Bonus and diminution of benefits
The year 2025 has ended, and a new year has begun.
There are many employees who had a merry Christmas, especially those who received generous bonuses from their employers. However, there may be those who did not receive any and are understandably disappointed.
The Labor Code of the Philippines provides that the wages and benefits already being given to an employee shall not be diminished. This is known as the prohibition against diminution of benefits, which is contained in Article 100 of the Labor Code.
An example of diminution of pay is the case of Nippon Paint Philippines Inc. v. Nippon Paint Philippines Employees Association (G.R. No. 229396, June 30, 2021), where it was the practice of the company to grant its employees holiday pay that was more than what was provided by law. The company paid its employees 200 percent, instead of 100 percent, of their regular daily rate on unworked regular holidays, and 300 percent, instead of 200 percent, of their regular daily rate on worked regular holidays.
When the company stopped this practice, the employees complained about diminution in wages. The case eventually reached the Supreme Court, which explained that there is a diminution of benefits when the following are present:
- The grant or benefit is founded on a policy or has ripened into a practice over a long period of time;
- The practice is consistent and deliberate;
- The practice is not due to error in the construction or application of a doubtful or difficult question of law; and
- The diminution or discontinuance is done unilaterally by the employer.
Since the company had granted additional holiday pay to its employees for a period of two years, the Supreme Court declared that this had ripened into a company practice such that the company could no longer withdraw the benefit without violating the principle of nondiminution of benefits.
The Supreme Court explained that the principle of nondiminution of benefits under the Labor Code was founded on the constitutional mandate to protect the rights of workers, promote their welfare and afford them full protection.
No bonus
With that in mind, will the nonpayment of a yearly bonus by a company also be violative of the principle of nondiminution of benefits?
A “bonus” is defined as a gratuity or act of liberality of the giver, which the recipient has no right to demand as a matter of right. It is something given in addition to what is ordinarily received by, or strictly due to, the recipient.
The granting of a bonus is considered a management prerogative and cannot be forced upon the employer, who may not be obliged to assume the onerous burden of granting bonuses or other benefits aside from the employees’ basic salaries or wages.
After all, the term “bonus,” as used in employment contracts, conveys the idea of something that is gratuitous, or which may be claimed to be gratuitous, over and above the prescribed compensation that the employer agrees to pay (PNCC v. NLRC, et al., G.R. No. 117240, Oct. 2, 1997).
The concept of a bonus should not be confused with gratuity.
While gratuity may be similar to a bonus, as both can refer to a voluntary payment, it differs in employment law in that the former refers to payment to an employee, under certain conditions, upon retirement or separation from service. Accordingly, gratuity pay is demandable as a right by the employee as long as the conditions are satisfied or present.
Exceptions
Considering the definition of a bonus as an act of liberality by the employer, it cannot be demanded as a right by the employee. There are exceptions to this rule, however, which have been laid down by the Supreme Court in decided cases, as follows:
1. When the bonus is made part of the salary or compensation of the employee
When a bonus constitutes additional compensation that the employer promised and agreed to give without any conditions imposed for its payment, then it becomes part of the wage and is demandable as a right by the employee.
On the other hand, if the bonus is paid only if profits are realized, if it is not payable to all employees, or if it depends on the achievement of a certain level of productivity, it is not automatically demandable as a right.
2. When the giving of a bonus has been the company’s long and regular practice
The practice of giving a yearly or regular bonus over the years ripens into a policy that gives employees the right to demand payment when it is not given.
To be considered a “regular practice,” the giving of the bonus must have been done over a long period of time and must be shown to be consistent and deliberate. The test is a clear showing that the employer continued to give the benefit knowing that it was not required by law.
In a case where a company had been giving 14th, 15th and 16th-month bonuses for a period of 27 years, regardless of whether the company earned a profit for the year, the Supreme Court declared that the practice of giving these bonuses had ripened into benefits for the employees, which the company could not simply withdraw without violating the Labor Code provision mandating nondiminution of benefits.
3. By agreement between the employer and the employee
A bonus may be contained in a written agreement between the employer and the employee, making it a contractually demandable right if it is not paid.
This written agreement may take the form of a collective bargaining agreement for businesses with a union. For those without a union or collective bargaining agreement, the contractual obligation to pay a bonus may be contained in the employment contract or any other document between the employer and the employee.
In any of the foregoing scenarios, a bonus becomes a demandable right of the employees, and the employer’s obligation to pay it is no longer optional but mandatory.
Notwithstanding the foregoing, even when a bonus has become a demandable right —such as when the practice of paying a bonus has ripened into a company practice—there remains an exception to the exception.
This occurs when the prevailing financial condition of the employer has declined to the point that it can no longer afford to pay the bonus to its employees.
The Supreme Court has declared that such an employer should not be penalized for its past generosity, and that obligating the employer to pay the bonus under such circumstances has no legal or moral basis (Traders Royal Bank v. NLRC, et al., G.R. No. 88168, Aug. 30, 1990).
The author is a practicing lawyer and founding partner of Tiongco Siao Bello & Associates Law Offices, an arbitrator of the Construction Industry Arbitration Commission of the Philippines. He teaches law at the De La Salle University Tañada-Diokno School of Law.
Feedback at jcs@tiongcosiaobellolaw.com.
