SC, the implementation of R.A. No. 6640 resulted in the increase of P10.00 in the wage rates of Alcantara, supervisor, and Morales and Salvo, both foremen. They are P.I. Manufacturing’s lowest paid supervisor and foremen. As a consequence, the increased wage rates of foremen Morales and Salvo exceeded that of supervisor Buencuchillo.

Also, the increased wage rate of supervisor Alcantara exceeded those of supervisors Buencuchillo and Del Prado. Consequently, the P9.79 gap or difference between the wage rate of supervisor Del Prado and that of supervisor Alcantara was eliminated. Instead, the latter gained a P.21 lead over Del Prado.

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Like a domino effect, these gaps or differences between and among the wage rates of all the above employees have been substantially altered and reduced. For the SC, it is undeniable that the increase in the wage rates by virtue of R.A. No. 6640 resulted in wage distortion or the elimination of the intentional quantitative differences in the wage rates of the above employees.

In NCR Wage Order No. 22 took effect on November 22, 2018. This mandated the increase in the minimum wage by P25.00 making it P537.00 daily wage.

Consider the following scenarios using the NCR daily rate:

Employee                  Rate Before W.O. NCR-22             Rate After W.O. NCR-22

Clerk

May Saniv                  P512.00                                             P537.00

Mash Mesanib         P520.00                                             P537.00

Supervisor

Mae Hadad               P540.00                                             P550.00

May Anne Ning         P555.00                                             P560.00

The gap between May Saniv and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

Mash Mesanib         P8.00                                                 P0.00

Mae Hadad               P28.00                                               P13.00

May Anne Ning         P43.00                                               P23.00

The gap between Mash Mesanib and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

Mae Hadad               P20.00                                               P13.00

May Anne Ning         P35.00                                               P23.00

The gap between Mae Hadad and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

May Anne Ning         P15.00                                               P10.00

To breakdown the rates of the gap:

The rate of the gap between May Saniv and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

Mash Mesanib         1.56%                                                            0.00%

Mae Hadad               5.46%                                                            2.42%

May Anne Ning         8.39%                                                            4.28%

The rate of the gap between Mash Mesanib and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

Mae Hadad               8.00%                                                            2.42%

May Anne Ning         6.73%                                                            4.28%

The rate of the gap between Mae Hadad and other employees based on the above is shown as follows:

Employee                  Gap Before W.O. NCR-22              Gap After W.O. NCR-22

May Anne Ning         2.77%                                                            1.81%

As can be observed, the rates of the gap between the wages and salaries of employees involved decreased after the implementation of the W.O. No. NCR-22. Is there wage distortion?

There is elimination if the difference in salary between the employees mentioned in the definition is removed. There is severe contraction if the contraction is more than 50% of the intended quantitative differences in pay between two groups of workers in an establishment. (See citations on page 147 of Solutions and Remedies on Wage Order and Minimum Wage)

Findings whether elimination or contraction exists:

Between May Saniv and other employees:

Employee                  Before W.O. NCR-22          After W.O. NCR-22  Findings

Mash Mesanib         1.56%                                                0.00%                                    Elimination

Mae Hadad               5.46%                                                2.42%                                    Contraction

May Anne Ning         8.39%                                                4.28%                                    None

Between Mash Mesanib and other employees:

Employee                  Before W.O. NCR-22          After W.O. NCR-22  Findings

Mae Hadad               8.00%                                                2.42%                                    Contraction

May Anne Ning         6.73%                                                4.28%                                    None

Between Mae Hadad and other employees:

Employee                  Before W.O. NCR-22          After W.O. NCR-22  Findings

May Anne Ning         2.77%                                                1.81%                                    None

Thus, there is wage distortion with respect to Mesanib and Hadad as against Saniv. There is also distortion between Hadad as against Mesanib.

How should this distortion be corrected?

In a company that has a union, the following shall be observed in correcting wage distortion: (See page 152 of Solutions and Remedies on Wage Order and Minimum Wage)

1. Negotiation between management and union to resolve wage distortion;
2. If negotiation does not work, resort to grievance procedure in the CBA shall be made; and
3. If grievance does not work, then the issue shall be brought to Voluntary Arbitrators.

If there is no union in the company, the following steps shall be made: (See page 153 of Solutions and Remedies on Wage Order and Minimum Wage)

1. The employees and the employer shall endeavor to correct the distortions;
2. If it remains unresolved, it shall be referred to the National Conciliation and Mediation Board (NCMB);
3. If still no resolution is met, then the dispute shall be brought before the appropriate branch of the NLRC.

What formula should be used in correcting wage distortion? There is no specific formula mandated to correct any wage distortion.

In fact, the NWPC provides only the suggested formulas for correcting the effects of the implementation of wage orders.

The most common used for correction is the Pineda formula. He is the former member of the RTWPB-IV or the CALABARZON area.

His method provides pay increases for higher-paid employees at a decreasing rate.

Wage Distortion =   Previous Minimum Wage x Mandated Wage Increase

Adjustment               Wage of Employee

Let us correct the distortion in this example and the adjustments needed for other employees to at least rationalize the new gaps (See page 160 of Solutions and Remedies on Wage Order and Minimum Wage to see other sample corrections):