Wage Distortion Concepts And Solutions

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.

The post below is based on Atty. Villanueva‘s book Solutions and Remedies on Wage Order and Minimum Wage (Pp. 151-160)

Say in January 2017, employee Nelly Distortado, located in NCR in a non-agricultural job is receiving a daily salary of Php520.00. While Taz S. Weldo, his officemate of the same level and next to him in the scale is receiving PhP491 consisting of Php481.00 basic wage and PhP10.00 COLA. In October 2017, a new minimum wage, Wage Order No. NCR-21, took effect mandating that all minimum wage workers shall be granted basic wage increase of P20.00 per day and an additional COLA of Php10.00 per day.

Thus when the company implemented the Wage Order, Taz will be receiving Php512.00 while Distortado, the more senior of the two, still receives Php520.00. There is no reason to increase the salary of Distortado based on the wage order because he is already above the new minimum of P512.00.

Is there wage distortion in this case?

First, there is a need to know some basic concepts of 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.

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.

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

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

There is elimination if the difference in salary between the employees mentioned in the definition is removed. For example, if the difference in salary between employees X and Y is 4.3%, which after the implementation of the wage increase became 0%, then there is elimination of intentional quantitative differences.

Say X’s salary is Php12,806.92 per month while that of Y is Php13,354.67. After effecting the increase in minimum wage, the salary of both became even at Php13,354.67, then there is wage distortion by elimination of the quantitative difference.

While there is severe contraction of intentional quantitative difference when the former gap in salary between X and Y is severely reduced. For instance, the previous gap in salary between X and Y is 7%, but when the new minimum wage was implemented it shrunk to 2%.

There is severe contraction in this case as illustrated below:

Let us say X’s salary was PhP12,806.92 while Y’s is PhP13,703.40 or a difference of P896.48. Both are workers in NCR. If the factor adopted by the company is 313, the monthly equivalent of a minimum wage of PhP491.00 per day is PhP12,806.92. Hence, there is a need to adjust the wage of X being below minimum as of October 2017 when the new NCR minimum wage took effect.

When adjusted, the salary of X became PhP13,354.67 while that of Y remains at PhP13,703.40. While there seems to be no violation anymore as both comply with minimum wage, closer look would show a problem.

The gap between the two salaries shrunk. PhP13,703.40 – PhP13,354.67 = PhP348.73. Their previous gap was PhP896.48 shrinking by 61.10%. Previous gap of PhP896.48.00 was 6.50% of Y’s salary. However, after implementation of the wage order the gap became just 2.54%.

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. In this example, there is severe contraction as the gap contracted by more than 50%.

The NWPC provides that where the application of any prescribed wage increase by virtue of a Wage Order issued by the RTWPB or the Board results in distortions of the wage structure within an establishment, 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 ten (10) days from the time said dispute was referred to voluntary arbitration.

If there is no union in the company, the following steps shall be made:

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.

It bears noting however, that Article 124 of the Labor Code provides that it is only when the “prescribed wage increase by virtue of a law or wage order issued by the Regional Board results in distortions” that the correction is in order. Thus, it is an error to claim that the obligation to rectify wage distortion is not confined to wage distortion resulting from government decreed law or wage order.

The correction required under Article 124 and that of various wage orders by the different RTWPBs is not to the last centavo. What is required is the re-establishment of a substantial or significant gap.

Get an updated and re-numbered copy of the Labor Code 2018

Should a wage distortion exist, there is no legal requirement that, in the rectification of that distortion by readjustment of the wage rates of the differing classes of employees, the gap which had previously or historically existed be restored in precisely the same amount. In other words, correction of a wage distortion may be done by reestablishing a substantial or significant gap (as distinguished from historical gap) between the wage rates of the differing classes of employees. (Metropolitan Bank and Trust Company Employees UnionALU-TUCP vs. NLRC, G.R. No. 102636, September 10, 1993)

As to the formula to use to correct the same, it depends upon the choice agreed upon by the management and employees. Thus, closer scrutiny of the suggested formula below is highly recommended.

Scenario:

A and B are employees of Distorted Company, Inc. principally located in NCR. The two employees are next to each other in terms of rank and salary. A receives a higher pay at Php525.00 per day while B receives Php491.00.

When Wage Order No. NCR-21 came into effect in October 2017, the salary of B became Php512.00. Hence, the gap between the two got smaller. A cries wage distortion.

If the company decides to resolve the wage distortion what formula should it use?

See the suggested formula in the book Solutions and Remedies on Wage Order and Minimum Wage

The most popular formula is the Pineda approach. The Pineda Formula was authored by Mr. Marcelino Pineda, an HR Manager of Nestle Philippines. 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                           Previous Minimum Wage                              Mandated

Distortion      =          ____________________             x          Wage

Adjustment               Wage of Employee                                             Increase

Resolving Distorted Company, Inc.’s problem using Pineda Formula. Assumptions:

1. Mandated additional Php11.00 to the minimum wage per W.O. No. NCR-21
2. The current minimum wage is Php491.00
3. The target employee (employee A) receives Php525.00 per day

Target employee means the worker whose salary needs to be adjusted as a result of increase of employees below his level to maintain the gap at a reasonable distance.

In the example, B’s salary already moved up from P491.00 to P512.00 inching closer to A’s P525.00 which in fact severely contracted the previous gap by more than 50% at 61.76%.

Wage distortion adjustment = Php491.00 x Php11.00

Php525.00

= Php.94 x Php11.00

= Php10.29

Adjusted Daily Rate = P525 + P10.29

= P535.29

Applying the Pineda Formula to our facts, A’s salary will have to be adjusted as follows:

A = adjusted rate of Php535.29 per day

B = P512.00